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Category: Insight | Date: 23/03/2023

How to weather the economic storm by Mike Lawrence

With a turbulent economy driving insolvencies, our Head of Sales, UK, Mike Lawrence explains the main reasons for liquidations and why it's time to take action to ensure business survival.

Businesses across the country are being lashed on various fiscal fronts, and we are seeing that those which are unprepared are going under in growing numbers. Insolvencies of registered UK companies were up 32 per cent in December 2022 compared to the same month the previous year, and 76 per cent higher than in December 2019 – just before the pandemic.

The reasons for liquidations and insolvencies

Record levels of inflation and high interest rates are causing widespread belt-tightening that is constricting markets while also slashing profit margins.

At the same time, soaring energy prices are causing further misery, putting firms at the mercy of increasingly unpredictable commodity markets which are putting bigger and bigger holes in bottom lines. The result is that many companies already have to do 10 per cent more business than they did just 12 months ago just to stand still.

Another factor many firms are dealing with is the end of the government's Covid support, a crutch which has played a key role in creating a benign business environment in recent years. With this period of economic support coming to an end and with the prospect of the Bank of England setting higher interest rates still on the horizon, the headwinds aren't expected to die down anytime soon.

Global growth is slowing sharply in 2023, according to analysis from the World Bank Group. But businesses can protect against insolvencies.
Global growth is slowing sharply in 2023, according to analysis from the World Bank Group. But businesses can protect against insolvencies.

Protection for an economic downturn

Canny business owners know they need to take active steps to ensure they can continue to trade unhindered. Credit insurance policies can be the difference between profitable growth and insolvency, providing protection against the risk of non-payments, and ensuring vital cash flows are safeguarded.

While businesses can work night and day to increase their turnover, if they remain exposed to a breakdown in payments, then profitability can rapidly go out of the window – or worse, they could even increase their exposure to failure.

On the other hand, credit insurance not only provides a short-term safety net if clients or customers are unable to pay, it also means your business remains on the front foot, allowing you to remain far more flexible, adaptable, and competitive than if your firm is embroiled in debt. Over the longer term this opens greater business access in every direction, from managing greater profitability to improving access to trade finance.

What we can learn from the construction industry in a downturn

From bitter experience we know that whenever we go into a downturn it's usually the construction industry that leads the way.

Construction has already been heavily impacted with the rising cost of materials meaning developers with contracts drawn up in advance can end up doing projects at a loss.

Failures in the construction sector then feed through to the rest of the economy. Other industries are following. Eventually construction tends to lead us out of downturns too – hopefully that will be sooner rather than later.

However, the energy crisis is something which can't be solved as quickly. For retailers that have low profit margins, energy costs going up by even 30 per cent is a disaster. But some have seen rises of over 300 per cent for both electricity and gas and prices are still rising.

This means that whatever you're doing as a business, you're likely to be facing difficult times. This is why growing your business with confidence starts with securing the vital supply lines, allowing you to focus on core products and services.

Xenia has specific credit insurance policies to protect businesses against the risk of defaults. Find out more here.

Data sources:
Some firms have already seen energy price rises of over 300 per cent (The Guardian)
Energy costs still rising (BBC)