The global economy is going through a period of uncertainty as our experts have explained in a recent report. Some media outlets have focused on the conclusion that the UK appears in relatively good shape, compared with the economies of many Eurozone countries. So, does that mean that all’s well as far as the British economy is concerned? Or is there is a wider economic context to consider?
With a predicted rise in insolvencies over the next year or more, the UK’s ‘relative strength’ may not be entirely as it seems. Whilst the UK may, at first glance, appear to be better placed to weather economic headwinds than other nations, a 16% UK increase in insolvencies in 2023 (compared to a 21% rise globally) tells a different story – one that’s reflected in the official statistics. Whichever way you look at it, the message contained in our insolvency report ‘No rest for the leveraged’ is crystal clear.
As we attempt to navigate the near and midterm future, we should hope for the best while still preparing for the worst.
This preparation should take the form of:
- Building up cash reserves
- Reducing debt levels
- Increasing efficiencies
- Improving financial performance
- Seeking professional advice
- Taking out insurance to protect against insolvency
A perfect storm for the global economy
Wherever your business is based and whatever you do, there’s no escaping the fact that the last few years have been tough. A global pandemic, soaring inflation, labour shortages, supply chain issues and international conflict have conspired to create a challenging business environment.
The numbers bear that out, with global insolvencies set to surge by +21% in 2023 and a further +4% in 2024. Over half of the countries analysed in the ‘No rest for the leveraged’ report are likely to exceed pre-pandemic levels of insolvencies, with the logistics, trade, accommodation and food services most likely to be impacted.
The UK insolvency challenge
Just because a French or Italian business will be hit harder than their UK counterparts doesn’t mean that British businesses are immune. For example, in May 2023 data from the ONS showed that compulsory liquidations in April 2023 were double those of a year before and higher than pre-pandemic rates.
Like businesses globally, the surge in UK insolvencies is being driven by a number of international factors, including:
- The war in Ukraine and the resulting sanctions, which have damaged business confidence and disrupted global trade and demand
- Rising inflation and eye-watering energy costs, which have put a strain on profits
- Rising interest rates, which make it more expensive for businesses to borrow money and harder to plan for and invest in the future
- COVID-19, which is still disrupting supply chains and causing uncertainty
Unlike businesses from other countries, the UK also faces a unique challenge in the form of Brexit.
“Domestic firms have had to deal with a fragile situation amid a sharp growth deceleration, earlier monetary tightening and rapid inflation in addition to specific Brexit-related issues,” said Maxime Lemerle, Lead Analyst for Insolvency Research at Allianz Trade.
There is still room for optimism – even 2024’s projected peak will fall some way short of 2009’s record year for insolvencies and there are tentative signs of the increase in insolvencies slowing down.
And there are positive steps you can take too.
What can I do to limit the risk of insolvency?
There are a number of ways you can prepare for worst-case scenarios and prevent any cash flow problems:
- Build up cash reserves: Healthy cash flow is essential for any business. It will help you cover unexpected expenses and keep your business afloat, especially as materials costs keep rising.
- Reduce debt levels: Too much debt can put a strain on your business and make it difficult to make payments. Aim to reduce your debt levels as much as possible.
- Increase efficiencies: Avoid unnecessary waste, indulgences or less-than-optimal processes.
- Improve your financial performance: This means tracking your expenses and revenue closely. Making sure you are turning a profit and keeping a close eye on a diverse customer base means you’re not too reliant on just one or two key clients.
- Get professional advice: If you have concerns about your business's financial health, it’s always important to get professional advice to help you assess your situation and manage economic risks.
Of course, one of the biggest risks to your business is the insolvency domino effect – where your firm suddenly faces huge pressure because of different, seemingly unrelated company collapses around it. And this leads us to perhaps the most important step you can take to mitigate this unexpected threat.
Trade credit insurance: Trade credit insurance protects your business from insolvency by, amongst other things, checking customer creditworthiness, dealing with late payments or liquidations and handling claims and collections.
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