The 5 steps of business failure - Which UK industries are most ‘at risk’ in 2024?

Leading analyst Plimsoll specialises in identifying the companies in the UK economy that are in financial peril and most likely to fail should there be an economic shock or continuation of current economic uncertainty. Plimsoll’s latest research has rated 1 in 4 UK businesses as Danger, early warning that change within those companies is needed quickly.  

The economic mood music in Britain continues to be relatively uninspiring. Stubbornly high interest rates and higher input costs, scarce staff and the politically charged but seemingly unsolvable Brexit issues all continue to be a drag on a British economy that, less than a decade ago, sat atop the G7 growth charts. 

While Britain recently limped out of recession, growth remains anaemic and the cost of trading with the EU just got materially more expensive with the new border checks now written into law. With a quarter of all British companies rated as danger, what impact is this ongoing disruption having on the financial fortunes of businesses up and down the country and where are the pockets of businesses most risk in 2024?  

Plimsoll’s health rating on a company is based on a proven model of analysis that takes into consideration 5 years of financial performance of any business. The Plimsoll Model assesses whether a company is generating enough sales and profits from its assets, whether it is sufficiently capitalised or too reliant on its creditors, if it is over leveraged and whether those performance indicators leave the company weakened and exposed to external forces. The Plimsoll Model takes those indicators and provides an instant, graphical rating of a company’s financial outlook, so anyone can understand how ‘at risk’ they are. 

A Plimsoll danger rating tends to be a culmination of multiple years of inaction or poor decisions. Companies fail to act early enough during the ‘decline’ period. Acting early will always mitigate having to make larger, more painful decisions further down the line. Plimsoll’s graphical model of analysis is designed to give even non-financially trained Directors a visual representation of the level of risk in their company’s performance profile and where the issues are. 

To highlight how Plimsoll helps businesses to act earlier in the process and to save having to undertake more painful remedies later, the following 5 steps of failure should be understood:  

Step 1 - Falling sales from assets 
The first stage of business failure is something many businesses encounter. You invested for growth, but it didn't generate sales at the requisite level or sales from established markets started to slow. Your business is saddled with assets that aren’t generating new sales at the rate you were previously.  Smart businesses make these tough calls early and take remedial action to get back to sales efficiency. Many don’t take the required actions and end up chasing the elixir of higher, but less efficient sales that will, within a couple of years lead you to step 2. 

Stage 2 - Declining profits 
Companies that fail to act are now generating sales at a lower rate from a more expensive asset base or, in the case of market decline, generating less sales from the same assets. In either instance, this fall in sales efficiency reduces profit margins and, in some cases, generates losses. This step increases the urgency of taking the remedial steps needing to address the decline. 

Trading out of declining profits is unlikely for most companies as the increased cost associated with business development requires further investment. Cessation of the double impact of lower sales and lower profit at this stage has become vital if the business is to avoid the damaging effects of step 3. 

Step 3 - Reduced working capital 

Business leaders, wedded to the strategic decisions they have made, often fail to act quickly enough in the hope that it will “come good” at some point. However, falling profits in any business erodes working capital. A company can very quickly become undercapitalised and its ability to cover its debts without selling assets and make normal decisions becomes compromised.  

At this stage, an injection of additional shareholder funds would recapitalise and stabilise the business. If this is coupled with an immediate closing of all inefficient, profit sapping parts of the business, further increases in the vulnerability of the business might be avoided. Sadly, almost all failed companies instead move to step 4. 

Step 4 - Increased borrowing 

Instead of shareholders rebalancing the company with additional capital coupled with removal of inefficiencies within the business, most businesses look to borrow money to rebuild their working capital position. There is also a tendency to convert short term debt into cheaper long-term borrowing, this will provide short term relief, but it only delays the inevitable. It can reduce interest payments temporarily, but the debt level remains the same and needs to be paid back. These lead into step 5.   

Step 5 - Further decline in profits leading to failure 

The company is now overleveraged and is exposed to any additional downturn in a key market or an increase in cost. Cover for trade creditors is usually increased as suppliers become reluctant to trade. Elsewhere, lenders start to become nervous as concerns grow about recouping liabilities if the company further deteriorates.  

Once a company finds itself in such a precarious state, some will look to sell and limit the losses. Other, often smaller companies will find themselves at the mercy of an external trade shock or, more likely, their lender losing faith and pulling the plug. 

Where are the biggest pockets of risk in the UK economy in 2024? 

Plimsoll produces more than 1800 industry specific studies whereby we analyse the leading protagonists in each market. Based on these industry studies, these are the markets with the most risk: 
 
The restaurant industry

44% of the UK’s restaurants have been rated as “Danger” for 2024 by Plimsoll. The market has been hit by a perfect storm of soaring food costs, an increasingly sparse pool of available staff and a consumer disposable income that is being squeezed like never before. Such is the asset intensive nature of running a restaurant (with elements like equipment leases and the cost of physical premises) high fixed costs are unavoidable. Therefore, many operators must increase their footfall or sharply increase spend per customer. Otherwise, a wave of failures could be looming over the next two years. 

The car rental industry 

Plimsoll has rated 45% of all car rental companies as “Danger” for this year. The lack of computer chips and other supply bottlenecks has seen the cost of acquiring vehicles and fleet maintenance costs soar post Covid. This sharp increase in fleet costs coincides with a more cost-conscious consumer and changes in demand. Increased demand for EV’s and the additional costs incurred are not able to be passed on to end user. The result is that growth and margins are falling. 

Pub & Bar Operators 

47% of the UK’s pub and bar operators are rated as “danger”. The market, similar to restaurants, is asset intensive and faces the same pressures from input and staffing costs. It is also struggling under the changing demographics in modern Britain. According to data by www.morningadvertiser.co.uk, 39% of people aged 18-24 are not drinking alcohol at all in 2024. Coupled with the ongoing competitive price pressure from supermarkets, it is the perfect storm bearing down on an industry losing more than one pub a day. Can the industry entice enough people back in for a pint?  
 
The renewable energy industry

Half of all renewable energy companies in the UK have been rated as “Danger” by Plimsoll for 2024. While the drive towards Net Zero and the Green Revolution show no signs of falling out of political fashion, the sheer weight of investment required, despite the generous government subsidies, mean that generating revenue and profit in the private sector continues to be challenging. Investors and governments seem willing to finance the post fossil fuel dream, but should political enthusiasm wane, many companies are in a precarious state. 

The hotel industry

With 55% of operators rated as “danger” for this year, the UK Hotel industry is the most endangered. Facing the same staffing and input cost pressures as other parts of the hospitality sector, hotel operators have the added pressure of estate management and maintaining huge property assets. The “staycation” boom of post Covid has ebbed away, and hoteliers are struggling to pass on enough of their surging input costs onto guests.  

How to avoid a danger rating 

Plimsoll’s advice to all our clients is to monitor constantly and react early. If you have a business unit or product line adding sales but at a less than anticipated rate and that is also putting pressure on margins, then identify cost savings or shut it down entirely. If you persist with an inefficient idea, each of the 5 steps of failure outlined above, will get more painful and expensive.  

Plimsoll provides the analysis you need to make better decisions earlier in the process. 

Are you interested in finding out where you rank amongst your competitors, and how your business’ financial health looks to outsiders looking in? Visit our website to find out more about the services we provide! 

Visit www.plimsoll.co.uk today

Citations: 
https://www.pwc.co.uk/industries/hospitality-leisure/insights/uk-hotels-forecast.html#:~:text=Record%20supply%20levels%20to%20meet,across%20London%20and%20the%20regions. - hotel industry 

https://www.bbc.co.uk/news/science-environment-65500339 - renewable energy 

https://www.morningadvertiser.co.uk/Article/2024/01/03/Young-people-in-UK-regularly-drink-alcohol-alternatives - pubs and bars