- One-third increase in firms in 'critical' distress
- Companies facing multiple financial headwinds
- CCJs suggest rising tide of insolvencies
Just a day after the Bank of England forecast an early-1990s style recession lasting five quarters and the biggest drop in real incomes on record, business advisory group Begbies Traynor (BEG:AIM) published its latest ‘Red Flag Report’ on businesses in financial distress.
A combination of inflation in the ‘real economy’ which is much higher than reported levels, together with weakening confidence and the withdrawal of government support has pushed more companies into what the firm calls ‘critical financial distress’.
RISING TIDE
Begbies reports the number of companies in critical distress in the second quarter rose 37% on last year to 1,957, driven mainly by bars and restaurants, general retailers and small builders.
The number of companies in ‘significant financial distress’ remains a staggeringly high 582,000, showing the continuing strain on many firms.
‘Having emerged from the pandemic, many companies were hoping for an economic boom’, says Julie Palmer, partner at Begbies Traynor, ‘but that has simply fizzled out as supply chain issues and the invasion of Ukraine have taken their toll by driving up raw material and energy costs and reducing both business and consumer confidence.’
‘Sectors most exposed to discretionary consumer spending - bars and restaurants and general retailers - are feeling the pain most. Hit by staff shortages due to the latest spike in Covid rates, their customers are now reining in spending on anything that’s not necessary, ahead of the expected hike in the energy price cap, and we are seeing clear signs of this in this Red Flag data.’
Palmer also expressed concern about smaller businesses in energy-intensive sectors such as manufacturing, warning some ‘could simply become unviable’ due to the trebling of energy tariffs in many cases.
‘Many are fighting on, but the environment is only going to get worse, not better, at least until later next year or 2024. I fear that it may be a troublesome autumn as businesses which have struggled for so long are finally overwhelmed’, says Palmer.
One clear indication of the rising tide of financial distress is the sharp jump in County Court Judgements, which reached 46,235 in the first half compared to just over 59,000 in the whole of 2021 and hit the highest number in a single month for five years in March.
CCJs are seen as a leading indicator of insolvency and as the courts return to normal and backlogs are cleared there are fears this number could rise much further.
HELP IS AT HAND
Begbies itself is well-placed to help struggling businesses as it offers business recovery and financial advisory services, help with restructuring and company sales, and if the worst-case scenario unfolds it manages insolvencies.
Rival FRP Advisory (FRP:AIM) said recently insolvency appointments had started to increase in 2022 from the artificially low levels following the pandemic as the government and banks withdrew support, while company voluntary liquidations (CVLs) rose by 68% during the year.
‘If business leaders thought better times were returning as the pandemic's threat receded, then sadly they were disappointed as new challenges arose’, said chairman Nigel Guy.
