Survival of the Fittest

With the trading climate growing harsher, we look at what is fuelling the risk of insolvency that accountants and financial advisors will witness from the frontlines.

While the economy is relatively stable, growth is sluggish, and consumer sentiment is at worryingly low levels, which makes for tough trading conditions for UK businesses.

The race for survival

To set the tone of today’s trading climate, we look at company insolvency statistics published by Real Business Rescue. The statistics measure the number of companies in critical and significant financial distress, including regional and sector trends. They refer to companies with severely deteriorating financial health, retained profits, working capital and net worth.

The latest Business Distress Index for Q1 2025 shows 45,416 SMEs in critical financial distress, up 13% compared to 40,174 companies in Q1 2024. Out of 22 sectors assessed by Real Business Rescue, two-thirds (14 of 22) saw critical financial distress levels grow into double digits over the last year.

The Business Distress Index reflects the changing trading landscape for businesses, worsened by restrained consumer spending and reduced investor appetite. With the risk of insolvency prevalent across key bellwether sectors, companies must navigate this slow-growth period strategically.

As the Business Distress Index shows a substantial number of businesses already at breaking point, we look at how companies already at a tipping point can reduce the risk of insolvency.

Facing the tax burden

‘As UK businesses enter a new tax year, they must keep their foot on the pedal to navigate rising operating costs and steer clear of loading unnecessary financial weight. With market conditions growing harsher, businesses must operate more leanly, which can be achieved through strategic cost-cutting, streamlining and restructuring.

‘The tax burden on businesses is growing heavy as employers bear higher rates of National Insurance contributions and national living wage, along with additional tariffs on exports to the US for some sectors. With little financial relief available to businesses, tightening company wallets is more vital than ever.’

Shaun Barton, Operations Director at Real Business Rescue, commenting on the Business Distress Index

A bitter storm for UK businesses

In the game of survival of the fittest, the company most receptive to change holds the winning key. Businesses are currently up against rising overheads from all corners as operational costs skyrocket.

Recent tax changes mean higher labour costs, while at the same time businesses must digest greater borrowing costs due to high inflation. The US also unveiled a universal tariff on selected exports to the US which may directly impact businesses or indirectly through their supply chain.

We look at some of the pain points for UK businesses and the current economic outlook which directly influences the health of British businesses.

The British Chambers of Commerce Quarterly Economic Forecast touches upon key areas that are likely to feel the detrimental effects of the current trading climate:

• Business investment and trade may slow down due to the impact of the national insurance rise and major global uncertainties.
• Average earnings will likely grow at a slower rate as businesses absorb increased employment costs, including national insurance and the national living wage.
• Unemployment could rise if employers cut back on recruitment due to increased employment costs.
• International trade is expected to remain challenging due to trade barriers with the EU, global conflicts and US tariffs.

As this creates economic uncertainty for UK businesses, company directors must take active steps to keep their financial burden in check and offset rising costs. With the cost of operating a business exponentially rising, company directors must adapt to survive.

Reining in businesses from breaking point

The first quarter of 2025 marked the final period before the new 2025/26 tax year, when major tax changes came into play. As British businesses absorb higher operating costs due to rising taxes, what does this mean for SMEs already at breaking point?

As with physical health, the earlier a disease is diagnosed and treated, the greater the chances of survival. Company health follows the same principle, as the earlier a licensed insolvency practitioner is appointed to tend to the health of a company, the more routes for business survival will be available.

This is essential advice for companies already at breaking point. If a company is cash deficient and continues trading without a rescue strategy in place, this will worsen the financial position of creditors. The duties of a company director are clear – to act in the best interests of creditors – and these apply both pre-insolvency and during insolvency.

With businesses up against rising overheads from all corners, we look at what the game of survival of the fittest entails.

Adapting to survive

To survive in today’s trading climate, businesses must adapt to survive. This may require professional guidance from an insolvency or restructuring expert to help strengthen financial health.

Company restructuring may involve streamlining the business to increase operational and financial efficiency by trimming unnecessary or excessive costs and redirecting them to cash-deficient areas of the business. This makes for a leaner business as cash is directed to areas most in need.

Examples of company restructuring include:

• Debt restructuring: This involves taking steps to make company debts more manageable. These may take the form of a formal or informal debt repayment plan, or sourcing additional funds to bring company debts under control. Taking proactive steps to stabilise company debts can help to keep creditor pressure at bay, such as court action, which could result in compulsory liquidation.
• Streamlining: This consists of increasing the efficiency of the business by slicing away parts that are underperforming or no longer required. By streamlining company operations, the director can reduce operational costs and use these funds to offset the rise in overheads.
• Business finance: Company finance can provide a business with the necessary means to consolidate company debts, fulfil financial obligations, supplement cash flow and invest in growth. Specialist borrowing can provide a lifeline to distressed businesses at risk of becoming insolvent.
• Company administration: When a company is in administration, there is a protective barrier around it to provide breathing space as company directors formulate a recovery plan. This may involve company restructuring to rescue the profitable parts of a business or achieve a sale.

If essential company restructuring is delayed, rising operating costs can gradually consume company cash flow, which can push an unstable business into insolvency. As the health of a business rapidly declines, there will be early warning signs that insolvency is fast approaching, such as creditor pressure, persistent cash flow problems and the build-up of company debts.

To survive and thrive during this turbulent period of economic uncertainty, company directors must tread carefully and remain optimistic when it is most in short supply.

 

Author bio

Sharon McDougall is a personal debt adviser at Scotland Debt Solutions.