The risks inflation poses to potential insolvency - Palmers Solicitors

The risks inflation poses to potential insolvency

The risks inflation poses to potential insolvency

With the soaring cost of food and energy coupled with the ongoing war in Ukraine, inflation does not look likely to decrease drastically any time soon, which could pose greater risks of insolvency for your business.

According to data from the Office for National Statistics (ONS) the core CPIH annual inflation rate was 6.8 per cent in July 2023, down from 7.3 per cent in May.

The Bank of England suggests this might soon change to reflect current economic conditions.

For businesses, inflation has seen higher costs for raw materials, labour and other operational expenses. If your income doesn’t keep pace with these rising costs, your business could quickly find itself in a position of debt, pushing you towards insolvency.

The Bank of England generally responds to higher inflation by increasing interest rates to cool the economy and bring inflation down. This is seen with the Bank of England’s base rate rising to 5 per cent in June 2023, compared with it being just 1.25 per cent 12 months prior.

With higher interest rates, borrowing becomes more expensive. For businesses already anchored with debt, a higher loan rate will only exacerbate the risk of insolvency.

Cash flow problems can also rise during higher periods of inflation. Inflation can cause uncertainty which often leads to businesses tightening their belts and winding their operations in slightly. Consumers may reduce their spending as prices increase, potentially leading to decreased revenues for businesses which could ultimately cause cash flow issues. If these cash flow problems are not resolved, the risk of debt increases and with it the chances of insolvency.

In times of high inflation, employees will often ask for wage rises to keep up with the spiralling costs of everyday items and energy bills. The current climate is no exception, as in June 2023, UK wages have risen at their fastest rate in 20 years.

While these salary demands are justified, businesses may find it hard to accommodate increased wages, particularly if they’re already facing revenue shortfalls or increased costs. If not managed efficiently, wages can spiral and push a business closer to insolvency.

If left unchecked, inflation could lead to a higher risk of insolvency across the UK. The knock-on effect inflation has on the increased risk of insolvency serves as a reminder of the deeply interwoven economic web of cause and effect.

If you are worried about inflation and the risks it poses to your business, please speak to our experienced team today.