Wednesday, 25 July 2018 07:09

Insolvency Domino Effect Strikes Down One in Four UK Companies

More than a quarter of UK businesses have suffered negative consequences from another company becoming insolvent in the past six months.

A survey carried out by R3 revealed that one in 10 businesses have suffered a ‘very negative’ impact from a customer or supplier becoming insolvent since the start of 2018, while another 16% reported a ‘somewhat negative’ effect.

The figures come after a sharp spike in the number of companies being declared insolvent in the first quarter of this year. Led by the high profile collapses of Carillion, Toys R Us and Maplin, the number of insolvency cases rose an alarming 13% from the previous quarter.

While a spike in the number of company failures in itself sets alarm bells ringing about the state of the economy, it is the wider impact across supply chains and markets that creates deeper cause for concern. Because of the impact on payments and credit control, insolvency is known to have a domino effect, where one collapse sparks more trouble as cash flow is disrupted.

Put simply, the more insolvencies that occur, the more problems are likely to escalate.

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The construction industry is the sector where insolvency seems to be biting hard, with almost half (47%) of respondents telling R3 that the collapse of another company had had a very negative effect in the past six months.

This chimes with the devastating impact the failure of contracting giant Carillion is calculated to have had on the wider construction supply chain, which is likely to have left businesses billions out of pocket. Following Carillion’s acrimonious collapse, the government is looking at legislating to strengthen the hand of business creditors on debt recovery in the event of insolvency, precisely to try to curb the snowball effect.

In the meantime, all companies can do is pay attention to the financial state of anyone they do business with, and be prepared to take action if there are signs of trouble. In the case of Toys R Us, UK suppliers were quick to cancel orders even when the retailer’s financial distress seemed to be limited to the USA. Sure enough, the UK operation did collapse, revealing suppliers’ actions to have been a prudent piece of self-preservation.

With insolvency rates on the rise, it is also a good idea for any business not to become overly reliant on one partnership. The domino effect is at its worst when the collapse of big players wipes out suppliers who were completely reliant on their business. The best way to limit exposure to insolvency risks is to diversify your order book.

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Image "Dominoes” by flickr user "nmrmak" licensed under CC BY 2.0

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