How clients are coping as insolvencies reach a 13-year high

Increasing numbers of clients are choosing to operate at home to reduce risk

Lauren Harvey, Assistant Accounts Manager, The Accountancy Partnership

From what we’ve seen, the cost-of-living crisis has been the biggest cause of these insolvencies. Businesses have been impacted in two ways: business costs have increased while customers have reined in on spending, causing significant reductions in sales.

While some of our clients are certainly concerned, an increasing number are choosing to operate their businesses from home and as a result, exposing themselves to less risk.

We’re finding that hospitality businesses have been hit the hardest. Most concerns have come from clients who run cafes, restaurants and bars. A few have had to close because of this double hit they are taking with increased costs of rent and heating as well as the decreased custom, meaning their sales simply cannot bridge this growing gap.

Verdict: Cost-of-living crisis is biggest cause of concern for clients, many are now operating from home to reduce costs and risk. Hospitality is being hit hardest.

We’ve noticed an increasing number of insolvency enquiries

John Cullen, Business Recovery Partner, Menzies

The number of insolvency enquiries we have been receiving has risen significantly since November, so the latest statistics are not surprising. Between rising interest rates, high inflation and depressed consumer demand, it’s likely that corporate insolvencies will not only remain high but also increase further in Q1 2023 and beyond.

For the hospitality sector, pressures have hit especially hard, with sky-high energy costs and staff shortages conspiring to put many businesses at risk of insolvency. The challenges have rolled into the start of 2023 and, with another recession looming, many businesses in the sector have been taking drastic action to reduce their overheads.

It’s not just the hospitality sector that’s feeling the strain due to lack of labour. One of the reasons we’re seeing an increase in administrations and company voluntary liquidations (CVLs) at the moment is that HMRC is not able to pursue all of its debts as quickly as it would normally, given the number of defaulting companies and its own struggle to recruit staff.

Businesses will need to balance a number of pressure-inducing variables in the months ahead. Further interest rate increases and the reduction of the Government’s Energy Bill Relief Scheme in April will only make things worse. In the meantime, many businesses will be stuck in fire-fighting mode for a while longer.

Verdict: Businesses will experience pressure-inducing variables in the medium to long term and are likely to remain in fire-fighting mode for a while.

Businesses that survived the pandemic are now struggling

Steve Elliot, head of Insolvency and Business Recovery, Monahans

In the South-West, we are witnessing insolvencies on the rise.

It’s a perfect storm; a recession looming coupled with the cost-of-living-crisis means future concerns are driving down consumer spending. Many businesses are facing swelling overheads of energy costs and supplier price increases, with no realistic prospect of passing those increases on to the end customer.

We’re also seeing those who have battled through Covid struggling to maintain momentum. Businesses that survived the pandemic by making use of loans and grants are now considering the prospect of insolvency.

This is partly due to the delayed hangover of Covid. Some face higher tax liabilities due to the timing of grants or need to pay back bounce back and CBILS loans, adding a further squeeze to cash flow.

Small retailers and the hospitality sector are the most likely to struggle. That’s unsurprising considering they tend to operate on low-profit items and rely on high turnover with regular custom. In some cases, the increased energy costs have eaten away the vast majority of profits, and footfall is expected to drop even further.

Construction is also always at risk when recession hits. With raw materials in short supply and their prices rapidly increasing, it’s likely that we will be seeing more construction companies fold in the near future.

Verdict: Companies that managed to survive the pandemic are now struggling due to delayed Covid hangover and higher tax liabilities.

Clients in all sectors are concerned about business failure

Alan Broome, Director, Acumenica Tax and Accounting

We are finding clients in all sectors are becoming increasingly concerned about business failure. It seems that a perfect storm of the Covid hangover, energy prices and the general economic downturn is the main storm.

Much of the Covid relief provided to businesses during lockdown, while very welcome, was only temporary, and now we’re seeing the problems with kicking problems down the road.

Businesses that were given a suspension on paying their VAT and other taxes now have to pay them back, along with maintaining payments on current obligations, and possibly paying back Covid loans. This, coupled with twofold and more increases in energy costs, and less business generally is, unfortunately, making business failure, and liquidation almost unavoidable.

Those businesses in hospitality are most at risk, along with those in the supply chain.

Verdict: Clients in all sectors are concerned about insolvency thanks to Covid hangover, energy prices and global economic downturn.

Clients phone in financial distress, asking for reassurance they’re not the only ones

Jessica Middleton, money expert and founder, Middleton Professional Accounting Services (MPAS UK)

Businesses have just come through one of the toughest periods in economic history. When income is lost for one reason or another, the time taken to recover often matches the time of loss, or worse.

So unfortunately, insolvency is not surprising. Businesses are expected to cover current costs whilst still recovering from losses or debts incurred during Covid. Energy price hikes, tax increases, rising interest rates and more mean businesses are barely breaking even from month to month, or operating at a continuous loss. I have had clients phone me just to get the concern off their chest and the assurance they aren’t the only ones. When debts mount up, money can’t come in quick enough, you only have 24 hours in a day when you need 30, insolvency seems like the way forward just so you can sleep at night.

The sectors I have seen the hardest hit are health and beauty, hospitality and retail. I fear these are a fraction of the industries being backed into a corner feeling like insolvency is their only way out.

Verdict: Businesses are barely breaking even and clients are needing reassurance they’re not alone. Insolvency can feel like the only way out.