According to a recent report by The Association of Business Recovery Professionals (R3) over a quarter of UK companies have been hit by the domino effect of another company’s insolvency in last six months.
The research from R3 suggests that 26% of UK companies have suffered a hit to their finances following the insolvency of a customer, supplier or debtor during the last six months. In Q1 2018, underlying insolvencies climbed 13% from the previous quarter.
No business exists in isolation and this domino effect means that one company’s insolvency problems can have a lasting effect on others with whom it has a business relationship – 10% of respondents reported this effect as ‘very negative’ and 16% as ‘somewhat negative’.
The effects also seem more apparent according to the particular sector within which a business operates. Construction for instance has been contracting over recent quarters, with rising costs, weaker growth in house prices slowing output among house builders, and falling spending on infrastructure. 47% of firms in this sector claim to have been affected by the insolvency of others. The construction industry is particularly inter-connected in terms of suppliers, contractors and sub-contractors so the insolvency of one company can impact significantly those with whom it does business.
Medium sized companies seem to be most affected generally with 38% of firms with a turnover of between £5m-£24.9m reporting a negative impact. This could be because resources to manage credit control are not well established, or that they tend to have a particular reliance on a specific customer or supplier whose insolvency therefore has a considerably greater impact.
Organisations affected by others in their network becoming insolvent need to carefully calculate the potential risk to their own business and attempt to mitigate their exposure by actions such as diversification of suppliers or new business development.
If in doubt organisations should always seek professional advice to help manage financial problems or establish long term business plans. We recommend that early action is the key to avoiding or surviving financial difficulties. The difference between businesses that survive and thrive and those that fail is how well they manage difficulties.