What can I do to protect my business from the current economy?

MATTHEW FOX, PARTNER & LICENSED INSOLVENCY PRACTITIONER AT BEACON What can I do to protect my business from the current economy?

Could there be a recession ahead?

Following a fall in GDP by 0.3% in April 2022 fears of a recession are growing. That is to say, two successive quarters of decline in GPD - a measurement of the size of a country’s economy that has been used for many years - and if it should turn negative and the economy goes into decline could indicate a recession.

It has been predicted by The National Institute of Economic and Social Research (NIESR) that the UK will face a recession in the second half of this year. A warning has also come from the Bank of England that the UK could experience a “sharp

economic slowdown.”

NIESR further added that 1.5 million households are estimated to start to struggle to pay for food and energy bills causing a cost-of-living crisis. Their report predicted the Bank of England will have to raise interest rates to 2% by the end of 2022 and possibly to 2.5% next year to try and stifle increasing inflation. The main causes currently are a combination of the war in Ukraine, growing inflation following industries re-opening following lock down and rapidly increasing energy prices. There is also a recognised shortage of stock and materials, pushing prices higher.

The Monetary Policy Report issued in May said, ‘Household

disposable income is projected to fall in 2022 by the second largest amount since records

began in 1964’. The economy is expected to shrink by 0.25% whilst unemployment could reach 5.5% in the next few years.

Other economists have indicated that it is increasingly likely that the UK will enter recession later this year. The UK will not be alone, other major economies are also likely to suffer warned the former president of the CBI, Paul Drechsler.

Latest Statistics

The latest statistics issued by the Insolvency Service gave the number of registered insolvencies in May 2022 at 1,817. That is 79% higher than in the same month last year (1,014 in 2021) and 34% higher than the number registered three years previously (pre-pandemic 1,352 in May 2019).

In May this year there were 1,584 Creditors Voluntary Liquidations which is 70% high than in May 2021 and 66% higher than May 2019. As regards other types of insolvencies, for example Compulsory Liquidations, there were four times as many in May 2022 when compared to May 2021. The number of Administrations was also some 96% higher than one year ago.

Whilst Compulsory Liquidations numbered only 135, this is less than 50% of the number in May 2019 pre-pandemic. The pattern is similar with Administrations, 84 in May 2022, 95% higher than the prior year but 12% lower when compared to pre-pandemic levels.

From the beginning of the coronavirus pandemic until mid-2021, overall numbers of individual and company insolvencies were still low when they were compared to pre-pandemic levels. However, the one area that did see an increase related to CVL’s which are now much higher. Overall, across all forms of corporate insolvency, figures have steadily increased throughout 2021 and continue in 2022.

The reason for this may be that compulsory liquidations and bankruptcies remained low due to the government measures that were put in place to support such businesses.

The support initially came in the form of Bounce Back Loans, then CBIL’s (Coronavirus Business Interruption Loan Scheme). Then came the Corporate Insolvency and Governance Act 2020 (CIGA) which came into force on 26 June 2020.

In brief this Act restricted the presentation of debt-related winding-up petitions where a company cannot pay its bills (including rent) due to COVID-19. The restrictions were due to end on 30 September 2020; however, they were then extended to 30 September 2021.

New temporary measures were announced late last year which ran from 1 October 2021 until 31 March 2022. There were brought in to protect smaller businesses, particularly in the hospitality, leisure and retail sectors.

Now such measures are being removed the continued rise in Liquidations, may well be down to underperforming companies receiving the threat of petitions. In addition, the fact that formal rescue procedures such as Administrations, are still relatively low when compared to pre pandemic levels, would also indicate that many businesses are simply still not viable. Many businesses I see today have all taken out the bounce back loans, but this support was very much a quick fix, it did not replace lost customer orders, turnover or profit.

It remains to be seen if there will now be a significant increase in bankruptcies and compulsory liquidations as a result. But current information would suggest it is highly likely.

What could be the causes?

Overall, the trend for company insolvencies started to rise from February 2021 and is continuing to increase with a noted spike in insolvencies from early 2022. For many small businesses, the funding has simply not been enough to cover several months of closure, whilst potentially still having to pay rent, utility and other business costs. In addition, of course those businesses which took advantage of the bounce back loans are now having to make monthly repayments.

At Beacon we have experienced a steady increase in business owners seeking help and advice. For many it seems the sectors they operate in are still in a period of recovery. For others, the work or customer orders simply are not returning to pre pandemic levels.

This could be down to several reasons depending on which sector you operate in, such as the work from home ethic, businesses altering the way they operate, cutting costs to remain as efficient as possible. There are of course other more recent impacts that are contributing to a tough economic climate, with the cost of living on the rise and the actions of Russian in the Ukraine. The impact of historically high fuel costs and threat of rapidly increasing inflation.

Whilst many have taken advantage of the government backed bounce back loans, this has sometimes still not been sufficient to carry the business through this difficult period and provide the working capital needed as trade picks up.

At Beacon we are starting to see pressure grow from HMRC and Landlords requesting prompt payment and clearing any arrears. Whilst HMRC can offer time to pay in the right circumstances, unless your business is improving all the time and can service its current debt as well as the additional payments to clear arrears, without proper planning the business is still likely to fail. At Beacon we continue to provide free help and support to business owners who are worried about their company and how it might be able to survive.

Light at the end of tunnel?

There is however encouraging news for contractors. Recent research conducted in 2021 looked at the impact of IR35, introduced in April 2021, on contractors and revealed some very promising results. Many large organizations are still keen to grow and seek out the best talent there is on the market.

The research conducted between April to November 2021 saw an increase of 83% in contractors deemed operating correctly outside IR35. Large organisations have been positive and continue to ensure that they are operating in a tax complaint manner whilst also seeking to engage with the best the market has to offer.

How can I protect my company and manage debt?

As a director or owner of a business it is always a challenge to manage business debt, especially in these uncertain times of pandemic restrictions, rising costs and interest rates.

If you do find your business struggling to manage its debts, there are options available, but you must act. If you don’t, matters can soon get out of hand and your options can become extremely limited.

Understand your cashflow and liabilities

If you don’t have a bookkeeper or hands on accountant, the first step is to understand just what debt your business has; amount and when due.

Start off by creating a simple spreadsheet just listing all the debts. If you can, then break that down further, such as which amounts are due to be paid each week, or if monthly, the week they fall due in. Don’t forgot payments, such as rent, rates and HMRC that may not fall monthly. Factor in any loan and other financial repayments.

You’ll soon then build up a picture of what is due to be paid each week and any potential peak weeks when monthly or quarterly payments are due.

Next, look at your income, depending on what payment terms you offer your customers, you should be able to estimate what amounts are due to be received each week. Be sure to amend your plans if a customer is not able or willing to pay on time.

Identifying the issues

Look closely at how your business operates. Do you raise invoices promptly and issue them to your customers? Are there any reductions in expenditure that can be implemented? Make sure to review any non-essential expenditure. Consider any existing contracts you have with suppliers or utilities to see if savings can be made switching to alternatives.

If it is an issue receiving timely payment from your customers, consider offering a discount for prompt payment. Alternatively, if payment is overdue, speak to your customers and understand the issue. If necessary, and to save your valuable time chasing debts, instruct a local debt collecting company.

Is there a change that needs to be made to your business; are you competitive; do you need to change your pricing structure; can you be more proactive to raise your business profile and win more work?

Don’t bury your head in the sand

If you are aware of a potential problem in paying an amount due to a supplier or other creditor, don’t ignore the problem. Pick up the phone and explain the issue, see if you can either make a part payment on account, agree a payment plan or just have more time to pay.

The earlier you address the issue the more likely you are to get an understanding and agreement from creditors to extending payment terms. Create a plan of action, which is simple, clear, realistic and stick to it.

Sources – The Financial Times, The Evening Standard and Insolvency Service Government Statistics

Seeking professional advice

If you are concerned about the survival of your business, seek professional help as soon as possible. Make sure if you do speak to a professional that they are professionally qualified and fully licensed. Unfortunately, there are many advisers online who are unqualified; it pays to check. If in doubt review their website for professional body membership such as ICAEW, IPA and R3.

A good adviser should be able to give you several options that are clear. You should be able to understand the consequences, advantages and disadvantages of each option. The earlier you seek advice; it is highly likely the more options will be available and as a result the higher the chance of success and your business surviving.

Matt Fox

Partner & Licensed Insolvency Practitioner BEACON

For more information and advice please contact

023 8065 1441