In our last article, we discussed the prospect of 2022 being a year defined by inflation – a point that was only heightened by a weekend of tepid Black Friday sales for retailers.
Looking ahead, the concern is that the economic challenges of 2022 – ranging from input and wage inflation through to supply chain delays and labour shortages – will manifest themselves in more finite ways next year. Namely in an increase in business insolvencies.
At first glance, the latest insolvency figures highlight the number of company insolvencies in England and Wales increasing by 38% year-on-year. While the increase links to a base period last year when winding up orders were restricted due to emergency COVID-19 measures, October’s figures also represent an increase of around a third (32%) on pre-pandemic levels. In Scotland, insolvencies were up almost 12% year-on-year for the quarter finishing in September. Notably, across the UK, Administration appointments increased by 6% over the past year, which indicates distress and cash flow pressures in medium and larger size trading businesses.
In short, the data points to the reality of on the ground inflation negatively impacting margins and throwing into doubt historically sound business models.
Looking at longer term trends, our own modelling suggests that the level of insolvencies has been consistent throughout the year, with around 5,500 taking place every quarter in England and Wales. The same can be said for Scotland in terms of consistency, at around 2,000 cases per quarter. However, it is worth noting that the UK government’s figures represent a 16% monthly increase on September – perhaps reflecting the watershed increase in energy bills that came into effect on 1st October. With interest rates rising and inflation yet to peak, there is the very real prospect that current conditions will increasingly eat away at business confidence heading into the New Year.
As Black Friday and the Autumn Statement both indicated, consumer and public spending are likely to be limited in 2023 at a time when businesses will need to continue servicing the emergency loans provided by the government during the pandemic. As a result, strong management teams and lenders will be critical in the months to come. To avoid a scenario where recovery plans are undermined by unsupportive lenders, business owners will need to develop a clear plan for the year ahead. We recommend using the time now to plan for a range of scenarios, bearing in mind that the OBR is forecasting that the current recession – albeit shallow – will last for the duration of 2023.
It’s for this reason that we’ve prepared our guide to help management teams to take early action and defuse the inflation time bomb. The guide covers:
You can download the guide here.