Latest Red Flag Alert Report for Q4 2017

RNS Number : 0633C

Begbies Traynor Group PLC

17 January 2018

 

Half a million UK businesses start 2018 in 'Significant' financial distress

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."

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1.    'Negative net worth' occurs when a company's liabilities exceed its assets. The company does not necessarily need to declare bankruptcy if they can service their debt in instalments. These are often referred to as 'zombie' companies.

For further information, contact:

MHP Communications

Katie Hunt / Giles Robinson / Calum MacDougall / Alice Osborn / Peter Lambie

Tel:        [phone]

Email:   [e-mail]

About Red Flag Alert

Red Flag Alert has been measuring and reporting corporate financial distress since 2004, and over that time has become an industry benchmark of the underlying health of companies across every sector and region of the UK.

Through its unique algorithm, the Red Flag Alert measures corporate distress signals, drawing on factual legal and financial data from a wide range of relevant sources, including intelligence from the UK's leading insolvency business, Begbies Traynor. Please note that the Red Flag Alert algorithm was refreshed in Q3 2017 to enhance the risk factors analysed in the data. The reported results have been backdated to ensure consistency of comparative data.

The release refers to the numbers of companies experiencing 'Significant' problems, which are those with minor CCJs (of less than £5k) filed against them or which have been identified by Red Flag'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 prepare them for the future.  Further information about Red Flag Alert can be found at: www.redflagalert.com

About Begbies Traynor Group

Begbies Traynor Group plc is a leading business recovery, financial advisory and property services consultancy, providing services nationally from a comprehensive network of UK locations through two complementary operating divisions.

Business recovery and financial advisory services

Begbies Traynor is the UK's leading independent business recovery practice, handling the largest number of corporate appointments, principally serving the mid-market and smaller companies.

BTG Advisory is a boutique practice, providing commercial, strategic and partner-led advice, offering the broad range of professional services necessary to provide viable and effective solutions to businesses.

We provide these services to businesses, professional advisors, other stakeholders, investors and financial institutions, working with all the major UK clearing banks.

Property services

Eddisons is a national firm of chartered surveyors, delivering advisory and transactional services to owners and occupiers of commercial property, investors and financial institutions. The division includes Pugh & Co, the largest regional firm of commercial property auctioneers by number of lots.

 

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