The UK business landscape has been under increasing pressure over the past decade, with many companies choosing to enter voluntary liquidation rather than face compulsory liquidation or winding-up petitions. The sharp rise in voluntary liquidations reflects how businesses are grappling with tough trading conditions, economic uncertainty, and unforeseen external factors.
A recent Freedom of Information (FOI) request to the Insolvency Service by automation platform Quadient sheds light on the disturbing trend of rising liquidations, pointing to deeper issues within the economy.
The Rising Trend of Voluntary Liquidations
The ratio of voluntary to compulsory liquidations in the UK has shifted dramatically in the last decade. According to the FOI data, until 2012, the ratio held steady at an average of 2:1, meaning that for every two voluntary liquidations, there was one compulsory liquidation. However, by 2023, this ratio had surged to 7:1, with voluntary liquidations far outpacing compulsory ones. The trend peaked in 2021, during the COVID-19 pandemic, when the ratio soared to an astonishing 25:1.
This increase has raised alarms, as voluntary liquidations now account for a significantly higher portion of all insolvencies. One in every 272 UK businesses entered voluntary liquidation in 2023, the highest proportion recorded in the 21st century. This figure reflects the escalating financial struggles that many UK businesses are facing.
“One in every 272 UK businesses entered voluntary liquidation in 2023, the highest proportion recorded in the 21st century. “
Voluntary liquidations, while seemingly a controlled choice for businesses to cease trading, often represent a last-ditch effort by business owners to prevent their operations from being forced into compulsory liquidation by creditors.
Business owners in voluntary liquidation aim to take control of their assets and wind down operations on their terms, rather than face potentially more severe outcomes from legal action initiated by creditors.
Why Are Businesses Choosing Voluntary Liquidation?
There is no single reason why a business might enter voluntary liquidation. For some, it is the culmination of years of struggling to maintain financial health. For others, it may be due to more recent economic pressures, such as the impact of the COVID-19 pandemic, rising costs due to inflation, and supply chain disruptions. Some businesses were created for specific, short-term purposes and are simply no longer needed.
According to Joey Glazer, Director of AP Automation at Quadient, many so-called “voluntary” liquidations are likely not voluntary at all. Instead, businesses are forced into making the decision by various external factors way beyond their control. These factors include the pandemic’s lingering effects on the economy, increasing energy prices, wage inflation, and disrupted supply chains.
For businesses that wish to avoid this fate, financial resilience is crucial. Businesses need to be able to quickly spot when their finances are in trouble, making sure they have a steady cash flow and their accounts are up-to-date so they can see the full picture.
The ability to monitor real-time financial health and the state of their affairs can often mean the difference between survival and liquidation.
The Role of Automation in Financial Management
One of the key strategies businesses can adopt to avoid voluntary liquidation is the implementation of automation and AI tools to streamline financial processes.
Automating key functions such as invoicing, payment collection, and cash flow monitoring can significantly reduce the time and resources spent on manual finance tasks. This allows business leaders to focus on making informed decisions that can safeguard their company’s future.
“Businesses that use AI and automation in their financial operations experience a 30% improvement in cash flow management and a 25% reduction in manual errors.”
Faster Payments: Automated systems can help ensure that invoices are issued and payments are collected faster, improving cash flow and reducing the risk of liquidity crises.
Accurate Financial Data: By using automated tools, businesses can have real-time insight into their financial health, allowing them to react quickly to external pressures.
Cost Savings: By reducing the reliance on manual processes, businesses can save valuable time and reduce administrative costs, allowing them to invest more resources into growth-oriented activities.
According to a report by McKinsey, businesses that use AI and automation in their financial operations experience a 30% improvement in cash flow management and a 25% reduction in manual errors, proving how essential these tools are for financial resilience.
Voluntary vs Compulsory Liquidation
The Insolvency Service defines voluntary liquidation as a process where shareholders of a company decide to wind up the business. In contrast, compulsory liquidation is initiated by creditors who seek a court order to force the business to close. While voluntary liquidation may give the business owner more control over the process, it still signifies the end of the business’s operations and the likely loss of jobs and capital.
Compulsory liquidation often comes with more severe consequences. Creditors initiate this action when a business fails to meet its financial obligations, and a court order is issued to wind up the company’s assets to pay off debts. The frequency of compulsory liquidations has been outpaced by voluntary liquidations over the last decade. However, this doesn’t necessarily indicate that fewer businesses are failing; rather, more businesses are choosing to liquidate before creditors take action.
Economic Pressures and the Future Outlook
The overall number of insolvencies in the UK has increased over time, growing from 1,563 in 1960 to over 25,158 in 2023. This increase reflects not just the rise in the number of businesses but also growing financial pressures within the economy. Factors such as rising interest rates, inflation, and ongoing geopolitical instability are likely to exacerbate these trends.
A survey by The British Chambers of Commerce showed that 60% of UK firms have seen an increase in operating costs due to inflation and rising interest rates. In particular, small businesses have been hit hard by energy price hikes and labour shortages, making it more difficult for them to remain solvent.
While the government has introduced measures such as temporary insolvency protections during the pandemic, these measures are not enough to prevent a long-term rise in business failures. To mitigate these risks, businesses need to adopt more proactive financial management strategies, including forecasting, cost control, and better financial planning.
What Can Businesses Do to Stay Resilient?
For businesses to avoid insolvency, particularly voluntary liquidation, it is essential to build financial resilience. Proactive financial management can help businesses stay ahead of potential problems. Here are key strategies for businesses:
Focus on Cash Flow: Maintaining positive cash flow is one of the most critical aspects of staying solvent. Automated invoicing and payment systems can help businesses collect payments faster and manage cash flow more effectively.
Implement Financial Forecasting: Regular financial forecasting helps businesses anticipate future challenges and allocate resources accordingly. Knowing when a liquidity crisis might arise allows businesses to make strategic decisions in advance.
Cost Control and Efficiency: Streamlining operations and cutting unnecessary costs can free up resources to invest in essential growth areas. Using automation to reduce administrative overhead can be a cost-saving measure.
Seek Expert Advice: Engaging with financial advisors or external accountants can help business owners understand their financial position more clearly and make informed decisions.
In Conclusion
The spike in voluntary liquidations in the UK is a worrying trend that reflects broader economic pressures. With a threefold increase in voluntary liquidations over the past decade, businesses need to act quickly to build financial resilience and avoid being forced into insolvency.
Automation and financial management tools can provide the real-time insights and efficiencies that businesses need to stay afloat in turbulent times. By taking control of their finances now, business owners can safeguard their company’s future.
Contact us today to learn more about how we can assist with your business and all your accounting needs.
How Glow Accounts Can Help Your Business Avoid Financial Distress
At Glow Accounts, we understand the mounting pressures that businesses face, particularly in uncertain economic times. Our proactive approach to financial management ensures that your company has a clear view of its financial health, helping you avoid the path to voluntary liquidation.
With our expertise in cash flow management, financial forecasting, and strategic planning, we work closely with business owners to strengthen financial resilience.
We offer automated financial processes, giving you real-time insights into your business’s financial status, so you’re never caught off guard. Our Virtual CFO services provide ongoing support, guiding you through complex financial decisions and ensure that you have the tools and knowledge to grow sustainably. Whether you want to streamline your financial operations or need strategic advice, Glow Accounts is here to help you thrive.
Contact us today today to learn more about how we can help secure your business’s future or email us at info@glowaccounts.co.uk or call 01892 267 750.
