Q1 Insolvency Stats: What Do They Mean for the Financial Forecast?

 

Discretionary income is now a distant memory for both individuals and businesses. The cost of living crisis hits businesses just as hard, if not harder, than individuals, forcing them to decide whether to pass on their rising costs to consumers (who are also struggling) or risk sinking themselves and laying off employees. Credit Connect finds that “rising costs are the biggest challenge facing nearly half of UK businesses in the next six months,” and these costs are inevitably passed on to consumers to prevent the economy from collapsing entirely. Consumers aren’t happy because everything suddenly seems expensive, leading them to cut back on spending. Thus, the cycle continues. The cost of business crisis is just as real as the cost of living crisis, affecting everyone involved.

 

A BDO survey of “500 medium-sized business leaders reveals that a third will raise the prices of their goods and services in response to rising costs.” Credit Connect also suggests that “almost a third (31%) are seeking additional financing due to rising inflation, rising to two-fifths (42%) in the hospitality and leisure sectors and 36% in retail and wholesale.”

 

You might notice that these are sectors that were severely impacted by the pandemic. Now, surviving companies are turning to loans or other credit-based options to stay afloat. Naturally, this raises concerns about the long-term viability of these businesses. Taking on extra debt without expecting inflation rates to drop soon or sales to skyrocket means one thing—more businesses becoming insolvent and entering administration or liquidation.

 

What Does This Mean for the Future?

For the insolvency sector, it means continued high demand, though this isn’t necessarily good news for the broader economy. The unfortunate reality is that when insolvency professionals are swamped with cases, it signals widespread financial distress. When people lose everything they’ve worked hard for, it’s a sobering reminder of the tough economic times we’re in. Those who started with little face even greater hardships unless measures are taken to address the energy crisis and rein in runaway inflation. Unfortunately, it doesn’t seem poised to improve anytime soon.

 

While these figures aren’t particularly encouraging for the overall economy, if you’re an insolvency professional without cases on your desk right now, consider yourself lucky. It seems you won’t remain idle for long.

 

Final Thoughts

Working in insolvency is an unusual profession. You’re there to help when called upon, yet no one seems particularly delighted to see you. Your presence often signifies failure, at least in the eyes of those whose businesses are faltering. 

 

On the flip side, where would the economy be without insolvency professionals? If creditors turned to the courts instead, they’d incur further costs and still receive little compensation. Managers of failing businesses might sink deeper into trouble without guidance to show them the hard truth. Being overwhelmed by debt is tough enough without bearing the weight of others’ livelihoods on your shoulders.

 

Insolvency services offer a critical function, and never more so than now as financial markets seem to unravel. It’s often said that things must get worse before they improve. We’re all hoping that’s true for our national economy. 

 

If your workload is overwhelming, Virtual Cabinet can help bring order to the chaos so you can tackle your caseload systematically and efficiently. Organize your case files, reports, and other documents while cleaning up the mess others left behind. Virtual Cabinet understands the insolvency sector and is always ready to demonstrate how seamlessly our Document Management System integrates with major Case Management software.

 

What are you waiting for? Futureproof your business today with a dedicated Document Management System.

 

FAQs

 

What’s the Difference Between Insolvency and Liquidation?

Insolvency refers to a state of being unable to pay debts, applicable to both individuals and companies. Liquidation, however, specifically describes the legal dissolution of a limited company. Once all assets are liquidated (converted to cash), the company is officially dissolved and can no longer accrue debt.

Essentially, a company can be declared insolvent due to unpaid debts but this doesn’t always lead to liquidation. There are situations where a company can recover from insolvency with assistance from an insolvency service. 

 

What Are Corporate Insolvencies?

Corporate insolvency pertains to companies, businesses, and organizations whose total liabilities exceed their assets (balance sheet insolvency) or lack sufficient cash flow to meet immediate debt obligations (cash insolvency).

When a business can’t pay its creditors, it becomes insolvent. At this point, an insolvency practitioner steps in to organize the company’s assets, debts, and financial commitments to ensure fair distribution of what is owed. The qualified practitioner may sell off assets, restructure the business, or initiate liquidation, selling off all company assets.

The alternative to corporate insolvency is individual insolvency.

 

What Are Individual Insolvencies?

Also known as personal insolvency, individual insolvency refers to the state of an individual unable to repay their debts and declared insolvent. While not a strict legal term, it generally applies to someone who owes more than £5,000 to a creditor and either:

• Has received a financial court judgment against them personally (not their business) that has been enforced or attempted to be enforced, or

Or

• Has not paid a statutory demand within three weeks of receiving it or resolved it through legal channels, such as requesting the court to set it aside.