Q2 2011 Red Flag Alert Report
12% Quarter on Quarter Increase in UK Business ‘Critical’ Financial Problems
A fall in ‘significant’ financial problems indicate vulnerable businesses are making the transition from ‘significant’ to ‘critical’ problems.
Key findings from the Q2 2011 Red Flag Alert Report:
A 12% increase in businesses facing ‘critical’ financial problems when compared to last quarter
A total of 5,179 companies facing ‘critical’ problems in Q2 2011, representing liabilities of almost £60 billion
A 48% quarter on quarter fall in the amount of ‘significant’ financial problems across all sectors, indicative of:
Many distressed companies making the transition from ‘significant’ to ‘critical’ financial problems
Seasonal factors: ‘significant’ problems are materially higher in Q1 because of the volume of overdue accounts due to be filed by 31 December
However year on year “significant” problems are relatively unchanged at 94,015 (+1%)
Substantial variation in sector performance with an improvement in year on year critical problems in Utilities (- 36%), Print and Packaging (- 37%) and Other (Non Food) Manufacturing (- 13%)
Worsening outlook for sectors dependent on discretionary spending with the following sectors experiencing a rise in quarter on quarter ‘critical’ distress
Travel & Tourism: + 31%
Hotels & Accommodation: + 47%
General Retailing: +17%
The Property Services sector shows no sign of improvement with critical distress up by 42% quarter on quarter
A 41% quarter on quarter rise in critical problems in the Haulage and Logistics sector reflect the impact of rising fuel prices
Food and Beverage Manufacturing figures demonstrate a 24% year on year increase in ‘critical’ problems – the first real increase in this sector.
Red Flag Alert, which monitors a series of indicators of company distress, shows a 12% increase to 5,179 companies which experienced ‘critical’ financial distress in Q2 2011 compared to 4,620 companies in Q1 2011.
Julie Palmer, partner at Begbies Traynor commented:
“Many struggling companies made use of the Revenue’s Time to Pay Scheme yet a high proportion of businesses have failed to achieve a full turnaround and are now trying to seek time to pay arrangements for a second time – or else apply for the scheme whilst using dividends as a form of remuneration rather than paying HMRC.
“The austerity measures mean the Government is finding it difficult to give second chances or extend its support to business owners that have chosen to use their money for another purpose and as a result, the number of winding up petitions issued by HMRC in Q2 2011 has more than doubled since Q1.”
Although banks remain supportive of struggling customers there are an increasing number of companies that cannot continue without significant new investment as costs cannot be reduced any further and sales demand weakens.
Ric Traynor, Executive Chairman of Begbies Traynor Group, said:
“The figures for Q2 2011 show the number of UK companies facing ‘critical’ problems has increased since last quarter. The fall in ‘significant’ problems is an apparent glimmer of good news, but we believe this is indicative of weaker businesses actively moving from ‘significant’ to ‘critical’ financial problems – and ultimately to insolvency, as well as seasonal factors which typically impact on the Q1 figures.
“In addition HMRC is taking a more robust stance. As the level of support from the Revenue is gradually decreased, it is increasingly evident that businesses using the scheme are now struggling to cope with current trading conditions.”
Ric Traynor concluded:
“The increased costs being placed upon consumers are likely to have an impact on non food retailers and recent weeks have seen the effect of reduced high street demand with a number of well known retailers entering administration. We believe this distress is likely to continue ahead of the pre-Christmas shopping period, which traditionally starts in early October.”
The financial distress across sectors is variable, with clear winners and losers, with Other (Non Food) manufacturing, utilities and print and packaging all showing an improving picture.
However sectors reliant on discretionary spending such as Travel & Tourism have faced a steady increase in critical distress in Q2 2011, despite the long Easter break and extra bank holidays which would have usually been beneficial to trading. A significant proportion of the population are being squeezed by inflationary pressures and concerns over the security of their employment and are therefore being extremely cautious with their spending – which is beginning to have a real impact on travel and tourism related businesses, particularly the UK hotel market which has seen a 47% increase in critical problems since the last quarter.
Consumer spending is already depressed and the impact of significant utility bill rises, combined with the increasing cost of fuel, is likely to have further serious consequences for any businesses dependent on discretionary spending.
The malaise within the property sector shows no sign of improvement with quarter on quarter critical problems up by a substantial 42%. This distress is affecting both residential and commercial real estate, with recent surveys predicting that property prices will not return to 2007 prices until the next decade.
The squeeze on marketing budgets and the structural changes in the media sector are showing through in terms of increased levels of critical problems - up 33% year on year and 21% quarter on quarter. At the heart of this is overcapacity, particularly in the printed media sector - where publications are chasing shrinking advertising revenues. The move towards online and social media channels has accelerated the problems, as advertisers typically benefit from lower costs.
A surprising increase of 24% in year on year critical problems within the food and beverage manufacturing sector, are indicative of reduced margins within supermarket supply chains, combined with higher input costs which cannot be passed on to customers.
Combined problems by sector:
Sector Q2 2010 Q2 2011 Percentage change Q1 2011 Q2 2011 Percentage change
Automotive 1,909 1,893 -1% 3,296 1,893 -43%
Construction 12,667 12,375 -2% 25,031 12,375 -51%
Food & Beverage Mfrg 306 354 16% 502 354 -29%
Printing & Packaging 670 552 -18% 1,978 552 -72%
Other Mfrg 3,788 3,527 -7% 6,559 3,527 -46%
Financial Services 1,900 1,915 1% 3,658 1,915 -48%
Property Services 7,794 7,567 -3% 15,720 7,567 -52%
Professional Services 7,368 7,059 -4% 15,526 7,059 -55%
Support Services 22,246 23,757 7% 52,862 23,757 -55%
Media 2,000 2,026 1% 3,598 2,026 -44%
Hotels & Accommodation 548 619 13% 1,169 619 -47%
Bars & Restaurant 2,408 2,554 6% 4,505 2,554 -43%
Sports & Recreation 1,002 1,089 9% 1,977 1,089 -45%
Leisure & Culture 1,256 1,273 1% 3,006 1,273 -58%
Travel & Tourism 1,003 1,061 6% 1,893 1,061 -44%
Food & Drugs Retailing 1,197 1,297 8% 2,390 1,297 -46%
General Retailing 4,046 4,314 7% 7,897 4,314 -45%
Wholesaling 3,123 3,344 7% 5,664 3,344 -41%
Haulage & Logistics 1,345 1,235 -8% 2,358 1,235 -48%
Telecoms & IT 7,380 7,411 0% 15,231 7,411 -51%
Utilities 157 176 12% 400 176 -56%
Others 13,714 13,796 1% 11,334 13,796 22%
All Sectors 97,827 99,194 1% 186,554 99,194 -47%
Julie is a law graduate who qualified with Price Waterhouse in 1994. Julie joined Smith & Williamson in 1997 and became a partner in 2001. With Mike Stevenson, Julie set up Middleton Partners offices in Salisbury and Southampton, both of which are now part of Begbies Traynor.
Julie is a member of the Insolvency Practitioners Association and the None Administrative Receivers Association and is a Fellow of The Association of Business Recovery Professionals. Julie deals with all aspects of Corporate Recovery and turnaround work and takes all form of personal insolvency appointments.