Low failure rates provide false sense of security

Company failure rates will remain flat during the second quarter of 2012 but firms supplying the construction, real estate and retail sectors should not be drawn into a false sense of security as they assess the financial risks facing their businesses, according to the latest Graydon UK Insolvency Predictor.

Based on data published in June by commercial credit referencing agency Graydon UK, second quarter company liquidations will increase marginally (up 1.4 percent) on the first three months of 2012, with the year on year increase also being 1.4 per cent. The second quarter figures will also represent a fall of 4.8 percent on the same period during 2010 and a drop of 11.6 percent compared with the same period three years ago (2009).

This flattening of the overall rate, however, masks stark differences between industry sectors in the likelihood of businesses hitting the wall. Projected second quarter failure rates in the construction (up 2.1 percent), retail (up 2.5 percent) and real estate (up 5.3 percent) sectors, sit above the overall projected trend level. (Average rate of increase based on the last 5 quarters – Q1 2011 to Q2 2012)

In practice, this means that companies in construction, retail and real estate are 2.6 times more likely to go under in the present market than those in the other sectors covered by the data, including support industries such as those providing accounting, marketing and project management services.

Gordon Skaljak, External Spokesperson for Graydon, says that the relatively flat rate of business failures does not suggest that a sustained economic recovery is imminent: “It’s also clear that companies exposed to the construction, retail and real estate sectors, in particular where companies in the industries are key customers or suppliers, should be proactive in their approach to risk management and make sure they are regularly reviewing the credit status of the businesses they’re interacting with,” he says.