How distressed are UK businesses really?

With the UK economic downturn having arguably bottomed out, few would dispute that the 'recovery' remains fragile. At the coalface of the commercial sector, over 160,000 companies are experiencing significant or critical financial distress, according to figures released by the accountancy firm, Begbies Traynor. Between them, these firms owe more than £55 billion to creditors, suppliers and service providers.

Begbies Traynor's ongoing survey monitors warning signs of companies in distress. What is interesting is that the number of companies experiencing significant or critical financial problems has risen by 20,074 or 14% to 161,601 in the first quarter of 2010 (Q4 2009: 141,527). Businesses with "significant problems" are those with either a court action and/or average, poor, very poor, or out-of-date accounts. Companies with "critical problems" are those with county court judgements with a total of £5,000 or more and/or winding-up petition related actions.

The accountants' estimate that approximately seven per cent of this increase is the result of a shift in trade creditor behaviour. The remainder of the increase could be attributed to the normal seasonal uplift.

As companies need to bolster their own funding for the recovery phase, trade creditors are increasingly seizing the opportunity to take action against their debtors in order to raise much-needed working capital. This behavioural shift represents a new phase in the cycle, putting businesses experiencing cash-flow trouble at greater risk of failure.

Low interest rates is one of the principal reasons why business failures have not yet reached the peak levels many feared this recession would cause. A rise may tip more struggling businesses over the edge later in the year and through into 2011, especially in the embattled but vital SME sector which cannot afford the protection of sophisticated interest rate hedging.

Begbies Traynor reveals that the first quarter of 2010 marks the second consecutive quarter of increases in the number of distressed companies. In the third quarter of 2009, a total of 134,000 were reported as being in considerable or perilous predicaments.

These figures are lower than those recorded in early 2009 as economic stimulus and government measures have provided support for companies that may have otherwise found it impossible to survive. Perhaps the biggest support has been the HMRC policy of 'time to pay VAT and PAYE'. In some cases, large liabilities are being broken down into very small regular payments allowing the company to continue trading through the tough periods of low cash-flow.

Construction was one of the sectors worst affected in the first quarter of 2010 - building businesses experiencing considerable or urgent cash-flow issues were up 30% on the previous quarter. Other sectors affected were professional services - up by 19%, property services - 42%, recruitment - 18% and retail, which was up by 19%. Sharp rises in input costs coupled with one of the worst winters for decades combined to make this a particularly difficult period across a number of sectors. In the case of the recruitment sector, increasing numbers of distressed companies are due to fewer job vacancies to fill, but also to businesses, which increasingly have balked at paying large finder's fees for placements.

Significant and critical problems by sector:



Significant and critical problems by region:




Scotland was, yet again, one of the worst affected regions of the UK on a quarter-on-quarter basis, with the number of companies experiencing notable or perilous difficulties up 18% on the previous quarter to 10,377. A recent report by Accountant in Bankruptcy (AiB), who is responsible for administering the process of personal bankruptcy and recording corporate insolvencies in Scotland, also pointed out a rise of 32% in Scottish businesses becoming insolvent. One particular problem Scotland has faced is that its economy has a relatively large financial services sector. It's rate of insolvencies was closely followed by that for the North West and North Wales with 19,081 companies - up 17%, and the South West and South Wales with 22,426 companies - up 17%.

Purely focusing on the businesses that have had significant and critical problems as a micro-economic indictor does not provide a complete summary, as firms that have been made insolvent in that time period have not been factored in. While others have recovered and continued to trade effectively, preserving jobs.

The rate of businesses subject to formal insolvency procedures has fallen dramatically over the course of the last twelve months. In the first quarter of 2010, there were a total of 783 businesses put into administration for England and Wales, compared with 1,311 in the same period last year. The figure for companies being liquidated has also decreased by 8.4% on the previous quarter, as well as a decrease of 17.8% on the same period in 2009.

It should be borne in mind that an administration process is a relatively expensive option and is a pathway mainly taken by larger businesses with revenues of £3m and higher.

So determining how distressed UK businesses are is a difficult task. It is still a mixed picture, and much will depend on the actions of trade creditors and the government. From the above statistics, it is clear that figures on formal insolvency procedures are not a reliable indicator of the levels of strain seen in UK businesses. It appears that it is more of a last resort option than before.

Whatever the economic environment, there will be plenty of opportunities for entrepreneurs to buy up struggling businesses. In last month's issue, we published a piece on how to buy a failing business.

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