How smaller companies are surviving
Christopher Allner - 14 May 2010
Recent figures show that in the wake of the economic crisis, there have been relatively few failures of small companies, decreasing from 2009 to 2010 (source: The Insolvency Service*). This is not simply heartening, it's the kind of result that we should consider carefully in order to arrive at the reasons for it. As long-time investors in small growing companies, we know how important it is to be aware of and deliver the support companies need, not only at every stage in their development but at every stage of the economic cycle. In this way we can help to ensure that they're prepared for the future.
We think there are four major reasons for this relatively low number of company failures: low interest rates, a relatively sympathetic approach initially by Her Majesty's Revenue and Customs (HMRC), a flexible approach from companies themselves, and the particular shape of the recent downturn.
Interest rates on borrowing have remained much lower than in previous recessions, at around 0.5%. Yes, companies had to contend with first a bank freeze on lending and then banks hiking up their rates. But it's still been better than the situation during the recession of the early 1990s when typical bank lending rates were around 14% (source: www.moneyworld.com). These relatively lower rates, which look set to continue, have allowed businesses to ensure they could meet all their regular payments and stay afloat throughout the downturn.
Another important aspect has been the role of HMRC. Recognising the gravity of the situation, it chose to give many companies extra time to meet payments of VAT and PAYE. The Revenue's more lenient approach certainly helped companies in 2008 and 2009, even if this year, it has begun to adopt a tougher stance.
Management and staff at many companies have also made short-term sacrifices in order to ensure long-term survival. While a few instances of company management eschewing bonuses have made headlines, there have been many more cases where loyal staff have agreed to take pay-cuts, sometimes up to 20%. This has helped people hold on to their jobs while management have worked to hold on to a whole company.
Finally, the trajectory of this recession has been a factor in companies' survival rates. Whereas previous downturns have been V-shaped; characterised by a steep fall, a quick turnaround, and then a strong recovery, the recent downturn has been described variously as U-shaped (a long period of decline, with an extended period of time spent at the bottom before recovery happens), and W-shaped, (a downturn, followed by a false dawn and a further dip, before real recovery takes place). The main point is that there has not been a quick return to growth - it is happening slowly and tentatively. What this means for small growing companies is that there has not been a sudden resurgence of orders with recovery, and so they have not had to face the issue of needing to find cash to buy supplies to meet the new orders. It's often during an upturn that many good companies have failed and we should be wary about what will happen this time around when the economy does start to get moving.
At Octopus Ventures, we've been working closely with investee companies to help them get through the downturn and to identify the particular opportunities it has bought - from reassessing and streamlining operations to expanding via good value acquisitions. Our aim is to ensure that companies are able to face all the challenges in the economic environment, from recession to recovery. In this way companies can constantly develop and innovate, whatever the economic climate.
* There were 4,082 compulsory liquidations and creditors' voluntary liquidations in total in England and Wales in the first quarter of 2010 (on a seasonally adjusted basis). This was a decrease of 8.4% on the previous quarter and a decrease of 17.8% on the same period a year ago (source: The Insolvency Service).
