Financial Troubles Spell Tough Times for Small Businesses

The start of 2017 looks set to be a tough period for small businesses. With increasing number of businesses being wound up, it appears the high street’s suffering is far from over.

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The past twelve months have been hard for small businesses, and it doesn’t look as though 2017 will offer much respite. Changing consumer trends, and economic and political factors, are already taking their toll on the UK’s High Street.

Over 760 businesses ceased trading in December 2016, with a further 1093 small businesses scheduled to be wound up this month. And, according to a survey of the latest insolvency notices published in The Gazette, some industries are being harder hit than others.

Small Business Suffering

Between the companies wound up in December and January, as well as those which failed in the third quarter of 2016, it brings the total number up to nearly 5,500 failed businesses.

With the official figures for the final quarter of 2016 due for publication in January 2017, cause and effect is yet to be confirmed. But it is certain that wherever a business is unable to weather restrictions in cash flow, insolvency looms.

The research was carried out on behalf of London insolvency practitioners Hudson Weir. It reveals that some industries are being hit harder when it comes to failing businesses. The study revealed that 14.5 per cent of these companies were operating in the retail and food and drink sectors.

However, it’s in the construction industry where the impact is felt most acutely. According to data collected during the second quarter of 2016, 2450 construction companies ceased trading. Next most affected was the wholesale, retail and repair of vehicles sector, with 2065 company insolvencies.

And it’s not only small businesses suffering from lower trading towards the end of 2016. Retail giant, Next, has issued a warning over trading for 2017. The company saw a drop of 3.5 per cent in the run up to Christmas, and anticipates a similarly gloomy picture for 2017.

Brexit or Cash Flow to Blame

The reasons for company insolvency can be complex, ranging from unrealistic planning through fraud and unforeseen loss of market share. But the root cause of is it frequently simple: inadequate cash flow.

Financial trouble tends to strike early in the business life cycle. Only 41.4 per cent of the UK businesses started in 2010 survived to their fifth birthday.

But how much of an impact has the Brexit vote and uncertainty had on insolvencies? Although the UK economy seems to be surviving the immediate post-referendum period, vulnerable business sectors – like construction – have experienced contraction.

Restaurants, cafes and other food outlets are heavily represented in the latest insolvency reports, too, a trend which could reflect the recent well-publicised rise in food prices. Even large companies such as catering giant Compass have been affected by the consequences of a weaker pound.

Hasib Howlader, a chartered accountant at Hudson Weir Ltd, commented on the survey results.

“Brexit is unlikely to bring good news for small businesses, and it seems now it’s just a question of how bad it’s going to be. With more than 40 per cent of small businesses struggling to survive beyond five years even in a pre-Brexit climate, it’s now more important than ever for them to be looking for warning signs that their business may be unhealthy.

“If cash flow is a problem, and you can no longer pay your bills as they fall due, the earlier you speak to an insolvency practitioner the better.”

Mitigating the Effects

Even though businesses are at the mercy of circumstance, it’s possible to mitigate the effect of uncertain situations like Brexit. Hudson Weir recommends that business owners:

• Get to know the normal patterns in cash flow data

When a business keeps good records of its cash flow over a period of years, it’s possible to identify seasonal and other trends, and plan for them.

• Look to the future

The logical next step after record-keeping is making a cash flow forecast. A clear-eyed view of incomings and outgoings six months to a year in advance helps manage business expectations.

• Keep up to date with invoicing and payments

Each invoice should be accompanied by clear payment terms, and it’s well worth enforcing these. It’s also worth getting to know customer payment habits, since any unusual delays can be early indicators of financial trouble.

• Make long payment terms the exception, not the rule

30- and 60-day terms make cash flow management more complicated.

• Focus on managing cash flow

This is something even highly profitable business should do, as out-of-control cash flow undermines profitability and jeopardises future prospects.