Latest Red Flag Alert Report for Q2 2024

Begbies Traynor Group PLC

22 July 2024

 

22 July 2024

Over 600,000 UK firms face financial strain amidst challenging economic climate

·    The level of firms in 'significant' financial distress rose by 8.5% to 601,950 in Q2 2024 (Q1 2024: 554,554), considerably higher than Q2 2023 (439,815), up by 36.9%

·    In Q2 2024, 'significant' financial distress rose particularly rapidly in the following sectors: Travel & Tourism (+20.1%), Hotels & Accommodation (+16.4%), Health & Education (+12.4%) and Bars & Restaurants (+12.2%)

·    Levels of 'significant' financial distress increased in 20 of the 22 sectors covered by Red Flag Alert in Q2 2024 versus Q1 2024

·    40,613 UK businesses are in 'critical' financial distress, up 1.1% on the prior quarter (Q1 2024: 40,174) and 34.5% higher than Q2 2023 (30,186)

·      Serious concerns remain over the state of the Construction, Real Estate and Support Services sectors which represent over 40% of the companies in 'critical' financial distress

The latest Begbies Traynor "Red Flag Alert" research, which has provided a snapshot of British corporate health for almost two decades, reveals a particularly worrying picture as the number of UK companies in 'significant' financial distress jumped by nearly 10% in Q2 2024 to 601,950 businesses (Q1 2024: 554,554).

The marked acceleration in the number of companies entering 'significant' financial distress was driven significantly by the Travel & Tourism (+20.1%), Hotels & Accommodation (+16.4%) and Bars & Restaurants (+12.2%) sectors. The growth in financial distress among these sectors reflects the ongoing weakness of consumer confidence in the UK, which is putting a huge amount of pressure on these consumer-facing sectors in the country.

During Q2 2024, 'critical' financial distress increased by 1.1% to 40,613 companies in the UK. This followed noticeable increases in the Automotive (+13.2%), Industrial Transportation & Logistics (+12.2%), Health & Education (+8.4%) and Bars & Restaurants (+7.3%) sectors.

With a large number of the businesses in 'critical' financial distress expected to enter insolvency over the next 12 months, the state of the Construction, Real Estate, Hospitality, Financial & Support Services sectors continue to be of concern as companies from these sectors account for nearly 50% of the businesses in 'critical' financial distress.

Julie Palmer, Partner at Begbies Traynor, said: "It looks like 2024 will prove to be another tough year for UK businesses. Six months in, and we're seeing clear signs that financial distress is growing across almost every sector.

"It is a particularly difficult situation for businesses in consumer facing sectors, such as hospitality. While a fall in inflation to more palatable levels will likely provide some relief, consumers simply aren't behaving like they used to and these businesses, who are still grappling with higher costs pushed up by higher wages, are really struggling.

"This, combined with one of the wettest summers on record, continues to significantly impact trading.

"Additionally, the situation for the consumer remains very precarious. The latest figures from the Bank of England highlights how more than three million households will come off their fixed rate mortgages over the next two years - resulting in substantially higher repayments for many - which will in turn act as a drag on disposable incomes.

"In a climate like this one, many businesses who were supported through the pandemic and its aftershocks by the Government, will be hugely concerned by the very real prospect of a prolonged period of higher interest rates.

"Many businesses who loaded up on cheap debt prior to the pandemic are simply not equipped to survive the current pressures and the financial burdens they face may ultimately prove too much.

"Indeed, HMRC, which has been fairly lenient on companies repaying pandemic funding to date, will eventually tighten its grip and I expect this to push a considerable number of companies into insolvency over the next 12 months."

Ric Traynor, Executive Chairman of Begbies Traynor, commented: "We are a little over halfway through the year and the macro-economic environment for UK companies remains extremely testing.

"There might be a greater sense of optimism in certain corners of the economy, but this is yet to translate into anything meaningful for the hundreds of thousands of businesses fighting for survival.

"The situation for many British firms remains grave, with the latest Red Flag Alert data highlighting a substantial increase in the number of businesses in significant financial distress in comparison to this time last year.

"The good news is that we now have some political certainty after the recent elections, which should result in some momentum starting to build this summer. A continuation of falling inflation levels will be especially helpful for businesses, particularly if interest rates begin to inch backwards later this year.

"Beyond these small glimmers of hope, all eyes are now on our new Government as we ask ourselves what they can do to kickstart economic growth in the UK.

"Sadly, the reality is that the Government may not be able to act fast enough to stop many struggling businesses from succumbing to the economic pressures with which they are currently grappling.

"In short, the prevailing economic situation means that we still expect to see heightened levels of company insolvencies extend into 2025 and beyond."

Top 10 Sector Ranking - Critical Financial Distress							Top 10 Sector Ranking - Significant Financial Distress
1.	Construction			6,043			1.	Construction		89,824
2.	Support Services			5,758			2.	Support Services		89,763
3.	Real Estate & Property Services			5,575			3.	Real Estate & Property Services		65,919
4.	General Retailers			3,113			4.	Professional Services		50,683
5.	Professional Services			2,770			5.	General Retailers		42,992
6.	Health & Education			2,436			6.	Health & Education		39,933
7.	Telecommunications & Information Technology			2,256			7.	Telecommunications & Information Technology		39,659
8.	Food & Drug Retailers			1,696			8.	Media		24,831
9.	Bars & Restaurants			1,587			9.	Food & Drug Retailers		17,443
10.	Media			1,467			10.	Financial Services		16,977
Critical Distress by Region						Significant Distress by Region
1.		London	12,560			1.	London		169,442
2.		South East	6,216			2.	South East		102,288
3.		Midlands	4,918			3.	Midlands		75,144
4.		North West	4,527			4.	North West		63,454
5.		Yorkshire	2,738			5.	South West		42,111
6.		South West	2,546			6.	Yorkshire		41,858
7.		East of England	2,373			7.	Scotland		40,435
8.		Scotland	2,031			8.	East of England		38,594
9.		Wales	1,214			9.	Wales		17,463
10.		North East	743			10.	North East		11,329
11.		Northern Ireland	741			11.	Northern Ireland		9,756
12.		Misc	6			12.	Misc		76

--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 were improved at the end of 2023, 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 UK advisory firm with expertise in business recovery, advisory and corporate finance, valuations, asset sales and property consultancy. 

We have over 900 fee earners operating from 45 locations across the UK, together with four offshore offices. Our multidisciplinary professional teams include insolvency practitioners, accountants, lawyers, funding professionals and chartered surveyors.

·    Business recovery

o  Corporate and personal insolvency; business restructuring and turnaround; contentious insolvency; creditor services

·    Advisory and corporate finance

o  Debt advisory and finance broking; corporate finance; special situations M&A; financial advisory

·    Valuations

o  Property, business and asset valuations

·    Asset sales

o  Property, plant and machinery auctions; property and business sales agency

·    Property consultancy

o  Building consultancy; transport planning; commercial property management; insurance and protection

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

 

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