It’s fair to say that the last few months have been extremely turbulent for the UK economy. Inflationary pressures in particular are putting the squeeze on firms’ margins, and the recent weakening of the pound is only exacerbating that.

A wave of insolvencies is often a symptom of these pressures, with firms unable to pay invoices and eventually going out of business. The latest official insolvency statistics back up this trend, showing a 13 per cent increase in business failures in the last quarter.

And unfortunately, the situation doesn’t look to be improving.

Our own forecasts expect insolvencies in the UK will increase by 15 per cent in 2023 compared to pre-Covid levels, which equates to around 25,400 UK firms.

Fortunately, that represents a minority. The majority of firms – while feeling the squeeze – will have healthy cashflows and be able to successfully mitigate the impacts of inflation and a faltering economy.

However, businesses don’t operate in a silo and they typically form links in supply chains which are growing ever-more complex. Should one link in the chain fail, this has the potential to create an insolvency domino effect, affecting a swathe of businesses.

Fortunately, there are tell-tale signs that businesses can watch out for to help them monitor the health of suppliers and trading partners to avoid falling foul of this domino effect.

Late payments are an early warning sign of an ailing firm. They indicate that cashflows are becoming constrained and that a business is struggling to service its debt.

If a partner asks to extend payment times, or if they’re beginning to extend beyond the UK’s day sales outstanding (DSO) – the measure of average time it takes to pay suppliers – of 50 days, then extra caution is required.

For suppliers, there are obvious consequences if a customer goes bust, largely around whether invoices will be paid. Similarly, if a supplier collapses, this raises a question of where to source critical components or raw materials for products, potentially raising costs and causing delays for consumers.

However, any business going bust has the capacity to create an unwanted ripple effect in the supply chain. For example, a direct rival going bust may appear a positive development as you can enlarge your market share.

But this could have an unwanted impact on any suppliers that are shared with the rival, who may also collapse as a result.

This in turn may make other suppliers in the industry nervous, so they may look to limit credit and diversify overseas. These are the knock-on impacts of the insolvency domino effect.

The failure of one company causes problems for rivals, suppliers and customers across industries. More firms may well end up following suit. In turn, these new failures cause more problems and so the domino effect continues to ripple.

Protecting against this – be that via close monitoring of trading partners, diversifying the supplier- and customer-base and employing solutions such as trade credit insurance, which guarantee unpaid invoices should a firm fail – will be essential.

This is a treacherous time for all firms – even those who aren’t feeling the pinch as much as others.

But taking steps to avoid the insolvency domino effect must be an increasing priority if Yorkshire’s firms are to weather the storm and wait for the economic turbulence to subside.

Andy Hodson is a risk director at Allianz Trade.

How to avoid the insolvency domino effect as recession looms - Andy Hodson