By Daniel Hunter
Company failure rates will remain flat during the second quarter of 2012 but firms supplying the construction, real estate and retail sectors should not be drawn into a false sense of security as they assess the financial risks facing their businesses, according to the latest Graydon UK Insolvency Predictor.
Based on data published by commercial credit referencing agency Graydon UK, second quarter company liquidations will increase marginally (up 1.4 per cent) on the first three months of 2012, with the year on year increase also being 1.4 per cent. The second quarter figures will also represent a fall of 4.8 per cent on the same period during 2010 and a drop of 11.6 per cent compared with the same period three years ago (2009).
This flattening of the overall rate, however, masks stark differences between industry sectors in the likelihood of businesses hitting the wall. Projected second quarter failure rates in the construction (up 2.1 per cent), retail (up 2.5 per cent) and real estate (up 5.3 per cent) sectors, sit above the overall projected trend level. (Average rate of increase based on the last 5 quarters — Q1 2011 to Q2 2012)
In practice, this means that companies in construction, retail and real estate are 2.6 times more likely to go under in the present market than those in the other sectors covered by the data, including such support industries such as those providing accounting, marketing and project management services.
“The relatively flat rate of business failures will be welcomed by many company owners, but it does not suggest that a sustained economic recovery is imminent," Gordon Skaljak, External Spokesperson, Graydon UK, commented.
“It’s also clear that companies exposed to the construction, retail and real estate sectors, in particular where companies in the industries are key customers or suppliers, should be proactive in their approach to risk management and make sure they are regularly reviewing the credit status of the businesses they’re interacting with.
“This reminds us that the financial climate is still very challenging and many businesses are struggling to survive. Construction firms are being hit hard as many long term capital expenditure projects, particularly those funded by the Government, are coming to an end and price pressure triggered by reduced demand is eroding margins.
“For retailers, meanwhile, the impact of reduced household disposable income budgets amid rising living costs, combined with the continued rise of e-tailing is making life hard for businesses which have failed to adapt their business models accordingly. The failure of Clinton Cards is a case in point, with the closure in that case of many High Street branches emphasising the pressure being felt by real estate managers facing the worrying prospect of increasing levels of vacant space at a time when rental yields are not being sustained outside prime urban locations.
“This is why companies must stay alert to any changes in their customers’ circumstances that could lead to non-payment of debts in the future. It’s also a reason why all companies need to maintain a strong credit rating to secure alternative sources of funding quickly should their cash flow take a hit. This is an incremental process and hinges on the submission of accurate, transparent data to credit providers to give companies the best possible opportunity to raise capital when and where they require it.”
Join us on