Mid-Term Business Report: Failure Rates Signal Caution; the High Rate of Business Failures in Northern Ireland May Be a Warning to Budding Entrepreneurs That a Bright Idea Doesn't Always Work Commercially. Partner in Insolvency with Business Advisors PricewaterhouseCoopers, GARTH CALOW Examines the Competitive Costs When the Pressure Is On

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THE Northern Ireland economy may be demonstrating increased confidence and new investment, but business failures are soaring for the first time since the mid-1990s.

In the first quarter of 2000, business failures jumped by 26 per cent. Just three months later, quarter two delivered equally concerning statistics, with failures up again, this time by 20 percent.

Over the last 10 years, the Northern Ireland economy has performed remarkably well. Manufacturing output outperformed the rest of the UK while unemployment fell to its lowest level since records began. Between 1989 and the end of 1999, the local economy created 89,000 net new jobs and business failures had declined steadily since 1992.

This relatively upbeat performance coincided with annual business failure rates that virtually halved over the decade. Recent information would suggest that that trend may be reversing and employers, unions and the financial institutions are all waiting anxiously for further confirmation of the position in the next set of failure statistics.

However, looking to the Republic tells us that there is no automatic correlation between economic prosperity and declining failure levels. In the last quarter of 1999, the failure rate was 85 per cent up on the equivalent 1998 period. In the most recent period- the three months to June 2000, Irish business failures were up 65 per cent on the same period in 1999.

Much of the increased failure rate in the South is accounted for- perhaps surprisingly- by the buoyancy of the economy. As economic growth increases so does business formation. In the year to January 2000, Irish retail sales jumped by 10.6 per cent while GDP growth was almost 9 per cent.

Irish unemployment had fallen from over 12 per cent in 1995 to 5 per cent in January 2000, resulting in critical labour shortages in many sectors. Transcending all of this were low interests rates and- until mid 1999- low inflation. Connectively, the ideal scenario for new business formation.

The Republic's experience of high-growth, high-demand and high-failure rates is no different to any other region with the same profile. Most business failure casualties are small. Unincorporated businesses, sole traders and partnerships represent the majority of casualties and bankruptcies in this sector are three-to-four times more frequent than liquidations amongst the generally larger company sector.

According to Dun & Bradstreet, in the three months to June 2000, 101 small concerns were declared bankrupt, while only 39 limited companies entered liquidation. That general ratio can be seen on both sides of the border and has prevailed since the early 90s. Entrepreneurs may be driven by opportunity and demand, but they fail because of bad planning, bad management and- occasionally- bad luck.

So, will Northern Ireland business failures continue to grow and reflect the sort of trends apparent south of the Border? …