Category: Insight | Date: 23/06/2022

Xenia Xtra Series: Point 1 - Insolvencies are set to rise, particularly as interest rates climb, so act with extra vigilance

A compounding sequence of negative economic factors including the end of pandemic protective measures is causing a dramatic rise in business insolvencies and this is likely to continue for the remainder of this year and into the next. Latest Insolvency Service data from the ONS revealed UK companies filing for some kind of insolvency proceeding has been increasing month by month since the turn of the year and more concerning higher than pre pandemic levels. These figures could just be the beginning of something far worse and a disquieting trend that will ripple throughout markets and industries. One could presume that this is indeed the aftermath of the challenges post the last two years and this anticipated ‘perfect’ economic storm has been intensified further by rising costs and soaring inflation.

The latest data provides more evidence that insolvencies are already rising and could climb further due to the myriad of financial challenges prevalent in society and the economy. Invariably many of the cases outlined include companies that would have followed into some form of insolvency process without government measures taken but the landscape is drastically worse and going to impede business performance, growth and in many cases viability given some of the difficulties they are facing relating to costs and inflation particularly around energy.

When management are caught up in the day-to-day running of the company, it’s easy to miss the signs of an approaching insolvency. It may just be accredited to cash flow problems, market wide issues, to an unproductive department or function of the business, rather than operations as a whole. UK insolvencies are already rising and could climb further as mounting inflation, rising costs and the withdrawal of pandemic-related stimulus causes cracks in the economy to deepen. Here are some key factors to look for and/or monitor;

  • Overtrading demonstrating lack of capital to pursue growth strategy and driven by declining profit margins
  • Accrued debts with HMRC
  • Significant bad debts & ageing debtor ledger
  • High staff turnover
  • Delays in producing and providing financial information when requested
  • CCJ’s, Statutory Demands or Writs registered against the Company
  • Loss of major contracts resulting in cash flow issues
  • Slower paying with lengthening Days-Payable-Outstanding (DPO)
  • Increase in the gearing ratio
  • Slow movement of stock and therefore cash tied up

In addition, this is all occurring at a time where those businesses that opted for CBILs and/or bounce back loans have to start repayment of this liability. Any businesses facing financial difficulties should factor in the array of extra costs to support any refinancing or restructuring planned. Most crucially, companies that are encountering or exposed to such challenges of a potential insolvency should always seek advice and guidance to help them pilot through these precarious and choppy uncharted waters.

Roberto Simone
Risk Development Executive