A new study from advisory firm Quantuma reveals a sharp acceleration in the rate of businesses in low performing sectors facing insolvency in the wake of the pandemic, Brexit backdrop and wider economic and political instabilities. If preventative action is not taken now, the research predicts over 500,000 UK jobs are at risk.
Quantuma’s ‘The uneven recovery’ report, released today, is driven by the firm’s new and unique data asset, ‘Clarity’. The Clarity model has been created to inform and support the advisory and lending community in developing predictive insight into the health of UK’s SMEs. In addition to identifying opportunities for growth, the forward-looking data set also measures levels of distress amongst SMEs and their respective sectors in order to spot issues early and take action to resolve.
According to Clarity’s proprietary insolvency propensity model, 6,500 SMEs currently have an insolvency risk 4-25% higher than the national average, meaning over half a million people face unemployment. These predictions follow an increase of 11% to just over 14,000 businesses registered as insolvent in 2021, up from 12,500 in 2020. These figures are expected to exceed pre-pandemic levels by 2023 and jump to the highest in the last decade (approx. 19,000) by 2024.
The report also found that the number of creditor voluntary liquidations (CVLs) now constitutes 90% of all insolvencies – a 15% increase since 2020. The proportion of CVLs is at its highest level since 2011.
Manufacturing clear winners in recovery
Clarity’s Growth Score predictions, which determines the likelihood of a business achieving high growth (60%+ growth in employment) via a 1-100 scale, sees the utilities sector come out on top. SMEs operating in the sector record a Growth Score of 94, comparable to the UK median of 51.
Elsewhere, SMEs funded by the public purse, including those that fall under the ‘public administration’ sector, have a Growth Score of 87. There is a watchful eye on manufacturing and financial services businesses which demonstrate strong patterns of growth set to intensify in the coming years, with domestic manufacturing set to soar in the years to come.
Persistent profitability pressures within the mining sector saw its market shrink and, along with SMEs in the education sector, it has the highest share of SMEs with a 15-25% insolvency rate. Alarmingly, start-ups and younger businesses are the most at risk during the pandemic recovery phase, with companies between 0-3 years most prevalent in the 15-25% insolvency rate bucket.
Regional recovery
Analysing changes in regional growth across the UK, the Clarity data found that while levels of distress amongst SMEs appears broadly consistent across regions, there are pockets of growth and financial stability in certain areas. The South West of England is an example of a region excelling away from the pack, with an 11% growth gap between London when combing Growth Score and Financial Strength Score.
A direct impact of the pandemic, local London businesses that relied on footfall from city workers have seen growth hampered, leading to financial underperformance amongst businesses in the capital. As a result, London is lagging behind regional counterparts, namely the South West, Midlands, Scotland and Wales when it comes to SME growth.
Carl Jackson, CEO, said: “Despite various government support schemes, fundamental structural change in market conditions and supply chains, driven by Brexit and compounded by Covid-19, have meant many businesses are simply not as viable as they once were. Looking ahead, inflationary pressures, the cost-of-living crisis, and the fallout from Ukraine will weigh heavily on SMEs and particularly owner-managed businesses in the sectors highlighted with low Growth Scores in our report.
“However, it is not all doom and gloom; pockets of impressive growth are starting to prevail. The manufacturing sector is excelling at an exceptional rate and improving supply chains to increase domestic work is set to soar in coming years. For those sectors that are struggling, action must be taken now to prevent a sharp decline and inevitable job loss in the period ahead.
“The data from Clarity is invaluable to the advisory and SME community. It helps identify those sectors in need of vital support, urging businesses to take the necessary steps to keep staff and meet payments to creditors now, rather than waiting until it’s too late. This model is a crucial tool in futureproofing not only the economy via the SME business community, but also seek to secure high volumes of jobs for the years ahead. Alleviating external pressures will play a fundamental role in the post-pandemic recovery, and Quantuma is leading the way in helping businesses establish a position of strength going forward.”
