Number of Companies in Financial Distress Drops in Second Quarter

Posted on 21 July, 2013 by Kirsten Kennedy

During the course of the past months, there have been a number of indicators that the economic situation is slowly improving. Business confidence has once more reached highs not seen since before the recession, consumer confidence is rising and the commercial property market has seen increased activity.

Now further good news for British businesses has been revealed by restructuring specialist Begbies Traynor. A study examining the resilience of UK firms shows that the number said to be in “financial distress” has dropped dramatically.

According to the report, the second quarter yielded a hugely encouraging 39 per cent drop in businesses said to be in “critical” condition when compared with the same period last year, with only 3,001 in this category between April and June. Similarly, this total also dropped by 9 per cent between the first and second quarters of this year.

Yet, unfortunately, this does not necessarily guarantee that SMEs are out of the woods yet, as many small companies remain in a perilous position. Even though they may have survived the recession, these so-called “zombie” SMEs lack the financial backing to expand in the event of a recovery and, with the banks still hesitant when it comes to lending, this could spell bad news for those getting left behind.

Partner at Begbies Traynor, Julie Palmer, calls the study “the first real sign that the UK economy has turned a corner towards a sustained recovery”, but warns SMEs not to become overconfident at this point in time.

She says; “We have real fears that many small and medium-sized enterprises will have serious financial difficulties at the time they least expect – during a recovery.

“Our experience has shown time and time again that many SMEs run out of cash during the recovery phase, as there is a real temptation to overtrade.”

Thanks to the recent booms in the financial services, professional services and construction sectors, business distress levels fell most steeply in these categories. Manufacturing also managed to post a comfortable drop despite the industry failing to perform to the level forecast by economists at the beginning of the year.

However, businesses which rely upon high levels of consumer spending continue to push up the higher distress level of their sectors, with hotels, restaurants and bars all being common features of the critical list. Begbies Traynor reasons that consumers remain wary of luxury spending.

Ms Palmer concludes; “The consumer-facing industries continue to struggle as shoppers maintain tight control over their purse strings at a time when disposable income has remained under pressure.”

With the majority of British industries posting successful statistics regarding overseas trade and consumer demand, it can only be hoped that sectors heavily reliant on consumer spending follow suit in the next quarter. However, with the gap between inflation and pay growth widening, it seems that this problem could be set to continue for the foreseeable future.

Do you think SMEs need to be wary of overtrading during recovery, or is now the ideal time to significantly boost revenues?

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