Begbies Traynor sounds red alert on corporate UK

Bigger companies and those based in the south of Britain are faring better than their smaller, northern rivals, according to the latest 'Red Flag Alert Report' from Begbies Traynor Group, the insolvency accountant.

The results of the report on the health of corporate UK confirm anecdotal evidence.

Among its findings were that the corporate nation is starkly divided, with a marked increase in financial distress in the third quarter (Q3) among businesses based in the North and small and medium sized enterprises (SMEs), while southern based companies and larger businesses have shown a marked improvement in financial health.

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It also noted the growing impact of 'zombie' businesses - those which are in debt and only just generating sufficient cash to survive - and the growing effect they are having on the natural UK recovery cycle.

'Critical' distressAcross the UK, companies experiencing 'critical' distress (the most severe risk level) were down 17% to 4,107 (Q2 2012: 4,947) compared to the previous three months, indicating a marked reduction in the number of companies with a high propensity to fall into insolvency in the next quarter. However, the report says this fall in critical distress does not represent an improving picture of corporate health overall.

This is because actions measured within the 'critical' problems category - such as the issuing of county court judgements and winding up petitions - are typically at their lowest during Q3 due to seasonal factors, including Court holidays. This has been exacerbated by both creditor forbearance and the fact that the majority of businesses, by instigating tougher credit control procedures and avoiding transacting with companies with poor credit scores and payment records, have reduced their need to resort to court actions to recover unpaid bills.

Early warning signsHowever, it considers that companies in its 'significant' problems category are an earlier stage indicator of the trend in the financial health of 'Corporate UK' and these show a wide divergence in the health of SMEs compared to larger companies.

Within this category, there has been a 10.5% increase in SMEs exhibiting signs of earlier stage distress to 208,067 (Q2 2012: 188,265) compared to a 61% decrease in large companies to 10,951 (Q2 2012: 28,123).

The increase in SMEs experiencing distress has been driven primarily by marked increases in specific sectors, including; construction and real estate (up 41% and 148% respectively), transport & logistics (up 70%), print & packaging (up 52%) and hotels (up 66%). The regions showing the greatest increases in 'Significant' distress amongst SMEs include Scotland (up 22%), the East of England (up 20%) and the North West (up 20%).

This increase may also reflect the considerable increase in the number of newly incorporated companies registered in the 2011/12 year, many of which have been formed by individuals pushed into starting their own businesses due to unemployment but, unaware of the risks involved in starting a new business, many are unfortunately already showing 'significant' financial distress.

All this corporate misery should bode well for Begbies Traynor's insolvency work. Consensus estimates are for pre-tax profits for the year ending April 30th 2013 of £8.06m on turnover of £59.6m.

CM