One in three West Midlands companies hit by domino effect of another firm's failure

The so-called 'domino effect' has seen businesses struggling following the insolvency of a customer, supplier or debtor, according to the latest report from the Midlands branch of R3, the insolvency and restructuring trade body.

It follows a 13 per cent rise in underlying insolvencies in the first three months of this year compared to the previous quarter, and a spate of high profile company failures involving large companies such as Carillion and Toys R Us.

R3 Midlands chairman Chris Radford, a partner at Birmingham law firm Gateley, said: “No business exists in isolation, and every headline-grabbing corporate insolvency will have consequences for numerous other enterprises.

“After the news of the Carillion liquidation broke, for example, our local members reported an immediate upsurge in requests for advice from companies with links to Carillion. Many retailers have hit the headlines as a result of their current difficulties, causing less visible struggles at other firms, such as suppliers and service providers.

“Regarding the challenges in the construction sector, official figures show that construction has been contracting over recent quarters, with weaker growth in house prices slowing output among housebuilders. Falling spending on infrastructure has reduced the sector’s contribution to GDP.”

The report found the financial impact of the insolvency of another business was described as “very negative” by seven per cent of the region’s companies, and as “somewhat negative” by 25 per cent of local respondents.

Nationally, construction businesses were the most likely to say the insolvency of another firm had had a negative impact on their finances in the last six months, with almost half (47 per cent) reporting a hit. Nearly a third (32 per cent) of UK manufacturing companies and a similar proportion (31 per cent) of companies in the retail sector reported a negative impact.

Chris Radford added that the problems caused by the domino effect are generally ones that businesses are able to overcome with foresight and planning, albeit with a possible hit to future turnover and profitability.

He said: “Any smart business knows it needs to mitigate risks due to insolvency in its supply chain or its customers through active monitoring of partners’ credit profiles, diversification where possible to spread risk, and through building strong relationships which can provide support when a major counterparty hits a rough patch.

“If your business hears that a partner is in financial distress or is insolvent, calculate your potential exposure and seek expert advice immediately if it will be significant. You could also look to the possible upsides: could buying the distressed business help your own business? Can you pick up any new contracts or customers? Counterparty insolvency is likely to affect every business out there at some point so prepare as best you can, with a contingency plan in place.”