Published: 17th January 2018
New research from Begbies Traynor, the UK’s leading independent insolvency firm, reveals that nearly half a million businesses across the country ended 2017 in a state of ‘Significant’ financial distress, as potentially 2018 looks set to be another challenging year for the UK economy.
According to Begbies Traynor’s Red Flag Alert research for Q4 2017, which monitors the financial health of UK companies, 493,296 businesses were experiencing ‘Significant’ financial distress at the end of the 2017, up 36% compared to the same period last year (Q4 2016: 361,856) and 10% higher than the previous quarter (Q3 2017: 448,011).
Begbies Traynor warns that a number of macro-economic pressures last year contributed to this considerable increase in distress, with the combination of rising inflation, stagnant real wage growth, a weak Pound, political uncertainty, November’s rise in interest rates, and the ever-tightening credit environment putting increasing financial stress on businesses across the country. As a result, 258,349 UK businesses ended the year in a position of negative net worth1, while a further 154,251 demonstrated a worrying increase in their working capital deficit.
The data shows that ‘Significant’ distress rose across every sector and region of the UK over the past 12 months. Support Services was the worst performing sector by volume, with 121,095 businesses showing signs of financial difficulty at the end of 2017, up 43% on last year. Over the same period, financial distress in the UK Construction industry grew 31% impacting 62,294 firms, while ‘Significant’ financial distress in the Real Estate sector increased by 46%, hitting 40,508 companies. These three sectors alone made up 45% of all UK businesses in ‘Significant’ financial distress.
However, there was more positive news for businesses with a strong export book who benefitted from the devaluation of the Pound, particularly within the manufacturing and engineering sector.
Geographically, the region with the most affected businesses was London, where 121,528 companies ended the period in a state of ‘Significant’ financial distress, up 13% on Q4 2016; representing 25% of businesses in distress nationally.
Julie Palmer, Partner at Begbies Traynor, said:
“The number of UK businesses experiencing ‘Significant’ financial distress during Q4 2017 is of real concern, as a perfect storm of macroeconomic headwinds pushed nearly 500,000 firms into significant distress. Our data shows that no region or industry has entered the New Year unaffected, as the whole economy felt the combined drags of the inflationary environment, higher interest rates, growing business uncertainty, tighter credit availability and subdued consumer spending.
“When the overall business environment is so challenging, unfortunately there can be few real winners, however certain sectors of the economy are certainly feeling the pinch more than other. In particular, the vast UK support services sector saw a spike in distress as their stretched customers reined back spending, the construction industry saw the lowest levels of optimism in five years while the real estate sector felt the full impact of the increasingly stagnant UK housing market.”
Ric Traynor, Executive Chairman of Begbies Traynor, commented:
“Prolonged exchange rate weakness undoubtedly hit some businesses hard last year and despite a recent recovery in Sterling, this improvement is yet to feed through in terms of any widespread recovery in corporate health. Meanwhile, the impact of continued political and economic uncertainty surrounding the ongoing Brexit negotiations cannot be underestimated.
“Looking forward, UK growth is widely expected to be sluggish again in 2018, so it’s important that companies focus on staff engagement and business efficiency, in line with the Government’s push for productivity this year. For the thousands of businesses now showing signs of financial ill health, prudent cost management, sustained improvements in productivity, and finding innovative ways to stay ahead of the competition will be critical to surviving beyond the next 12 months.”
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 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.