Insolvency domino effect hits Midlands firms hard
The failure of firms in the supply chain has adversely affected one in three firms across the West Midlands, making it one of the UK’s worst affected regions.
The ‘domino effect’ – where the failure of a customer, supplier or debtor has a negative effect on another – saw one in three firms in the region take a financial hit in the past six months, according to figures from insolvency and restructuring trade body R3.
When coupled with a 13% rise in underlying insolvency in the first quarter of this year when compared to the final three months of 2017, a rising number of firms are deemed to be at risk.
Numerous high profile failures of high street chains and other companies – including construction giant Carillion – have hit the finances of firms across the West Midlands.
Some 32% of businesses in the region said an insolvency elsewhere had either had a “very negative” (7%) or “somewhat negative” (25%) impact on their finances.
R3 Midlands chairman Chris Radford revealed that an upsurge in requests for advice regarding insolvency and restructuring was noted in the immediate aftermath of the Carillion liquidation.
He added that many firms have experienced supplier issues and that it may not be immediately apparent that they are in difficulty.
The construction sector in particular has struggled in recent months, as weaker growth in house prices has resulted in reduced output among housebuilders.
For context, 47% of construction firms across the UK reported that the insolvency of another firm had negatively influenced their finances in the first half of this year.
That is considerably ahead of other industries that have been adversely affected, with 32% of manufacturing firms and 31% of retail companies the next worst affected sectors.
Foresight and planning can help to overcome some of the impacts of the domino effect, although there is no guarantee that turnover or profitability will not be affected.
Businesses therefore need to mitigate the risks surrounding insolvency and should seek advice at the earliest possible moment if they, or a supplier, faces financial difficulties.
By Phil Smith