R3 warns businesses of ‘domino effect’ from other firms’ insolvencies

Business News

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A new study by R3 has found that businesses across the UK are suffering from a ‘domino effect’ from the insolvencies of other firms.

It revealed that the collapse of one firm was inadvertently pulling down other cash-strapped companies in the supply chain.

The insolvency trade body’s research showed that 10 per cent of British businesses have found the financial impact of another closely-associated business ‘very negative’, while a further 16 per cent have found such a collapse ‘somewhat negative’.

It may come as no surprise that the sector most likely to be affected by domino effect is construction, where R3 said that businesses working very closely together and providing work for layer upon layer of contractors and subcontractors suffered the most significant impact on their finances.

The recent collapse of construction giant Carillion is a perfect example of how the ‘domino effect’ works, but R3’s study reveals that the problem is not solely limited to the construction industry.

The group’s figures reveal that, while almost half of the construction companies polled admit that their organisation was affected by another firm’s insolvency, 35 per cent of wholesale retailers have run into similar experiences, as have 33 per cent of businesses in the transport sector.

As a spokesperson for R3 pointed out, no business ever truly exists in isolation and the collapse of one firm will always have an inevitable ripple effect further down the supply chain.

Following the findings, businesses encountering early warning signs of financial distress are being urged to seek specialist advice ASAP – particularly if they are working closely with other companies that are already experiencing financial distress.

The so-called ‘domino effect’ is a vicious cycle, which can only be broken if businesses plan ahead as best they can, R3 warned.