UK businesses in distress

Are UK businesses doomed? Is there hope on the horizon?

There have been plenty of news articles recently citing the negative trend of UK businesses under strain. For instance, this article from the BBC news website: record jump in businesses in financial distress.

Critical Financial Distress

The article cites information from insolvency experts and uses the term "critical financial distress." Their source defines it as having a CCJ outstanding for over £5k or facing a winding-up petition.

However, I have seen winding-up petitions granted in circumstances where they were not the next logical step. A company might owe or even be in dispute over an account, but WUPs effectively end their access to credit and can lead to frozen accounts. This effectively ends the ability to trade out of insolvency.

A company might not be insolvent, but have a WUP granted against them if the judge can be persuaded. So, while having a WUP against a company is a factor, I would point to other indicators:

• are the company paying their regular bills?
• is they company recruiting or replacing staff that leave?
• is the company continuing to take on new clients?
• are there multiple CCJs against the company?
• are their company filings up-to-date?
• what does their credit rating reveal about them?

No one thing indicates critical financial distress, however, together they build a good picture of a company's financial situation.

Causes of the Financial Distress

It's no secret that the COVID pandemic from 2020 had a huge effect on UK business. While there were some businesses such a food delivery, online entertainment (streaming) and DIY that saw huge growth, plenty of other sectors struggled. Notably while food delivery excelled, many traditional restaurants, pubs and the like closed and continue to close to this day. A lot of those businesses that survived the pandemic built up large debts that became unserviceable as consumer confidence dropped, disposable income reduced, inflation rose and everything just cost more. Energy and food prices rose. Now we also have a rise in National Insurance contributions and the minimum wage.

Costs throughout the supply chain increased and not just by the rate of inflation. Businesses that were operating on margins of 5-10% found themselves trading at a loss and looking to reduce costs. Often by the time you are looking to reduce costs, you are trading behind and will struggle to recover your solvency.

Then there is HMRC which will have had a mandate to bring in tax revenue to ease government spending restrictions. The universally-despised government service is once again in the spotlight with even MPs accusing them of deliberately providing a poor service to tax payers. I have seen cases where HMRC have mistakenly calculated liabilities and trying to get them to review their calculations requires persistence, solicitors, money and influence. Not something the average business has when they are struggling to survive.

Low margin businesses are having to find ways around these issues and may cannot. There are only so many staff that can be laid off where you can continue to operate efficiently. Obtaining credit to trade through difficulty requires higher levels of growth or a large increase in revenue to service those loans. Using lower-pricing goods or ingredients can lead to a lower quality end-product or service.

We are dealing with Western economies that pushed manufacturing to cheaper countries and concentrated on services. Now we find ourselves massively dependent upon Chinese manufacturing (with a varying level of quality) while many services are provided by companies without a UK tax-base. Thus further reducing the funds available to encourage internal growth or spend on infrastructure.

Whenever there is positivity around manufacturing making a comeback in the UK, the truth is that the plants are usually just points of assembly for parts manufactured elsewhere. For examples of this, think car plants and battery factories.

Is there hope on the horizon?

There is a hope, however. If a company can provide a good quality product or service at a reasonable price here in the UK, it will find a place in the economy. Some may be locally-focused, while others have the potential to be a success internationally.

The UK government has to focus on providing the means for business to thrive in the UK and prevent that growth being diverted to other countries. The tax system needs to be thoroughly overhauled to be fit for purpose in the modern global economy. If a multinational can earn billions but only pay a small percentage in tax, then tax system is at fault, not the company. Additionally, it is delusionary to expect other countries (particularly the US) to be willing to work with us on a fairer system of trade which would inevitably reduce the power of global corporations to extract money without contributing fairly.

Often the focus is increasing foreign investment. However, once you factor in government subsidies, tax breaks and the internal revenue structure of these companies, there's often no benefit to the economy. Instead focus and invest in UK business, employing locally, contributing to their local economy where the tax revenue is paid fully within the UK.

If this doesn't happen, we'll continue to see UK businesses fail. The UK economy will continue to lose stability and be even more dependent upon foreign markets and currency fluctuations.