The latest quarterly Red Flag Alert, issued today by business recovery firm Begbies Traynor, 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.
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.
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."
He added: "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."
