An analysis of the government’s recent spending review suggests that George Osborne’s attempts to reduce the UK’s budget deficit of £155 billion will have a devastating impact on smaller suppliers dependent on public sector contracts.
According to Andrew Burn of accountancy firm KPMG: ‘For smaller businesses the overall impact is likely to be negative, leading to difficult discussions with funders or the need to take swift and aggressive action to reduce overheads.’
His comments are supported by the results of a recent study by insolvency trade body R3, which found that 30pc of small firms were either ‘very reliant’ or ‘fairly reliant’ on public sector sales, and one in 10 of all businesses believed they would become insolvent without public sector contracts.
These experts are spot on.
It’s likely that only a small number of big companies will benefit from contract consolidation and greater outsourcing opportunities
This will force suppliers to change accordingly, but only time will tell how many will remain solvent over the next 12 to 18 months.
The cuts will take time to realise, so effectively they’ve been thrown a lifeline to change the profile of their business model and customers.
Nevertheless, the lesson to be learned here is you can’t rely wholly on public sector contracts. If you’re a small supplier the spending review cuts will affect you, even if they are staggered.
In many industries, traditionally, 50pc of the turnover occurs during the last quarter of the calendar year, especially if consumers are the end purchasers.
A lot of businesses are fighting and they have high expectations for a healthy Christmas period, but if they don’t get the level of sales they’re expecting, come January and February 2011 and you’re going to see a hike in business failures.
Many of them would have been getting trade on 30 or 60 days credit, with the intention of paying in the New Year, but if Christmas sales are bad, they won’t have any money to pay creditors.
Seasonally, business failures happen in the first half of the year. In the second half, people try to limp through until Christmas, especially if they’re consumer based.
Corporation Tax is due in January so you tend to see a lot of businesses going down in the first few months of the year.
Really, most businesses that were insolvent in the New Year were really insolvent six months earlier and were just limping through and taking supplies they had no means of paying for.
For information about how we can help you through these challenging times contact Insolvency and Law on 020 7504 1300 for free confidential advice.