The failure score is designed to predict the likelihood that a company will cease operations without paying all creditors over the next 12 months. This includes the onset of failure such as a meeting of creditors, administrator appointments, bankruptcy, receiver appointments, petitions for winding-up and other legal events.
A score is calculated for almost all UK businesses so that approximately one per cent of businesses have the same score. This means that the score shows where a business ranks among scored UK businesses in the D&B database. D&B use an equivalent approach in other countries.
For example – if a business has a score of 85:
- one per cent of the entire database with a score of 85 has the same level of risk of failure
- eighty four per cent of the entire database has a higher level of risk of failure (are more likely to fail)
- fifteen per cent have a lower risk of failure (are less likely to fail).
The failure score and probability of insolvency tables form part of the levy determination. You can access the most recent ones on the following links:
How failure scores are calculated
Failure scores are produced from the results of statistical analysis of the characteristics that have historically been common to failing and successful companies.
In order to calculate the Failure Score in the UK, D&B collects data from a wide variety of public and unique data sources, including:
- Companies House
- London and Edinburgh Gazettes
- County Courts
- Electoral Roll
- Department for Business, Innovation & Skills
- Postal Deliverability data
- Telecoms Connectivity data
- D&B’s Trade Partners
- D&B’s call centres
D&B verifies and validates all information before it is added to the D&B database.
If you are not legally obliged to file accounts at Companies House, we encourage you to provide them to D&B directly.
The factors that influence failure scores
Although there are consistent scores for all businesses regardless of their size or line of business, different factors are obviously taken into consideration. For example, the assessment of a large limited company with a board of ten directors will be based on different factors to a sole trader. However, it is possible that both could have the same probability of failure.
There are a number of factors which influence the D&B Failure Score, and these fall into five main categories. Below is a list of some of the most significant elements in each category:
|Line of Business
||Line of business or Standard Industry Code (SIC) is very relevant because different industries have different levels of risk. |
||Different regions have different levels of risk for cultural, historical and business structure reasons or even government support in the different regions. |
|Years in Business
||While young and recent established companies seem more likely to fail, older companies have much lower risk. |
||Having a parent company may have a positive effect on a subsidiary, while having a parent company at significant risk may indirectly increase the risk of the subsidiary. |
Public Negative Data
|Negative Public Information
||Bad debt, county court, credit placed for collection, mortgages and charges are all associated with an increase in risk, although the volume, value and timeliness of these indicators is also considered. |
||The more experienced the principals can mean the less risky the business.|
||The associated businesses (both currently and previously) are an important factor. In particular, a high proportion of associated businesses which have previously failed indicates a higher level of risk. |
|PAYDEX®, Paydex Variance and Paydex Trend
||PAYDEX stands for “payment index,” which is based on an analysis of past payment behaviour as reported to D&B. The model looks at a company’s trade performance over the past 12-18 months, its volatility, its trend and its present value to predict future failures. |
|Percent of Satisfactory Payment Experiences
||The higher the percentage of satisfactory payment experiences the lower the risk. |
|Percent of Payment Experiences 90 or more days Past Due
||The lower the percentage of payment experiences of the firm that fall within the 90 or plus days past due category, the lower the risk. |
|Age of Balance Sheets
||A more recent Balance Sheet indicates lower risk. Very old financials or financials delayed for companies obliged to file their accounts is seen differently. |
|Liabilities to Net Worth (Solvency)
||Generally, the lower the company’s ratio of liabilities to net worth, the lower its overall likelihood of risk. |
||Generally, the higher the company’s profits, the lower its overall likelihood of risk. |
|Retained Earnings and Shareholders Return
||Profits may be retained or distributed. These two elements are correlated with the probability of a company becoming bad in the next twelve months. While retained earnings seem to be positively associated with good companies, negative or extremely high shareholder’s returns are more associated with bad companies. |
||More cash means more liquidity and that can indicate lower risk. |
||Generally, the higher the company’s current assets, the lower its overall likelihood of risk.|