Reduction in company failures does not mean more jobs

The number of company failures fell to the lowest level for a year in Q1 2010. However this will not necessarily mean that more jobs and higher wages are round the corner.

Company Failures have fallen in 2010 so far

The number of companies which fell into insolvency reduced by nearly 18% in Q1 2010 compared with the same quarter in 2009.

This figure is surprising when compared to the recent lacklustre performance of the economy. It returned to growth in the forth quarter of 2009 but only at a rate of 0.4%. This was followed by 0.2% growth in the first quarter of 2010 (although this figure may yet be revised).

Nevertheless the fact that the number of company failures is reducing is surely good news for the economy. It would make sense that as a result more jobs and better wages are on the way.

Are the fortunes of UK companies really improving?

During the past two years of recession many have survived the reduced demand for their products and services by cutting costs. This has meant reduced staff wages and implementing shorter working weeks.

In addition there has been creditor forbearance. The HMRC Time to Pay scheme has enabled many businesses to overcome short term cash flow problems by deferring payment of tax and VAT payments. Banks and other creditors have avoided forcing otherwise insolvent companies to close for fear they will recover little or nothing of their debt owed.

As such the fact that fewer companies are going bust does not necessarily mean that they are growing. In reality many are simply being prevented from failing. Their survival is maintained by cutting cost to the bone and creditor forbearance.

There has also been a 30% increase in the number of companies which have avoided liquidation using a Company Voluntary Arrangement (CVA). Reducing creditor payments and agreeing debt write off.

Are Company Insolvencies likely to rise?

There are a number of indicators suggesting that the environment for business will remain difficult for the foreseeable future. Recessions in the 1970s and 1990s have showed that company failures generally increase in the 18 months after the end of a recession.

There are two underlying reasons for this. First companies tend to over trade after a recession. Demand increases but cash remains tight. Failures follow as cash runs out. In addition creditors start tightening their debt collection policies.

Creditors such as banks will allow more companies to fail as the economy grows. This is because assets become more valuable and there is more chance of a return after liquidation.

The current reduction of business failures is certainly welcome. However many are still fighting for survival. In this environment it seems unlikely that they will be ready to start taking on the additional costs associated with wage increases and new recruitment any time soon.

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