Business failures set to rise by almost 20 per cent

The number of UK companies becoming insolvent over the next two years is likely to be worse than expected, according to the latest report from accountants and business advisers BDO.

The BDO Industry Watch report shows a significant increase in the predicted number of business failures. In December 2007 it was forecasted that business failures would rise by 11.4 per cent between 2007 and 2009. Only 6 months later, in the face of rising energy and food prices, decreasing consumer confidence, falling house prices and restricted availability of capital, the number of business failures between 2007 and 2009 is expected to increase by 18 per cent.

2009 business failures to reach highest since dot.com bubble burst

The report forecasts that business failures will rise to 17,874 in 2008, from 16,168 in 2007, as business conditions worsen. This figure will continue to increase in 2009 with figures expected to hit 19,124, the highest level since the dot.com bubble burst in 2002, which saw 19,928 business failures.

These predictions reflect recent profit growth figures. In 2007 companies enjoyed record profit growth of 9.5 per cent but profit growth is expected to slow dramatically in 2008 and 2009 to 0.9 per cent, the lowest rate since the early 1990s.

All sectors to feel the pinch

The report analyses business failures across all sectors. For the first time since the reports began in 2003, none of the sectors are expected to see a fall in business failures over the next eighteen months, a sign that the effects of the credit crunch are taking hold on the real economy. In 2009, figures for all sectors except Technology, Media and Telecoms (TMT), are set to ‘escalate’ – a term indicating that business failures in each sector will rise by more than ten per cent per year.

TMT sector best prepared to weather the storm

The only sector which is predicted to buck the trend of escalating business failures is the TMT sector. The number of failures in this sector is expected to remain flat until the end of 2009 when they are forecasted to decrease. The impact of the credit crunch on this sector is likely to be mitigated as other companies invest in technologies in an effort to reduce costs and increase efficiency.

Shay Bannon, Business Restructuring Partner at BDO LLP, said:

“This is a sure sign that the impact of the credit crunch is going to have a bigger lag than expected on UK business. Six months ago there was hope that business would feel some respite if the Bank of England slashed interest rates. But spiralling inflation figures now means that this is unlikely in the short term. With the number of business failures expected to decrease in 2010, there is light at the end of the tunnel. But until then companies need to batten down the hatches and put in place some tactics to weather the storm over the next eighteen months.”