By Daniel Hunter
According to the latest Begbies Traynor Red Flag Alert research for Q3 2013, which monitors the financial health of Corporate UK, levels of 'critical' financial distress among UK businesses continue to fall albeit at a slower rate, decreasing 2% on top of last quarter’s 9% reduction; with improving consumer confidence making up for subdued summer trading within the UK’s core services sectors.
Across all sectors, UK businesses experiencing ‘Critical’ financial problems reduced 2% from 3,001 in Q2 2013 to 2,951 in Q3 2013, supported by significant improvements in the UK’s consumer-facing industries including Bars & Restaurants, Hotels, Food Retailing and General Retail, which all experienced marked reductions in businesses suffering ‘Critical’ distress, falling 30%, 21%, 16% and 8% respectively.
However this positive trend masks a declining trend within the UK’s vital service industries, with Professional Services, Financial Services and Support Services all experiencing significant increases in ‘Critical’ distress levels during the last three months, rising 34%, 28% and 9% respectively. These increases bring the total number of services businesses suffering ‘Critical’ distress up to 330, of which 83% are SMEs, suggesting that the recent improvement as reported in the latest Markit/CIPS PMI data is being fuelled by the larger companies within these services sectors. According to Begbies Traynor’s analysis, declining net worth and increasing working capital deficits are driving the reported increases in distress among this group.
Julie Palmer, Partner at Begbies Traynor, commented: “Following a well documented second and third quarter surge for the UK services sector, this positive momentum masks a worrying picture among the industry’s SMEs. While transactional volumes have picked up across the sectors, they have remained at historically low levels, meaning that smaller, people businesses have struggled to maintain market share during the fallow summer months in the face of competitive pressure for new business from their larger peers. Given their significant high fixed cost bases and working capital requirements, the hopes of these SMEs will be firmly pinned on strong trading in the final quarter of the year, while effective management of their cost base and an improvement in the lending environment will be crucial to reverse this worrying trend.”
“Celebrating a return to form, the UK’s consumer-facing industries have seen significant reductions in ‘Critical’ distress levels, both on a quarterly and an annual basis, following a strong summer of sales aided by the extended period of good weather across the country. With market sentiment improving and rising house prices giving homeowners increased confidence, consumer spending is proving to be the engine driving this recovery; good news for the consumer-facing sectors, which are so dependent on a positive Christmas trading period.”
“However, with pay growth still lagging behind inflation, this consumer-led improvement could have worrying consequences for the wider economy as new research from the British Bankers' Association1 suggests that this resurgence is being funded by a rise in household credit, which has increased for the first time in four years. With rising property values prompting still more consumers to increase borrowing, even amid fears of an imminent housing bubble, we are reminded of the boom years prior to the economic downturn of 2008, and hope that this is not a sign of UK consumers repeating past mistakes.”
During the third quarter, the number of UK businesses experiencing ‘Significant’ levels of financial distress increased by 23% to 218,128, compared to 176,677 during Q2 2013; close to the same level reported for Q3 2012, when 219,018 businesses were classified as ‘Significant’.
However, these figures mask a dual track economy with a marked deterioration in the financial health of small to medium enterprises (SMEs) contrasting starkly with an improving picture for larger companies. The research finds that there was a 29% increase in ‘Significant’ problems amongst SMEs, from 155,209 in Q2 2013 to 200,000 in Q3 2013, while the level of ‘Significant’ problems amongst larger companies fell by 16% from 21,468 in Q2 2013 to 18,128 in Q3 2013.
Julie Palmer commented: “The past three months have shown a worrying spike in ‘Significant’ distress levels across all sectors covered by the Red Flag Alert, which from previous experience is a consistent trend during this fragile stage of the economic recovery. Unfortunately SMEs are bearing the brunt as endemic late payments and higher costs of funding take their toll on smaller companies’ cash flows, thus adding further fuel to the fire of the UK zombie problem.
“This represents a major step backwards in the Government’s efforts to improve the fortunes of this group and suggests more support is needed to nurse vulnerable SMEs back to health before this backbone of the economy is dragged into deeper distress. We welcome the Government’s consultation on penalties for late payments to small suppliers and hope that this is a shot across the bow of larger businesses which rely on paying late to fund their own cash flows. However, our statistics show that the SME community needs swift action on late payments, reducing the regulatory burden and business rates, and improving funding availability; without a rapid improvement in funding for the working capital and investment required to compete effectively with larger companies during the economic recovery, we could see an increase in insolvencies in the New Year.”
Comparing financial problems by region on a yearly basis, all regions across the UK experienced an improvement in ‘Critical’ distress, with Northern Ireland and the North East seeing the largest reduction in distress levels, falling 61% and 44% respectively. When comparing regions on a quarterly basis, the research reveals a mixed picture, with the North East (20%) and Northern Ireland (18%) showing the greatest improvement in ‘Critical’ distress during the quarter, alongside the East of England (9%), Midlands (7%) and the North West (7%).
However following a marginal improvement in Q2 2013, London has experienced an increase in ‘Critical’ distress, up 3% during Q3 2013, suggesting that the Capital’s recovery has slowed relative to the rest of the country. Other regions which have seen a quarterly deterioration in ‘Critical’ distress levels include Yorkshire & Humberside (5%), the South West (9%) and Scotland, which has increased a significant 23% over the period.
Julie Palmer added: “While the capital’s business community has ploughed through the recession like a proverbial freight train, it seems that London’s micro-economy has now slowed to a more leisurely pace. But, fortunately, the regional recovery has gathered enough momentum over the past three months to keep the UK economy on the growth track.”
Ric Traynor, Executive Chairman of Begbies Traynor Group, concluded: “This quarter’s Red Flag statistics spell good tidings for the upcoming Christmas trading period, as a nationwide resurgence in consumer confidence has contributed to an overall reduction in ‘Critical’ distress and positive growth across the regions. However with the UK’s core SME community continuing to struggle, particularly within the important services sector, there is still a great deal to do if we want to ensure this group is properly funded to get back on the hiring path and effectively contribute to the UK’s recovery.”
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