Companies in critical condition owe £53bn

UK businesses with critical problems owe more than £52.7bn to creditors, suppliers and service providers, according to Begbies Traynor’s latest Red Flag Alert.

The study also shows that by the fourth quarter of 2010, 147,836 companies were experiencing ‘significant’ or ‘critical’ financial problems, a 20 per cent rise from 123,361 firms in the third quarter of last year.

The report also claims a 24 per cent increase in the number of companies in distress from the third quarter of last year, with more than 61,000 struggling companies exposed to public sector spending cuts by the end of 2010.

The alert also shows a 17 per cent rise to more than 10,000 struggling businesses in the retail sector, from the third to fourth quarter of 2010; while the wholesale sector experienced the largest rise in distress of 30 per cent.

Begbies’ Red Flag Alert measures corporate distress through a complex methodology, drawing on factual legal and financial data for companies trading for more than a year.

It monitors the number of struggling firms in two categories: significant problems and critical problems.

Companies with significant problems are those with either a court action and/or poor, insolvent or out of date accounts. Firms with critical problems are those with county court judgements totalling £5,000 or more and/or wind-up petition related actions.

The 3,018 companies experiencing critical financial problems alone owe £52.7bn to creditors, suppliers and service providers, which compares to £57.5bn owed by 2,943 companies in the third quarter of 2010. 

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 year, higher inflation, an accelerated decline in business confidence, and higher unemployment forecasted for 2011, these figures indicate the renewed challenges facing businesses across most industries in 2011.”

The Red Flag Alert shows that the sectors most exposed to public sector cuts, which comprise construction, IT, recruitment, advertising and business services, have seen a 24 per cent increase in financial distress to 61,534 in the fourth quarter of 2010.

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 sectors.”

He added: “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.”

The retail sector saw a 17 per cent rise to 10,250 companies facing financial distress from 8,751 in the third quarter.

Traynor added: “The retail sector is seeing an increase in distress ahead of greater pressure on consumers’ disposable incomes from higher inflation, tax rises and job cuts.

“With recent evidence of falling house prices, we expect a combination of deteriorating consumer confidence and financial resources to result in an increase in business failures in the sectors most exposed to discretionary spending as we move through 2011.”

VAT rise will tighten screw on SMEs

Almost a third of small firms (30 per cent) will need extra funding to cope with the increase in VAT, according to research by British bank.

Some 35 per cent of small and medium-sized enterprises (SMEs) surveyed by the bank said that the VAT rise will strain their cashflow in 2011.

The bank said businesses usually have to pay VAT to HM Revenue & Customs before they have received payment from customers, meaning that the VAT rise will bite into their working capital, increasing the need for funding.

A spokesperson for the bank said: “The VAT rise will only add to the financial squeeze faced by many SMEs.

“A worryingly high percentage of SMEs say they will require additional funding but, with many of the big banks still reluctant to extend credit, the VAT rise could strain working capital to breaking point.”

The bank, which surveyed 292 SMEs for its study, stated that many firms are already being forced to wait months for bigger clients to pay invoices. The bank believes there is a risk that big businesses that buy services from small firms may try to mitigate the impact of the VAT rise by delaying the payment of invoices even longer. The VAT rise, therefore, may hit SMEs hardest.

Businesses will need to start paying their VAT bills at the new higher rate to HMRC at the end of February.

The spokesperson added: “Late payment of invoices is already a serious concern for many SMEs and the prime cause of their cashflow problems. The temptation for clients of SMEs to sit on invoices longer to shore up their own cashflow in response to the VAT rise will be difficult to resist.

“The public sector has made enormous efforts to keep payment days to its suppliers to an absolute minimum. Big businesses could do a lot more to alleviate pressure on their smaller suppliers by reducing the amount of time it takes to pay invoices.”

The bank says that the VAT rise comes at a time when many high street banks still have in place credit crunch era restrictions on lending – such as restrictions on unused overdraft facilities.

HMRC is also reported to have become more reluctant to allow businesses to roll over agreements to defer tax under its Time to Pay scheme.

The bank added: “The Time to Pay scheme has been a vital lifeline for struggling SMEs over the last two years but statistics suggest that HMRC has been refusing a slightly higher proportion of requests from businesses to defer tax payments.

“HMRC should consider whether its eligibility criteria for Time to Pay should temporarily be loosened in light of the VAT rise.”

Insolvency News this week… Business failures down 12 per cent

The level of UK business insolvencies fell more than 12 per cent for the whole of 2010 compared to 2009, as firms managed to survive the economic climate.

A report from business information provider and credit reference agency Equifax shows that corporate insolvencies decreased from 26,000 in 2009 to 23,000 in 2010.

The study also states that the level of corporate failures dropped 8.4 per cent year on year for the fourth quarter of 2010.

While the report paints a more positive picture for UK plc in 2011, it also reveals a 6.4 per cent rise in business failures during the last three months of 2010 compared to the third quarter.

Neil Munroe, external affairs director at Equifax, said: “What we have seen throughout 2010 is a steady drop in the number of organisations failing. Pay freezes and tight control on invoice payments were reported consistently throughout the year.”

He added: “It appears that there has been a clear focus on cost control and cash flow management which has aided survival.”

Equifax’s Business Failures Report also shows the regions that are recovering and those still struggling in the aftermath of the recession.

Scotland, for example, saw the highest increase in failures from the third to the fourth quarter of 2010 – at 32.9 per cent.

The level of business failures in London increased from 16 per cent, from 1,326 in the third quarter to 1,538 in the fourth, while the west Midlands also suffered, with insolvencies rising from 654 to 787 in the final three months of the year.

Equifax’s report attributes these rises to a number of companies being wound up at the end of their business year.

The regions that bucked the trend of quarterly rises were the east Midlands, with a 23.4 per cent drop quarter on quarter; the north west with a 7.6 per cent fall and the south west with a 2.1 per cent decrease.

Best Corporate Finance Boutique Award

2011 is off to a flying start with Beer & Young named as a finalist for the Business Moneyfacts, Best Corporate Finance Boutique award. 

The Business Moneyfacts awards ceremony will be held at the London Marriott Hotel in Grosvenor Square on Thursday 24^th March 2011.

Acquisition International

B&Y continue to enhance their reputation in the UK, regularly being asked for their expert views on the market place, most recently by Acquisition International who invited B&Y to discuss conditions in the UK, commenting “Beer & Young  is extremely well regarded in the insolvency and restructuring industry”