Company Insolvencies at highest level since 2009
Inflation is one of the key causes of this. What can companies do to ease the impact of inflation?
Insolvency Service data for Q2 2023 shows that company insolvencies in England and Wales hit the highest level since 2009, with 6,342 registered insolvencies in the 3 months to June 30th, a 13% rise, year on year, and 9% up on the previous 3 months. Of these, 83% (5,240) were Creditors’ Voluntary Liquidations, the highest quarterly level since 1960. The hardest hit sectors were construction, retail and food services, but all large industries saw increased insolvencies during the year to June 30th, 2023.
Most commentators point out that these numbers do not come as a surprise, with businesses under severe pressure, especially those with large post-Covid debts, exacerbated by rapidly increasing inflation, higher interest rates and supply chain problems. But what can companies do to minimise the effects of the threats they are facing and reduce the chances of insolvency and a Creditors Voluntary Liquidation? In this article, we look specifically at inflation and look at some strategies that companies could use to ease the impact of inflation.
Easing the impact of inflation
Two of the most common things to do to ease the impact of inflation, at least in the short run, is for companies to pass on the rising costs to their customers and/or increase borrowing to help ride out the storm. However, the latter option has been hampered by the high interest rates we now have. In the former case, although we have seen many large corporates from Unilever to Virgin Media O2 raise their prices by significantly more than inflation and see increased revenue as a result, that is a scenario that is less likely to be repeated in the SME sector, where the upward pressure on costs has been going on for at least 2 years now, which when coupled with a sharp fall in disposable income, makes it likely that many customers will spend less rather than paying more.
So, what strategies are available for companies to ease the impact of inflation?
Smart cost reduction and pricing
Rather than cutting costs across the board, including investment, which could lead to reduced competitiveness as trading conditions improve, a smarter approach to cost reduction is to focus on the ‘good costs’ (those that are central to really driving value), while reducing the ‘bad costs’, for example those that lead to process inefficiencies.
Knowing what customers really value is a good place to start when it comes to identifying and acting upon good costs and bad costs, and also when it comes to pricing.
It is still the case that even in the most price-sensitive markets, customers want value for money just as much as low prices, and this could mean that smart pricing focuses on ‘value branded items’, special offers or smaller pack sizes, for example. Likewise, a reduction in product ranges, perhaps temporarily, would help reduce the number of stock-keeping units, which will flow through into lower transport, storage and marketing costs.
Speed up digital investment
It might seem counter-intuitive to speed up investment of any kind at this time, but this follows on from the point above of smart cost reduction and pricing. Investment in digital technology can help with decision making in identifying and driving out ‘bad costs’. But it can also be used to improve understanding of the target market and deliver an enhanced level of customer service. For these reasons, the right digital investments made now are likely to pay dividends in the future.
Improve your forecasting
Cash flow (see our article on ‘are you in control of your cashflow?) and working capital forecasting are particularly important at a time of high inflation and economic downturn, especially when played out against different future assumptions of how and when improvements in the economy will occur. The more businesses understand what is coming the better the ability to manage the risks, make better decisions and sustain confidence among suppliers and creditors. If trouble ahead is detected, better forecasting about the scale of the trouble, will help businesses to tackle issues before they escalate. Likewise smarter and more timely decisions on investments can be made with better forecasting.
Focus on Environmental, Social and Governance (ESG)
This is an area that could easily get neglected during these inflationary times, as companies are forced to firefight and focus on the here and now. However, it is increasingly becoming the case that there is significant growth in how much consumers value sustainability when it comes to making purchasing decisions. In addition, nearly 75% of investors take into account the extent and effectiveness of a company’s ESG policies when extending finance. Reducing commitments to ESG policies could easily prove to be counterproductive.
Talk to us if you are worried about insolvency
Our advice to companies in financial distress is to contact an Insolvency Practitioner, such as Antony Batty & Company, as soon as possible, because the sooner we are appointed, the more likely it is we can help avoid a liquidation (usually a Creditors Voluntary Liquidation), perhaps with a turnaround procedure, such as an Administration or a Company Voluntary Arrangement.
We can also help turning businesses around with developing realistic forecasts, cash flow management advice and debt consolidation and management actions. However, the strategies detailed above are all worth looking at for integrating into a business’s methods for easing the effects of high and sustained inflationary pressure before an Insolvency Practitioner needs to be appointed.
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If your business, or a business that is a client of yours, is facing financial difficulties, with insolvency and possibly a Creditors Voluntary Liquidation looking, please contact our insolvency practitioners or call us at any of our offices:
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