MONEY COMMENT
Beware of Failing Employers

By Cliff D'Arcy
March 10, 2003

In response to a downturn in consumer confidence and weak economic growth, the Bank of England cut base rates last month. However, for many struggling firms, particularly manufacturers, this fall in the cost of borrowing comes too late.

According to accountancy firm BDO Stoy Hayward, almost 20,000 UK businesses failed last year, up 6.1% from 2001 levels. An additional 1,145 businesses went bust last year compared to 2001 - that's almost 100 more businesses going under each month.

Furthermore, things are set to get worse before they get better. BDO predicts that business failures are set to rise for the next three years, with almost 70,000 businesses going bust between 2003 and 2005. BDO expects almost 22,000 businesses to fold this year and next, rising to nearly 25,000 the year after.

The last time over 20,000 businesses went bust in a year was back in 1993 and 1994, as Britain struggled to emerge from its last recession. Overall, 1.2% of British businesses failed last year. By 2005, BDO expects this to have risen to 1.5%.

In terms of number of failures, hard-pressed manufacturers are expected to be the worst hit, with company closures rising 12% between Autumn 2002 and 2003. Almost 1 in 30 manufacturing businesses are expected to go under over this 12-month period. Partly due to rising fuel prices, increased excise duty and the terrorist attacks on the US on September 11, 2001, BDO expects closures in the transport and travel sector to rise by a massive 43% over the same period.

Even when the UK economy does finally strengthen, this may not lead to a reduction in business failures. This is because banks often wait until companies are in better shape before closing them down and recovering their loans (a bit like waiting for house prices to rise before repossessing homes).

Of course, there are many UK businesses that are struggling to survive but have not ceased trading. One notable casualty of the TMT bust is Marconi (LSE: MONI), whose value collapsed to a thousandth of its peak when its "new economy" business strategy flopped. In fact, a close friend of mine opted to join Marconi's voluntary redundancy programme last May, rather than wait around to see whether the company would survive its restructuring.

So, what can you do if you're worried that your employer's finances and strategy are looking shaky or, like David Brent in BBC2's The Office, your branch is being downsized?

• Watch out for the danger signs: suppliers not being paid; a freeze on spending; budget cuts; expenses going unpaid; increasing debts; management or senior staff departures; office closures or staff cutbacks; "whispers" on the grapevine; etc.
• If you think your employer may become a terminal case, cut back on your personal spending, repay your debts and put money away in case you get the chop. Also, you may want to look into payment protection insurance to pay your mortgage while you're unemployed, but watch out for exclusions in the small print.
• Start looking around for another job, register with recruitment agencies, and consider professional development courses or re-training to improve your attractiveness to future employers. You may even decide to set up in business yourself (perhaps with some of your colleagues), or go into full- or part-time study.
• If you are unfortunate enough to get axed, or even if you're feeling just a little concerned about your job security, read our twelve tips on Dealing With Unemployment and take a look at our Dealing with Redundancy discussion board. After all, it's better to prepare for the hurricane, rather than just ignoring it!

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