Recovery firmly established as financial distress levels reduce year-on-year, but Q1 bites back

Red Flag Alert Report for Q1 2014

• Year on year comparison shows a positive trend, with distress levels down 7%
• However, quarter on quarter indicates 4% increase in critical distress
• Rising distress in Scotland casts doubt over economic viability of Independence

According to the latest Begbies Traynor Red Flag Alert for Q1 2014, which monitors the financial health of “Corporate UK”, levels of ‘Critical’ financial distress among UK businesses has decreased by 7% year on year, from 3,283 in Q1 2013 to 3,063 in Q1 2014. Construction, financial services and travel & tourism saw some of the largest declines in distress, falling 15%, 31% and 11% respectively.

The construction sector has seen significant improvement, especially in the house building category as indicated in the construction PMIs issued earlier this month. With the extension of the Help to Buy scheme and a new surge of finance into the property market from pension funds following the changes to annuities announced in the Budget, construction is likely to be one of the sectors witnessing the most improved financial health over the coming quarters. Financial services is also benefiting from renewed market confidence and IPO activity, which are returning to pre-recession levels with March being the biggest single month for money raised since July 2007.

However, on a quarterly basis, distress levels have increased by 4%, from 2,933 to 3,063, reversing the positive trend experienced over the previous three quarters when distress levels consistently declined.

This sudden increase can partly be attributed to seasonal factors such as the effects of unusually heavy rainfall experienced across the UK, which amplified the usual lull in consumer spending following the busy festive period. According to the Red Flag data, the UK’s core consumer facing sectors witnessed the largest increases in financial distress over the period with ‘Critical’ distress among general retailers increasing 4%, bars and restaurants by 7%, media by 16%, hotels by 23% and food retailing by a massive 86%.

At the same time, financial pressures have intensified for businesses across all sectors in the lead up to the 5 April deadline, as creditors and directors take action ahead of filing accounts for the new tax year.

Julie Palmer, Partner at Begbies Traynor, commented: “These latest figures are proof that the UK economy hasn’t just turned a corner, but is getting firmly back on its feet. However, Q1 has historically been a difficult period for UK businesses, especially for those in consumer facing sectors with the post-Christmas slump caused by a tightening of customers’ belts due to excess festive spending. This year businesses have also been hit by adverse weather, undoubtedly deterring people from leaving their homes.”

A mixed picture for regional recovery
Comparing ‘Critical’ financial problems by region on an annual basis, the largest reductions in financial distress came from Northern Ireland, the North East, South West and Wales, which reduced by 23%, 20%, 16% and 16% respectively, indicating that regions outside of London are now also enjoying the green shoots of recovery over the longer term.

Scotland was the only area in the UK to experience a rise in financial distress year on year, increasing 6%. As more Scottish businesses continue to underperform compared to their peers south of the border, this worrying trend will only add to the growing uncertainty over the country’s economic stability ahead of the upcoming Referendum for independence in September.

When comparing regions on a quarterly basis the research reveals a starker picture, with all regions except Northern Ireland and the South West showing increases in ‘Critical’ distress levels. The highest levels were seen in the South East and East of England with 13% and 12% increases respectively during the first quarter.

Ric Traynor, Executive Chairman of Begbies Traynor Group, commented: “Whilst we had seen positive signs that financial distress was reducing during 2013, the early stages of an economic recovery are often a lot harder for businesses to negotiate than recessions themselves. Companies have worked hard to balance their finances but now need access to additional finance to fund increased customer demand as the economy improves.”

Julie Palmer, Partner at Begbies Traynor, concluded: “For some companies, the continuous spinning of financial plates has become too much, causing this sudden uptick in distress. While they may find means and ways to continue trading, they should be prepared for the perils of an interest rate hike, which could come in by 2015. It’s time for companies to get their books in order.”

Critical problems by Sector: