The effects of high interest rates and inflation continue to be felt across the business sector, with the latest data showing that company insolvencies are 27% higher than last year. With many SMEs suffering from increasingly tight budgets, it’s crucial to safeguard your finances if you’re to protect your business from insolvency.
Corporate insolvencies on the rise in 2023
The latest figures from 18th July show that England and Wales look set to reach the highest number of company insolvencies since 2009.
The government’s Insolvency Service reported 2,163 companies declared insolvent in June – a rise of 27% from June last year. Total numbers of insolvencies for the year to date mean 2023 looks set to reach the highs of 2009 in numbers of corporate insolvencies.
However, on a granular level, there may be a glimmer of hope. May’s year-on-year insolvencies were an even greater yearly difference than June’s, at 40% higher in May 2023 than May 2022. Whether this means that we will see a decreasing trend remains to be seen with future releases.
Meanwhile, in the United States, corporate bankruptcies are at their highest level since 2010, according to data from S&P Global Market Intelligence, reported in Reuters.
What’s causing insolvencies to grow?
Analysts in both the UK and USA point to four key reasons why companies are struggling in this present climate.
Firstly, rising interest rates are causing enormous cost increases. With the current bank rate at 5.25%, after a twelve-year period from 2009 of rates being below 1%, it’s a big change in business costs for those who had banked on low rates continuing.
Many small businesses cite how the escalating cost of borrowing has caused low-cost finance for SMEs to all but disappear, meaning that those who do have to take out loans, for example, face stiff repayment costs.
Secondly, price rises and inflation across all sectors are having a significant knock-on impact on anyone looking to protect their business from insolvency. The high cost of energy is particularly prohibitive for those with tight budgets: even with the Energy Bills Discount Scheme for non-domestic customers, the unit discount is £6.97/MWh above a threshold of £107/MWh for gas and £19.61/MWh above a threshold of £302/MWh for electricity.
Thirdly, many businesses are still repaying debt incurred during the Covid-19 pandemic. For those who took out loans at variable rates, interest rates again have made their repayments far more costly than they would have been even a year ago.
Fourthly, consumers have become more wary as their own costs rise too. KPMG UK research from April this year shows that half of consumers have reduced their non-essential spending in 2023, while a third are buying from cheaper retailers – which all has a knock-on effect on businesses trying to make more sales to cover their own costs.
How can you protect your business from insolvency?
The most important thing for anyone with tight margins looking to protect their business from insolvency, then, is to make sure that any volatility that can be controlled is indeed controlled. This ideally will be a structured effort that feeds into your strategic planning. A simple way to do so is to maintain a risk register, where you identify and score those risks on a scale of e.g. 1 to 5 for their likelihood and again for their impact. Multiplying those scores together gives you an easily scannable ‘risk value’ that you can use to prioritise your efforts, like in this example from the University of Manchester.
With this in mind, let’s look at three key areas: supply chains, financing and currency.
1. Shoring up supply chains
Of course, businesses don’t operate in a vacuum, so it’s important to see yourself as part of a supply chain with something of a domino effect. Even if your own budget is relatively healthy, that doesn’t mean those of your suppliers will necessarily be the same.
This means you need two elements which might seem contradictory. Firstly, you need as much certainty as you can get, particularly over pricing. For example, if you don’t use fixed-rate pricing contracts with your suppliers at the moment and you predict that your sector will see continued rises, locking those costs in for a set period of time brings extremely valuable certainty to your budget.
Secondly, you need flexibility. If one of your suppliers goes into administration, you need to have a back-up plan. This might mean that you’ve already vetted raw materials from different sources in advance, or you may spread your procurement to lessen your exposure to one particular supplier.
2. Reducing risk from financing
Understand what risks your business can afford to take in securing outside financing. That might be secured against an asset (is it one you can afford to lose?) or unsecured with consequent higher interest rates.
Make sure that you update any forecasts for your own growth too, to take account of the changes in consumer behaviour. As we’ve seen above, spending is restricted, and previous predictions may no longer be valid.
Taking both these elements, you can work out a stress test based on different repayment scenarios in different growth situations.
3. Shielding your budget from currency risk
Finally, if you have international exposure, then you need to mitigate the risk of currency volatility. For example, imagine that you have a supplier whom you pay in US dollars, while your business is conducted in pounds sterling. Because the currency markets are constantly moving, you can never totally accurately predict the value of that dollar price in pounds will be in even a short period – making budgeting extremely difficult.
This is why many companies use a forward contract as a way to gain certainty around their budget. If you can know how much of a particular currency you would require at today’s rate across a timescale of, say, twelve months, then a forward contract can help you lock in that rate for that set sum and period.
Using risk strategies to protect against insolvency
In this time of a squeeze on capital and costs, controlling risk to the maximum extent possible is absolutely crucial. For anyone with funds moving between currencies, it’s so important to make sure you minimise or totally remove the risk of a sudden movement in the markets costing you thousands extra.
Alexander is a writer specialising in foreign exchange and finance for companies with cross-border exposure. He’s written on topics including currency risk, international taxation and global employment for seven years. You can find him out hiking, travelling and working from Spain in the sunnier months.