Insolvency risk grows sharply for Scottish firms

The number of Scottish companies at higher than average risk of insolvency rose markedly over the course of 2017, according to insolvency and restructuring trade body R3.

In December, 26.6 per cent of Scottish firms fell into the category of companies at greater than usual risk of insolvency, up by 36 per cent from January 2017, when the equivalent figure was 19.6 per cent.

Scotland’s business community can however take some reassurance from its relatively strong position relative to other parts of the UK: Scotland has the lowest proportion of firms at above-average risk of anywhere in the UK. In all, nearly a third (32.9 per cent) of UK businesses were at greater than average risk of insolvency in December, up from nearly a quarter (24.7 per cent) in January.

Looking at different industry sectors, while some performed better than others, all of the sectors monitored by R3 saw their proportion of firms at above-average risk of insolvency rise between the start and the end of 2017.

In percentage terms, the restaurant sector saw the smallest rise in elevated risk levels from January (22.5 per cent) to December (24.3 per cent), up 8 per cent, while the figures for the hotel industry rose by 36 per cent over the same period, from 20 per cent to 27.2 per cent.

The Scottish technology and IT sector was the one which finished the year with the highest percentage of firms within it at greater than normal risk of becoming insolvent, at 40 per cent, up from 34.1% in January. The December figure is marginally higher than the overall proportion of all tech/IT firms in the UK in the elevated risk category (39.8 percent).

Tim Cooper, Chair of R3 in Scotland and a partner at Addleshaw Goddard in Edinburgh, said: “It’s not been the easiest of years for the Scottish economy, which is reflected in the overall increases in proportions of companies at higher than usual risk of insolvency. However, R3 has recorded rises in every sector it monitors in every part of the UK, so Scotland is not an isolated case in having seen its risk profile trend upward.

“A few factors likely to have played a part in the rise in risk levels include a hike in the National Living Wage, higher inflation, exchange rate fluctuations, and costs associated with owning or leasing commercial property. There is also some uncertainty around what the final Brexit deal will look like, which could cause headaches for Scottish businesses trying to plan ahead. Businesses need to know what the framework for EU imports and exports will look like in the next few years. A lot of Scottish firms rely on EU staff, too.

“It remains to be seen whether the changes recorded by R3 over 2017 will continue into 2018. Business advisors are anecdotally reporting more demand for their services from companies which are experiencing some degree of distress. Seeking advice from a qualified and accredited professional can be a wise move for any firm struggling to adapt to new market realities, and the sooner this advice is sought, the more options a firm will have to find workable solutions to the issues it faces.

“To start 2018 with confidence, we would recommend that all firms – whatever sector they are in – remain vigilant, keep on top of cashflow, and ensure they are keeping up with developments in technology and customer demand.”

The figures are from R3’s latest insolvency risk tracker. The tracker is compiled using Bureau van Dijk’s ‘Fame’ database and measures companies’ balances sheets, director track records and other information to work out their likelihood of survival over the next 12 months.