Do the latest insolvency statistics actually represent a recovery, or is it the lull before the storm?

The Insolvency Service has recently released their statistics for the third quarter of the year.  On the face of it they paint an improved picture. 

Looking at corporate insolvencies there were 3,974 insolvent liquidations in the third quarter of 2010, which represents a 13.9% drop compared to the same quarter in 2009. 

In the same quarter there were 349 receiverships, 633 administrations and 159 company voluntary arrangements.  On a percentage basis this is a decrease of 27.7% compared with the same quarter last year and within this the number of administrations dropped by 35% - I expect the drop in administrations is largely due to the drop in usage of pre pack administrations in the last year.

Turning to individuals, there were 13,907 bankruptcies (down 24.2% on the same quarter in 2009), 12,960 individual voluntary arrangements (up 4.6% against the same quarter last year) and 7,068 debt relief orders, which have continued to increase since their introduction in April 2009.  Prior to this these individuals would otherwise have been subject to a bankruptcy order, which explains at least a part of the drop in that figure.  Overall there were 33.935 individual insolvencies, representing a decrease of 3.7% compared with the same period a year ago.

In fact, looking further back, it can be seen that in the third quarter of 2010 just 0.8% of active companies entered into liquidation.  This compares favourably with an average of 1.3% during the last 25 years; particularly with a peak of 2.6% in 1993.  The number of active companies has changed considerably though.  Interestingly there were 2.2 million active registered companies in quarter three of 2010, compared with some 900,000 in the early 1990’s and less than 800,000 in 1986.

In the last quarter 1 in 311 individuals became insolvent, which is still very much higher than the average of 1 in 575 (0.1% of people) over the last 25 years.

So, do the above statistics represent a realistic recovery?  Or, is it a lull before the storm?  Looking forward to 2011 and beyond; we know that VAT is set to rise and that we can expect a number of public sector job losses, which will in turn have an impact on the private sector.  Various commentators are saying that interest rates are set to rise in the near future, but then again there are those that disagree.  Although it looks as if there has been, with regard to insolvencies as an indicator, some statistical improvement in the economic outlook, it appears increasingly likely that by the second quarter of 2011 any upward trend is likely to have halted and we may even see insolvencies, both individual and corporate on the increase.

A financial squeeze, but how tight?

The possibility of a double dip recession has been muted by many for some time now.  The Chancellor has now announced his four year spending review; revealing a number of spending cuts to deal with the £155bn deficit and to try and secure the country’s longer term future without, he hopes, the country suffering a second recession.  These cuts will inevitably affect the finances of many people and businesses, some to a greater degree than others.  There will be 490,000 public sector jobs shed over the next four years and government departments will see their budgets cut by an average of 19% over the same period.  There are many businesses that supply goods and services to these departments. So, not only is there a direct impact on the departments, but other stakeholders will feel the pinch too.  Locally, it is expected that the defence budget cuts will have a similar impact.

Although we may all experience a financial squeeze going forward, with sensible planning and good advice we should be able to cope. 

Below is an extract from an article I recently had published in the Southampton Daily Echo, which was in connection with coastal towns having some of the highest bankruptcy rates in the UK.  I think it is relevant on the back of  this week's news too.

“All too often, the Directors of businesses which are struggling financially do not share the burden with anyone and they certainly do not seek expert advice. When the business plan is not stacking up, we would recommend you look out for the early warning signs and consider:

1.      are you delaying payments to suppliers?

2.      are you regularly exceeding your overdraft limit?

3.      have your lines of credit dried up?

4.      are you struggling to meet the wage bill?

5.      is the tax man sending you threatening letters?

A common sense approach is required, and if you find that you are spending too much time in the business worrying about the financials, then that is usually an early symptom of a struggling business.

Avoid letting the warning signs appear to be obvious when it is too late. hjs|recovery can help with our free, confidential financial healthcheck. This is designed to help you identify and focus on the problem areas, enabling you to work on the business and get back on track.”

Finally, thank you to all who sponsored our team – hjs|commandos – on the 2010 Royal Marine Commandos Challenge, held in Bicton, Devon on 10 October.  So far we have raised £727 for the Devon Air Ambulance, and C Group (who support Royal Marines; particularly those suffering from long term effects of injuries sustained on operations).  We completed the 10k course – a 3k run, 4k over the Royal Marines’ assault course and another 3k run – in 1 hour and 33 minutes, coming in 70^th place out of 356 entries, so not bad, albeit rather tired, bruised, cut and blistered!