Q4 2010 Red Flag Alert Report

Key findings from the Q4 2010 Red Flag Alert Report:

147, 836 UK companies are experiencing ‘significant’ or ‘critical’ financial problems
the first year on year increase in distress for 7 quarters; a 4% increase from 141,527 in Q4 2009
a 20% increase from 123,361 in Q3 2010
Those with ‘critical’ problems owe more than £52.7 billion to creditors, suppliers and service providers
A 24% increase in distress on Q3 2010, with more than 61,000 struggling companies in the industries exposed to public sector spending
A 17% increase to over 10,000 struggling businesses in retail sector on Q3 2010; while the wholesale sector experienced the largest rise in distress, up 30%
Evidence of an increase in actions from trade creditors

Almost 148,000 UK companies are facing ‘significant’ or ‘critical’ financial problems, whilst those with ‘critical’ problems alone are struggling with nearly £53 billion worth of liabilities, according to the latest quarterly Red Flag Alert, issued today by Begbies Traynor, the UK’s leading business recovery specialist.

The report, which monitors the early warning signs of company distress, shows a 4% increase to 147,836 companies which experienced ‘significant’ or ‘critical’ financial distress in Q4 2010, compared to 141,527 companies in Q4 2009, representing the first year on year increase for seven quarters. The 147,836 companies also represented a 20% increase from 123,361 in Q3 2010, which was considerably more pronounced than the usual seasonal increase as seen this time last year (the number of companies increased by 6% from Q3 2009 to Q4 2009).

Whilst these figures are heavily weighted to the less severe category of companies facing ‘significant’ problems (representing 144,818 companies in Q4 2010), the data shows a marked increase in actions taken by trade creditors against their debtors.

The 3,018 companies experiencing ‘critical’ financial problems alone owe a total of £52.7 billion to creditors, suppliers and service providers, which compares to £57.5 billion owed by 2,943 companies in Q3 2010. The decrease in the average size of liabilities, from Q3 to Q4, indicates that a higher proportion of SMEs are suffering increases in financial distress.

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

“Today’s figures show that UK businesses are demonstrating real signs of distress and that trade creditors are both losing patience with their debtors and in need of collecting cash into their own businesses. Coming against a backdrop of the largest decline in house prices for a year1, higher inflation, an accelerated decline in business confidence2, and higher unemployment forecasted for 20113, these figures indicate the renewed challenges facing businesses across most industries in 2011, particularly in the SME sector.

24% increase in distress amongst public sector facing firms

Against this backdrop, Red Flag Alert has shown that the sectors most exposed to public sector cuts, which comprise construction, IT, recruitment, advertising and business services, have already seen a 24% increase in financial distress to 61,534 (Q3 2010: 49,756). This increase was particularly pronounced in the IT (up 27%), business services (up 25%) and construction (up 21%) sectors.

Traynor said: “These figures demonstrate that the sectors most reliant on government spending are already feeling the impact of public sector cuts, confirming the financial effects of the recent contraction in the services and construction sectors4. With the full implementation of budget cuts only starting to show through in these figures, public sector exposed sectors are likely to face significant increases in the level of corporate failures over the course of 2011.”

Further distress in retail and the supply chain

The retail sector has seen a 17% increase to 10,250 companies facing financial distress (Q3 2010: 8,751); a considerably more pronounced increase than the 4% seen last year (10,199 in Q4 2009 from 9,820 in Q3 2009). In addition, the wholesale sector saw a 30% increase to 6,520 (Q3 2010: 5,001).

Traynor added: “The retail sector is seeing an increase in distress ahead of greater pressure on consumers' disposable incomes from higher inflation, tax rises and job cuts. With recent evidence of falling house prices, we expect a combination of deteriorating consumer confidence and financial resources to result in an increase in business failures in the sectors most exposed to discretionary spending as we move through 2011.

“The largest increase in distress across all of the sectors was seen in the wholesale sector, indicating the challenges facing the supply chain. With higher commodity prices difficult to pass on to consumers, retailers will be under pressure to squeeze the already tight margins of their suppliers, which smaller suppliers will find increasingly difficult to withstand.”

Summary

Traynor continued: “After seven quarters of declines in the levels of financial distress, these figures show the first evidence of a hardening of creditor attitudes and the real strain being felt by UK companies at this point in the cycle.

“It is likely that many of these ‘problem’ businesses will reach informal arrangements with creditors or will be proactively managed by the banks and restructuring experts outside of formal insolvency. However, given historical experience, these higher levels of distress would typically be expected to translate into a 10% or greater rise in formal insolvencies in 2011 (compared to an estimated 15% decline in 2010), due to hardening creditor attitudes, the impact of public sector cuts and the gradual unwinding of government support measures. This could mean a rise from c.21,500 insolvencies in 2010 to more than 23,500 in 2011.”

“For smaller businesses, we are entering the darkest hour before the dawn; as they face the dual challenges of weak domestic demand and greater pressures from larger competitors and business customers looking to preserve their own profitability. As such, it will be smaller businesses that bear the brunt of an increase in formal insolvencies.”

1 Halifax House Price Index, December 2010
2 ICAEW Business Confidence Monitor, Q4 2010
3 CIPD Unemployment Forecast for 2011
4 Construction and services CIPS PMI for Q4 2010, January 2011