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The 'domino effect': One quarter of businesses affected by insolvencies

  1. Domino effect
    iStock_Martin Barraud
    Francois Badenhorst

    Francois Badenhorst Business Editor, UKBF & AWEB Staff Member

    91 18
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    One in four UK companies have suffered collateral damage following the insolvency of a customer, supplier or debtor in the last six months.

    New research from R3, the insolvency and restructuring trade body, added a darker shade to an already grim portrait of how a litany of high profile failures have affected the UK’s economy.

    The research found the financial impact of the insolvency of another business was described as “very negative” by one in ten UK companies, and as “somewhat negative” by 16% of respondents.

    Two-fifths (38%) of firms with turnover of between £5m-£24.9m reported a negative impact, while the levels for smaller companies (up to £4.9m turnover) were just under a quarter (24%), and 30% for larger companies (with turnover of £25m+).

    The figures, R3 said, demonstrate a “domino effect”, where one company’s insolvency will increase the insolvency risk for others. This year has seen a rash of high profile insolvencies, most notably Carillion and Toys R Us.

    The collapse of Carillion was particularly brutal. Once one of the UK government’s biggest contractors, the Wolverhampton-based firm amassed more than £900m worth of debt and a £587m pension deficit before it tumbled into oblivion.

    The insolvency left a reported 30,000 small firms with unpaid invoices. According to a witness statement filed at the High Court by Carillion’s chief executive expected recovery for creditors in liquidation is 0.8 to 6.6 pence in the pound.

    The concussive blast caused by Carillion has been compounded by the High Street’s seemingly ineluctable slump. Toys R Us, Jamie Oliver’s restaurant chain, Mothercare, Carpetright, and House of Fraser are just a few of the big-name victims.

    “No business exists in isolation, and every headline-grabbing corporate insolvency will have consequences for numerous other enterprises,” said R3’s Andrew Tate. “In the worst-case scenario, the loss of a vital business relationship can lead to a company’s own insolvency in turn – the ‘domino effect’ in action.

    “After the news of the Carillion liquidation broke, for example, our members reported an immediate upsurge in requests for advice from companies with links to Carillion. Many retailers have hit the headlines as a result of their current difficulties, causing less visible struggles at other firms, such as suppliers and service providers.”

    Construction companies and medium-sized firms report the biggest effect, according to R3’s research. Almost half (47%) of construction businesses said the insolvency of another firm had had a negative impact on their finances in the last six months.

    Wholesale (35%) and transport (33%) were the next most affected sectors.

    “The construction sector’s networks of contractors, sub-contractors, sub-sub-contractors, and so on mean that it is highly interconnected, with the impact of one insolvency rapidly affecting other firms,” said R3’s Tate.

    “The wholesale and transport sectors are both low-margin industries exposed to the ups and downs of the retail arena in particular, while the increasing demand for just-in-time logistics leaves little margin for error in either sector.”

    “Middle-sized companies are less likely to have the same resources focused on credit control as larger ones, especially if they have grown rapidly without ensuring their systems have kept pace. Reliance on a single supplier or customer can also be an issue in this space, meaning that any difficulties in a supplier or customer may have a disproportionate effect.”

    This article originally appeared on UK Business Forums' sister site AccountingWEB

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  2. JEREMY HAWKE

    JEREMY HAWKE UKBF Legend Full Member

    3,447 1,100
    Great article Francols

    Having suffered from customers going bust over the decades. I can speak first hand of the damage this does to a small business . Even if it does not cause a business to fail the knock on effect from a supplier closing its doors and calling the administrators in can last for years .

    As we entered into another era of business after the credit crunch I took a very close look at things and wanted to have more management of risk . I also wanted to simplify my life .
    When a customer is in difficulty and your business is at risk it creates uncertainty. Market forces ,trends and demand are one thing but I decided that this is something I can have control over .
    We now only take payment at the point of booking except for businesses that are completely rock solid ie water boards, large medical PLCs and councils ect .

    This caused us to lose some customers I knew this would happen when I took this decision but it means we are not depending on cash flow that may not even come . We are not a bank and we are not a lending facility .
    We are still here I cannot say that this would have been the case if we continued exposing ourself to risk

    The question a small company needs to ask itself
    Do we want to be here in the future
    Do we have a book that is not just at risk of shutting us down but also a risk to short term cash flow
    Is it worth the risk ?
     
    Last edited: Jul 27, 2018
    Posted: Jul 27, 2018 By: JEREMY HAWKE Member since: Mar 4, 2008
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    Kat Haylock likes this.
  3. Lisa Thomas

    Lisa Thomas UKBF Enthusiast Free Member

    2,251 276
    Interesting article.
     
    Posted: Aug 3, 2018 By: Lisa Thomas Member since: Apr 20, 2015
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