Reduction in company failures may not mean improvements for jobs and wages

The number of companies which were closed due to bad debts fell to the lowest level for a year in the first quarter of 2010. However, there may still be bad news to come for wages and jobs.

The number of companies closed forcibly by creditors or voluntarily due to an inability to pay their debts reduced by nearly 18% in Q1 2010 compared with the same quarter in 2009.

This figure is surprising when compared to the recent lacklustre performance of the economy which returned to growth in quarter 4 2009 but only at a rate of 0.4% and 0.2% in the first quarter of 2010 (although this figure may yet be revised).

Why are company failures reducing?

I believe that there are a number of reasons why more businesses have not failed.

Over the past two years, many companies have seen reduced demand for their products and services. However, they have successfully managed this by containing their cost of employment through reduced staff wages and implementing shorter working weeks.

These measures have been supported by the workforce as they are aware of the difficulties which their employers have been facing.

In addition, the HM Revenue and Customs time to pay scheme launched in November 2008 has enabled many businesses to overcome short term cash flow problems by deferring payment of tax and VAT payments.

The figures produced by the insolvency service have also shown a 30% increase in the number of companies which had avoided closure using a process called company voluntary arrangement (CVA).

A CVA allows a company to negotiate a reduced payment plan with its creditors and often write off 50% or more of its debt.

Prediction for the future

There are a number of indicators suggesting that the environment for business will remain difficult for the foreseeable future therefore maintaining pressure on wages and jobs

The economic recessions in the 1970s and 1990s showed that the number failed companies increased in the 18 months after the end of a recession.

This is largely attributed to companies increasing their demand for goods and service but demanding longer payment terms and tightening up on their own their debt collection activities. As a result of these activities, cash flow becomes increasingly tight.

In addition, given the level of public debt, the government will have to start tightening its policy on crown debt collection.

There are already signs that the HMRC time to pay scheme is coming under pressure. According to a report in the Times, the number of companies being refused requests to defer their VAT payments more than doubled in the 1st quarter of 2010 compared to same quarter last year.

The reducing number of business failures is certainly welcome. However, the economic environment looks set to remain difficult for many businesses into the foreseeable future.

While companies continue fighting for survival, it seems unlikely that there will be much appetite for the increased costs that recruitment and wages increases would entail.

For this reason I suspect that economic growth and strengthening business positions will not be felt in the pockets of individual employees for some time to come.

For more information visit www.Company-Debt.co.uk

Derek Cooper is Managing Director of Cooper Matthews Limited and a member of the Turnaround Management Association UK.

Cooper Matthews specialise in Company Debt Rescue providing straight forward insolvency advice for business owners with business and personal financial problems. They have significant experience in working with small to medium sized businesses, working with Directors, Sole Traders and Self Employed.

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