Trend spotting and the business of risk

UP TO DATE, accurate data is a critical asset for businesses, and for reasons of comparison, the further the data goes back the better. In good and bad times there are winners and losers, opportunities and risks. Spotting trends of the past means you are better equipped to spot trouble in the present.

When looking for trends, for instance, we can see that business insolvencies peaked in early 2009 and since then there has been a definite trend showing that they have been coming down and are now more stable.

There are also seasonal variations. March tends to experience the highest rate of failures — the insolvency rate is calculated by comparing the number of businesses that failed with the total business population in Great Britain.

In 2009, March witnessed a ten year failure high, with business insolvencies peaking at 0.13% of the commercial population. However, it is even more important to understand the individual circumstances of each and every organisation you do business with.

Since 2009 has published a monthly index that assesses the rate of business failures in the UK with breakdowns by region, size of company and also sector.

Size of business Mid-sized businesses have proved to be the most vulnerable over recent years. Companies with 11-100 employees have tended to rack up the highest rate of insolvencies. That said, the decline in failure rates over the past year has been visible across most sizes of business. The exception to this pattern is among the largest businesses in the UK. Insolvency levels among firms with more than 500 people peaked through the winter of 2008/9 – a time when the likes of Woolworths and Zavvi were hitting the headlines – then declined only to pick up again 2010. This demonstrates how quickly circumstances can change and how important it is for all firms to monitor the performance of those they do business with to fully understand the impact they could have on them if they failed.

Regional trends Although the performance of the regions varies month-by-month, there are some reoccurring trends worth noting. Although not prevalent every month, there is a recurring north south divide, with the north more frequently being the poor relative. The North West of England has experienced the highest rate of insolvencies across the UK on many occasions over the last three years, with Yorkshire a close second. Scotland is one of the best performing regions along with the South East and South West of England. Scotland achieved the record low of the last three years in November 2009 with an insolvency rate of 0.04%.

Property sector hard hit In sectors with few companies it is more difficult to spot trends. Insolvency rates can be disproportionately high or low with large monthly variances. Looking at the financial strength of surviving businesses, best done using a score that predicts the likelihood of a business failing in the next 12 months, the bigger picture can be seen. Variances are less severe and a clearer assessment can be made. In recent years the financial strength of food retailers has deteriorated. The average financial strength score for firms in the sector has fallen by six per cent since 2007 to 74.95 in April 2011. This compares with a decline of less than one per cent for all UK firms. Meanwhile, the oil industry now has the strongest average financial strength score of 85.94.

So, while our data is hugely valuable for showing trends, it has to be recognised that these figures are aggregated from many constituent parts. Failure rates and financial strength fluctuate and differ across regions, sectors and segments, making it especially important for every organisation extending credit to or relying on other businesses for goods and services to understand the level of risk associated with their commercial partners by using all the tools available to them.

Max Firth is managing director of Experian Business Information Services