Latest Red Flag Alert Report for Q1 2024

Begbies Traynor Group PLC

26 April 2024

 

26 April 2024

Over half a million UK businesses fighting for survival as UK economy stagnates

·    The level of 'significant' financial distress leapt 30.8% year-on-year in Q1 2024 with 554,554 companies affected (Q1 2023: 424,041).

·    Each of the 22 sectors covered by Red Flag Alert research experienced a double-digit growth in financial distress over the last year.

·    The Construction, Food & Drug Retailers and General Retailer sectors in particular drove the increase in 'significant' financial distress, up 38.6%, 40.8% and 38.7% respectively in Q1 2024.

·    40,174 UK businesses are in 'critical' financial distress - a 20.1% increase compared to Q1 2023 (33,449) making them especially vulnerable to failure over the next 12 months.

The latest Begbies Traynor "Red Flag Alert" research, which has provided a snapshot of British corporate health for over 15 years, highlights the speed at which financial distress has accelerated over the last 12 months, with 554,554 UK businesses now in 'significant' financial distress - a 30.8% rise compared to Q1 2023. This deterioration now affects all 22 sectors covered by this latest research.

Additionally, the much more serious 'critical' financial distress has leapt 20.1% compared to Q1 2023, with 40,174 UK businesses affected. Despite a 15.4% fall in critical financial distress compared to Q4 2023 company insolvencies remain at historically elevated levels as servicing debt at higher interest rates takes its toll.

With many companies in 'critical' financial distress expected to enter insolvency over the course of the next 12 months, the picture in the Construction, Real Estate, Financial Services and Support Services sectors is particularly concerning as nearly 50% (c.20,000 businesses) of the companies in 'critical' financial distress are represented by these sectors.

Additionally, Red Flag Alert's historic data indicates that a large percentage of the businesses currently in 'significant' financial distress are likely to progress towards 'critical' financial distress and potential insolvency if the economic backdrop does not improve.

Julie Palmer, Partner at Begbies Traynor, said: "Despite some optimism as we entered the new year, 2024 has so far been characterised by a continuation of the same pressures that plagued companies in the UK throughout 2023.

"Since the pandemic, hundreds of thousands of UK businesses depleted their financial reserves and loaded their balance sheets with increasingly unaffordable debt which for many may simply be too great to bear.

"As with the prior quarter, the picture is particularly concerning in the consumer facing sectors. We are starting to see this translate into larger companies entering insolvency, a trend that I expect to continue while consumer confidence remains uncertain. On top of that, the higher levels of financial distress in bellwether sectors such as real estate and construction point to a troubled UK economy.

"Right now, many companies will be pinning their hopes on a meaningful cut to interest rates later this year, but the Bank of England continues to be hawkish, so it is unlikely to make a cut in the near-term given inflation is still higher than expected.

"All of this means that these pressures are here to stay, and I fear this will result in thousands of businesses failing in the coming months as the constant pressures will become too great for many."

Ric Traynor, Executive Chairman of Begbies Traynor, commented: "We are three months into 2024 and the considerable economic challenges facing many companies up and down the UK show no immediate sign of abating. The macroeconomic conditions that made last year so difficult have continued to exert unrelenting pressure on corporate balance sheets.

"Consequently, our own red flag data shows a marked increase in British firms moving towards insolvency compared to the same period last year.

"Growing geopolitical instability is compounding this problem and impairing the UK economy's ability to pick up some much-needed momentum post-pandemic. The UK economy is in a precarious enough position as it is, and further instability could cause fuel prices to rise markedly, increasing inflation and slowing the appetite for the predicted cuts to interest rates.

"Unfortunately, there's no quick fix for our economy and with inflation falling slower than expected, hope of the Bank of England cutting interest rates significantly in the near future seems to be fading.

"Sadly, the pressing issues facing businesses today will simply push many over the edge and contribute to the current high level of UK corporate insolvencies."

Top 10 Sector Ranking - Critical Financial Distress				Top 10 Sector Ranking - Significant Financial Distress
1.	Construction	6,141		1.	Support Services	84,066
2.	Support Services	5,795		2.	Construction	83,559
3.	Real Estate & Property Services	5,396		3.	Real Estate & Property Services	61,344
4.	General Retailers	3,027		4.	Professional Services	48,680
5.	Professional Services	2,693		5.	General Retailers	38,542
6.	Telecommunications & Information Technology	2,295		6.	Telecommunications & Information Technology	36,702
7.	Health & Education	2,247		7.	Health & Education	35,542
8.	Food & Drug Retailers	1,662		8.	Media	22,479
9.	Media	1,497		9.	Financial Services	15,995
10.	Bars & Restaurants	1,479		10.	Food & Drug Retailers	15,646

Critical Distress by Region				Significant Distress by Region
1.	London	12,089		1.	London	157,156
2.	South East	6,406		2.	South East	95,018
3.	Midlands	4,822		3.	Midlands	68,327
4.	North West	4,526		4.	North West	58,599
5.	Yorkshire	2,777		5.	South West	39,259
6.	East of England	2,415		6.	Yorkshire	37,952
7.	South West	2,385		7.	East of England	35,587
8.	Scotland	2,065		8.	Scotland	27,936
9.	Wales	1,187		9.	Wales	15,408
10.	North East	776		10.	North East	10,258
11.	Northern Ireland	718		11.	Northern Ireland	8,991
12.	Misc	8		12.	Misc	63

--ENDS--

For further information, contact:

MHP Communications: Katie Hunt Charles Hirst Matthew Taylor

07595 461 231 07827 662 831 [e-mail]

Notes to Editors

About Red Flag Alert

Red Flag Alert has been measuring and reporting corporate financial distress since 2004. It has become a benchmark on the underlying health of companies across every sector and region of the UK.

Red Flag Alert's algorithm measures corporate distress signals, drawing on company accounts and factual, legal and financial data from a wide range of relevant sources, including intelligence from the UK's leading insolvency business, Begbies Traynor. The algorithm was refreshed in H1 2023 to enhance the risk factors analysed in the data. The reported results have been backdated to ensure the consistency of comparative data.

Algorithms which drive Red Flag Alert have been improved and updated for the latest report, with companies now measured against a new scorecard of indicators to give greater insight and accuracy into the health of businesses. Two years of work by data scientists analysing eight years of data, taking into consideration pre, during and post-pandemic insights to find signals and patterns indicating businesses in distress, combined with AI tools, means that Red Flag Alert aims soon to be able to predict how many companies in trouble will go on to fail.

The release refers to the number of companies experiencing "Significant" or "Critical" problems, which are those that have been identified by Red Flag Alert's proprietary credit risk scoring system which screens companies for a sustained or marked deterioration in key financial ratios and indicators including those measuring working capital, contingent liabilities, retained profits and net worth.

Red Flag Alert is commercially available to all businesses, on an annual subscription basis, to help them better understand risk and exposure and help subscribers to plan for the future. Further information about Red Flag Alert can be found at: www.redflagalert.com

Economically active businesses exclude those that are flagged by Companies House as being, Non-trading, Listed for Strike off / Strike off pending, Insolvent or Dissolved. Companies where there is insufficient information available for RFA to assign a health rating are also excluded.

About Begbies Traynor Group plc

Begbies Traynor Group plc is a leading professional services consultancy, providing services from a comprehensive network of UK and off-shore locations. Our professional team include licensed insolvency practitioners, accountants, chartered surveyors, bankers and lawyers. We provide the following services to our client base of corporates, financial institutions, the investment community and the professional community:

·     

·      Insolvency

o  Corporate and personal insolvency

·      Financial advisory

o  Business and financial restructuring; debt advisory; forensic accounting and investigations

·      Transactional support

o  Corporate finance; business sales agency; property agency; auctions

·      Funding

o  Commercial finance broking; residential mortgage broking

·      Valuations

o  Commercial property, business and asset valuations

·      Projects and development support

o  Building consultancy; transport planning

·      Asset management and insurance

o  Commercial property management; insurance broking; vacant property risk management

Further information can be accessed via the group's website at www.ir.begbies-traynorgroup.com

 

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