Is the cost-of-living crisis driving corporate insolvencies?

While businesses already in a precarious position due to the debt loaded on during the pandemic brace themselves for another financial calamity, how will this shape the future of UK businesses as they face unexpected costs from all angles? Inflation also reached an all-time high, driving up the price of goods and reducing purchasing power, ushering the country towards another recession.

Arming against the threat of corporate insolvency

The cost of operating a business has skyrocketed, largely due to the increase in energy bills, the rising cost of food and fuel, supply chain problems, staff shortages and the withdrawal of Covid-19 government support. To prevent becoming businesses are exploring numerous routes to stabilise their financial position given the new cost of operating a business.

Business restructuring – Appoint a licensed insolvency practitioner or company restructuring specialist to restructure your business to increase efficiency and maximise its potential to generate cash. The business restructuring process includes streamlining a business, financially, operationally, and legally.

Increasing prices – Raising prices so customers can absorb a proportion of the cost. Although this could put customer relationships on the line, there may be no other alternative.

Reducing investment – Downsizing the growth plans of a business can redirect cash towards essential outgoings, such as gas or electricity payments. Many businesses have already seen their energy bills quadruple, pushing many into serious financial distress.

Terminating contracts – Cutting away unnecessary costs such as outsourcing to freelancers or commissioning supplementary work, can help provide a cash boost.

While businesses rush to adopt a leaner way of operating to cope with the new cost-of-living, what do the latest corporate insolvency statistics show about the true reality of the crisis?

Corporate insolvency statistics and the cost-of-living crisis

The latest Red Flag Alert report from Begbies Traynor, which Real Business Rescue is a part of, reveals how many British businesses are in critical financial distress, including the sectors most in distress in Q2 2022. Here are the main findings from the report:

• There has been a rise in the number of businesses in critical financial distress over the last year, with a 37% increase in Q2 22 compared to Q2 21
• Bars and restaurants, general retailers and construction sectors are the major drivers behind this increase, with year-on-year rises of 70%, 48% and 36% respectively
• More than 582,000 companies in significant financial distress – flat on the previous quarter
• A considerable increase in the use of County Court Judgements to collect corporate debt – with CCJs in 2022 approaching the total for the whole of 2021

Commenting on the latest Red Flag business health statistics, Julie Palmer, partner at Begbies Traynor, said: “Having emerged from the pandemic, many companies were hoping for an economic boom but that has simply fizzled out, as supply chain issues and the invasion of Ukraine have taken their toll by driving up raw material and energy costs and reducing both business and consumer confidence.

“We are now in a very high inflationary environment that’s piling pressure on businesses that were already weakened by the shock of the pandemic."

As the cost of living is driving corporate insolvencies, businesses must find new ways to prop up their business as government support from the pandemic dries up, Covid-19 repayments start, and energy bills cost more than they ever historically have.