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Companies with significant problems are those with either a court action and/or poor, insolvent or out of date accounts.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.”