Why Do Company Insolvency Rates Vary Throughout The Year?

illustration of fluctuation

If you’re new to the My Liquidation blog, you may not be aware that we report monthly on company insolvency rates. Every month, the Insolvency Service publishes the latest company insolvency statistics and these give us the opportunity to reflect on the current state of play for businesses in the UK. 

Typically, this analysis illustrates that insolvency rates aren’t static and fluctuate throughout the year. Understanding the reasons behind these variations can therefore offer highly valuable insights into business cycles, risk management and financial planning. We’ll look at why company insolvency rates vary throughout the year in more detail in this article, highlighting the 5 key factors which drive often vast changes both month on month and year on year. 

Seasonal Cash Flow Pressure

The most common reason for fluctuations in company insolvency rates is seasonality. A huge number of businesses experience seasonal fluctuations in demand and this directly impacts their revenue and cash flow. Sectors such as retail, hospitality and tourism will all thrive at specific times of the year but may be notably quiet at other times. If a company’s cost structure remains high but revenue decreases significantly, cash flow problems can then emerge.

It’s in these post-peak seasons when businesses can struggle to maintain liquidity, causing a rise in insolvency rates at certain times of the year. For example, we often see a spike in the insolvency rate of retail and e-commerce businesses at the start of the calendar year as the reality of a post-Christmas sales slow down sets in and liquidation becomes the only feasible option. Conversely, company insolvency rates may decline in the lead-up to Christmas when boosted sales provide respite from any ongoing cash flow concerns. 

Financial Year Deadlines

The timing of the financial year can also contribute to changes in UK insolvency rates throughout the year. Businesses are always required to settle their accounts at the end of the tax year in April. It is therefore at this time in the year that many discover they are unable to meet their tax obligations. This can lead to a spike in company insolvency levels in the first months of the new financial year as cash resources have been drained to pay looming tax bills, leaving businesses unable to pay their other liabilities.

Wider Economic Conditions & Support

Company insolvency rates can also fluctuate due to broader economic conditions and subsequent government intervention. When there is an economic downturn, companies typically experience the effects of reduced consumer spending and increased borrowing costs. The UK government often offers schemes to support businesses and this melting pot of factors can both increase and decrease overall company insolvency levels at different times of year.

We have seen the impact of wider economic conditions on UK insolvency rates very prominently in recent years. During the COVID-19 pandemic, the government implemented a range of support measures such as Bounce Back Loans to help businesses navigate the complex economic conditions. These measures saw company insolvency levels decrease to levels not seen for a number of years. However, now that said support measures have been withdrawn, we have seen an overall trend of an increase in company insolvency levels. 

Lending Behaviour

The wider economic climate also has a significant impact on the credit and environment and actions of lenders. As economic conditions tighten, they are much less likely to take risks and this results in stricter borrowing conditions and higher interest rates. Such behaviour can result in a wave of company insolvencies, particularly if businesses find themselves unable to refinance loans or repay their debts as due. 

Supply Chain Disruptions

Disruption within the supply chain is another issue which can cause companies to be more susceptible to cash flow issues. If they face unexpected disruptions – as was the case during the COVID-19 pandemic and as a result of the war in Ukraine – they may be forced to pay higher prices or halt production and this can limit the amount of cash available to pay liabilities. While these kinds of disruptions do not typically follow a seasonal pattern, their timing can still cause company insolvency rates to spike unpredictably at certain times of the year.

Futureproof Your Company

Company insolvency rates fluctuate throughout the year due to a variety of factors, highlighting how important it is to look ahead and futureproof your business for possibly challenging periods. By paying attention to the wider economic landscape and understanding how seasonality affects demand for your products and/or services, you can better plan for potential challenges and mitigate risks.

If you are concerned about the resilience of your business or believe you may be insolvent, prompt action is critical. Speak to our team of licensed insolvency practitioners at the first sign of trouble and we will be able to help you understand your options moving forward, whether that is through the implementation of rescue measures to stabilise your position or by liquidating your business. Whatever challenges you are facing, we can help you navigate the challenges of company insolvency. 

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