In the last set of statistics there was a huge rise in company liquidations, however this was driven by a large amount of personal service companies entering liquidation due to changes in claimable expenses.
That having been said, adjusting for these still shows an upward trend that has been in evidence since quarter 2 of 2015 with 3967 companies entering liquidation through Creditors Voluntary Liquidation (CVL) during the quarter. This represents a 5.3% rise on the last period.
This rise is echoed in the number of individual insolvencies with 24,531 individuals entering some form of process such as Individual Voluntary Arrangement (IVA), Debt Relief Orders (DRO) or bankruptcy.
The trend in individual insolvency and the data for company insolvency suggests an underlying tightening of the trading and debt environment.
The last time we saw such a trend was in the dark days of 2007/2008 following the Lehman Brothers collapse and the subsequent banking crisis.
Although the UK hasn’t suffered a specific major shock of the type we saw in the noughties, some commentators are suggesting that the Brexit vote together with the hung parliament may be the catalyst for an ongoing slowdown of the economy.
Whilst it’s still too early to tell (and the data we are looking at won’t have included the fallout from the General Election) it’s important that companies are mindful of the macro environment that both they and their customers are operating in.
There are in general terms four areas that businesses need to be mindful of when performing environmental scanning.
Firstly, interest rates. The UK economy (and to an extent the world economy) has benefited from historically low rates since 2007. The problem is that many individuals and companies have become used to this and have organised their finances to suit. If interest rates rise, even by a small amount then this could be a precursor to much more far reaching effects.
Following on from this is debt levels. Low rates have fostered high levels of both personal and corporate debt. In itself this isn’t necessarily a problem however, unemployment, loss of customers or the aforementioned increase in interest rates could cause an increase in both insolvencies and default rates triggering a further banking crisis.
The uncertainty around Brexit could be seen as a driver towards lower investment rates among companies and some larger employers have been making noises about moving their operations abroad. For employees this clearly means redundancies but for each large business that leaves there are untold numbers of smaller enterprises that will suffer.
Similarly at the time of writing there is no clarity regarding the rules around migrant labour. It’s no secret that the NHS runs in large part through the work of incomers but it’s also true that many sectors such as hospitality and farming rely to a large extent on having an available supply of foreign labour.
We’ve already seen that the Brexit vote has led to a reduction in the amount of people moving to the UK from the EU and it remains to be seen whether this can be reversed once the process is complete. It may be that alongside a political change in the work visa regime it will also require employers to pay a higher rate to attract workers that may otherwise prefer to work within the EU.
The fourth major area of concern must be economic activity.
High debt and a long-term squeeze on incomes has reduced consumer spending considerably. The latest data from the ONS shows that consumer spending fell by 3.4% in June 2017, the biggest drop since 2013 and a worrying sign for an economy that exists to a large extent on retail activity.
Less retail activity means less manufacturing, transport and supply side activity with all the problems that this entails.
With all of this gloomy news in mind what can companies do to mitigate any potential issues?
A good place to start is to institute an environmental scanning report. Using the indicators above together with some company specific type indicators can give an early warning of which way the economy is moving.
Paying down debt is a good move too. Making sure that in increase in interest rates doesn’t catch the business out by both anticipating an increase and ensuring it won’t be so severe when it does hit is an important move to make.
Alongside this, swapping debt for equity may be a good option or at the very least making sure that debt is at fixed rates especially given the low rates on offer at the moment.
Companies often get into trouble when sales reduce but their expense base is largely fixed.
Typical examples would be lease costs, rent and of course permanent employees.
Making sure that any leases have handback options, properties have break clauses and having a proportion of the workforce on short term contracts or low basic hours can help if costs need to be trimmed.
It’s also important to remember that there is a train of thought that suggests things will be better with the UK out of the EU.
Companies need to ensure that they are well placed to benefit from any enhanced world trading opportunities. Again environmental scanning can help and businesses need to look at markets that were seen as uncompetitive due to high EU trade tariffs that may now no longer apply.
Similarly imports from countries outside the EU may well become more reasonable now that the incoming tariffs may be reduced. Once again it is important to re-assess operations and in particular the supply chain.
It will come as no surprise to business owners that there is a high degree of uncertainty around at the moment. The rise in insolvencies clearly shows that trading conditions are proving challenging and may get worse before they get better.
For smaller businesses it is more important than ever that they keep close to their customers and understand how they see the world, reassess their cost base to make sure they are ultra-competitive and ensure that they retain as much flexibility as possible so that they can weather any approaching storm.