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Ric Traynor

Business Health Statistics

| April 27th 2010

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Distressed UK businesses have £55bn of liabilities at risk of default

The latest economic data indicates that the UK economy appears to have turned the corner but the recovery remains fragile, with over 160,000 companies experiencing ‘significant’ or ‘critical’ financial distress.  Between them they owe over £55bn to creditors, suppliers and service providers, according to figures released today by Begbies Traynor, the leading business rescue, recovery and restructuring specialist.

 

In its latest Red Flag update, which monitors the warning signs of companies in distress, the  number of companies experiencing significant or critical financial problems has risen by 20,074 or 14% to 161,601 in the first quarter of 2010 (Q4 2009: 141,527).

 

We estimate that approximately 7% of this increase is the result of a shift in trade creditor behaviour, with an increase in court actions evidence of their growing willingness to take action against their debtors.  The remainder of the increase could be attributed to the normal seasonal uplift. 

 

Ric Traynor, Executive Chairman of Begbies Traynor Group, said:

 

“While the economy appears to be showing positive signs of recovery, the magnitude of the liabilities still at risk of default represents a serious risk to creditors, indicating the potential far-reaching impact of these levels of distress. It is this ripple effect which represents a real threat to a sustained economic recovery.

 

“Faced with these risks, and a growing need to bolster their own funding for the recovery phase, trade creditors are increasingly seizing the opportunity to take action against their debtors in order to raise much needed working capital. This shift in behaviour heralds a new phase in the cycle, putting businesses experiencing financial problems at greater risk of failure.”

 

Interest rates will also have a role to play, with the latest Reuters poll of over 50 financial institutions predicting a rise of 1% over the next twelve months, thereby tripling current base rate, with some banks forecasting a rise of as much as 1.5%. 

 

Traynor added: “Low interest rates have been one of the principal reasons why business failures have not yet reached the peak levels many feared this savage recession would cause. A rise may tip more struggling businesses over the edge later in the year and through into 2011, especially in the embattled but vital SME sector which cannot afford the protection of sophisticated interest rate hedging.”

Red Flag reveals that the last three months marks the second consecutive quarter of increases in the number of problem companies. In Q3 2009, a total of 134,000 were reported as experiencing critical or significant problems. 

 

These figures are lower than early 2009 as economic stimulus and government support measures have provided welcome support for companies that may have otherwise found it impossible to survive.  However, Begbies Traynor’s experience of previous recessions shows that the recovery phase of the economic cycle has represented the greatest challenge to vulnerable SMEs, meaning that the inevitable withdrawal of the government’s support will need to be handled sensitively to ensure a soft landing.

 

The sectors worst affected in the first quarter of 2010 include Construction, in which  companies experiencing significant or critical financial problems were up 30%, Professional Services up 19%, Property Services up 42%, Recruitment up 18% and Retail up 19% on the previous quarter. Sharp rises in input costs coupled with one of the worst winters for decades combined to make this a particularly difficult period across a number of sectors.

 

Around the country, Scotland was yet again one of the worst affected on a quarter-on-quarter basis, with the number of companies experiencing significant or critical problems up 18% on the previous quarter to 10,377. Scotland was closely followed by the North West & North Wales (19,081 companies – up 17%) and the South West & South Wales (22,426 companies – up 17%).

 

Q1 2010 Red Flag Alert Statistics

'Significant' and 'Critical' problems by Sector:

SectorQ1 2009Q1 2010Percentage changeQ4 2009Q1 2010Percentage change
Automotive

4,906           

4,178

-15%

4,021

4,178

4%

Construction

24,281

22,990

-5%

17,736

22,990

30%

IT

9,480

8,203

-13%

7,269

8,203

13%

Engineering

2,455

2,131

-13%

1,934

2,131

10%

Print & Packaging

2,825

2,322

-18%

2,091

2,322

11%

Manufacturing

8,052

6,820

-15%

6,111

6,820

12%

Property Services

20,159

16,385

-19%

11,556

16,385

42%

Recruitment

1,510

1,725

14%

1,459

1,725

18%

Professional
Services

11,167

9,620

 -14%

8,115

9,620

 19%

Retail

13,137 

12,156

-7%

10,199

12,156

 19%

'Significant' and 'Critical' problems by Region:

RegionQ1 2009Q1 2010Percentage changeQ4 2009Q1 2010Percentage change
Scotland

11,384

10,377

-9%

8,809

10,377

18%

North East & Yorkshire

16,520

14,317

-13%

12,612

14,317

14%

North West & North Wales

21,457

19,081

-11%

16,374

19,081

17%

East Midlands

10,586

9,068

-14%

8,013

9,068

13%

West Midlands

15,451

13,880

-10%

12,970

13,880

7%

South East & East Anglia

85,659

72,462

-15%

63,632

72,462

14%

South West & South Wales

24,716

22,416

-9%

19,117

22,416

17%

 

Significant problems by Sector

      UK Total       185,773   161,601  -13%  141,527  161,601  14%

 

About Begbies Traynor Red Flag Alert

 

Red Flag Alert measures corporate distress signals through a comprehensive and complex methodology, drawing on factual legal and financial data from a wide range of relevant sources for companies that have been trading for over a year.

The survey monitors the numbers of companies experiencing difficulties in two categories: "Significant Problems" and "Critical Problems".  

Companies with "Significant Problems" are those with either a court action and/or average, poor, very poor insolvent or out date accounts.

Companies with "Critical Problems" are those with CCJs totalling £5,000 or more and/or Wind-Up Petition related actions.

Since November 2009, Red Flag Alert has been commercially available to all businesses, on an annual subscription basis, to help them better understand risk and exposure and help prepare them for the future. 

  

 

About Begbies Traynor Group

 

Begbies Traynor Group plc is a specialist professional services organisation providing independent professional advice and solutions to businesses, financial institutions, the accountancy professions and individuals in the areas of corporate finance, recovery, investigation, risk management, commercial finance and specialist tax advice. It is listed on AIM (Ticker: BEG).

 

Ric Traynor

About the author

Ric Traynor

Executive Chairman

Meet our Team of Experts

Ric qualified with Arthur Andersen in 1984 and founded Begbies Traynor in 1989. Ric specialises in practice management and has considerable experience in financial turnaround and dispute resolution within professional practices.

Advice You Can Trust

Insolvency Practitioners Association Institute of Chartered Accountants in England and Wales R3: Association of Business Recovery Professionals ICAEW Business Advice Service Turnaround Management Association ACCA (the Association of Chartered Certified Accountants) ICAS | The Institute of Chartered Accountants of Scotland
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