Birmingham businesses struggling to beat the recession are facing a tough time ahead, with more rated with “critical” problems, according to the latest Red Flag Alert report produced by corporate recovery specialists Begbies Traynor.
Nationally, Red Flag Alert, which monitors a series of indicators of company distress, shows a 12 per cent increase to 5,179 companies which experienced “critical” financial distress in Q2 2011 compared to 4,620 companies in Q1 2011.
The Midlands region had 12,124 significant problems in the second quarter against 11,473 in the same period a year ago, a 5.7 per cent increase. The equivalent for critical problems was 693 (720), down 3.8 per cent. This compared to 23,509 significant problems and 652 critical in the first quarter of this year.
Birmingham had 1,797 significant problems against 2,988 for the first quarter, down 40 per cent. It was up 11 per cent on critical problems – 95 against 105.
John Kelly, regional managing partner in Begbies Traynor’s Birmingham office, said: “It looks as if Birmingham businesses are in for a rough ride this autumn.”
He pointed out: “Many struggling companies made use of the Revenue’s Time to Pay Scheme yet a high proportion of businesses have failed to achieve a full turnaround and are now trying to seek time to pay arrangements for a second time but are finding the Revenue’s attitude is less generous as they are under pressure to collect outstanding revenue debts.
“The austerity measures mean the Government is finding it difficult to give second chances or extend its support to business owners that have chosen to use their money for another purpose and as a result, the number of winding up petitions issued by HMRC in Q2 2011 has more than doubled since Q1.”
Although banks remain supportive of struggling customers there are an increasing number of companies that cannot continue without significant new investment as costs cannot be reduced any further and sales demand weakens.
Ric Traynor, executive chairman of Begbies Traynor Group, said: “The figures for Q2 2011 show the number of UK companies facing ‘critical’ problems has increased since last quarter.
“The fall in ‘significant’ problems is an apparent glimmer of good news, but we believe this is indicative of weaker businesses actively moving from ‘significant’ to ‘critical’ financial problems – and ultimately to insolvency, as well as seasonal factors which typically impact on the Q1 figures.
“In addition HMRC is taking a more robust stance. As the level of support from the Revenue is gradually decreased, it is increasingly evident that businesses using the scheme are now struggling to cope with current trading conditions.
“The increased costs being placed upon consumers is likely to have an impact on non food retailers and recent weeks have seen the effect of reduced high street demand with a number of well known retailers entering administration. We believe this distress is likely to continue ahead of the pre-Christmas shopping period, which traditionally starts in early October,” he said.
The financial distress across sectors is variable, with clear winners and losers, with Other (Non Food) manufacturing, utilities and print and packaging all showing an improving picture.
However sectors reliant on discretionary spending such as Travel & Tourism have faced a steady increase in critical distress in Q2 2011, despite the long Easter break and extra bank holidays which would have usually been beneficial to trading.
A significant proportion of the population are being squeezed by inflationary pressures and concerns over the security of their employment and are therefore being extremely cautious with their spending – which is beginning to have a real impact on travel and tourism related businesses, particularly the UK hotel market which has seen a 47 per cent increase in critical problems since the last quarter.
Consumer spending is already depressed and the impact of significant utility bill rises, combined with the increasing cost of fuel, is likely to have further serious consequences for any businesses dependent on discretionary spending.
The malaise within the property sector shows no sign of improvement with quarter on quarter critical problems up by a substantial 42 per cent. This distress is affecting both residential and commercial real estate, with recent surveys predicting that property prices will not return to 2007 prices until the next decade.
The squeeze on marketing budgets and the structural changes in the media sector are showing through in terms of increased levels of critical problems – up 33 per cent year on year and 21 per cent quarter on quarter.
At the heart of this is overcapacity, particularly in the printed media sector – where publications are chasing shrinking advertising revenues. The move towards online and social media channels has accelerated the problems, as advertisers typically benefit from lower costs.
A surprising increase of 24 per cent in year on year critical problems within the food and beverage manufacturing sector, is indicative of reduced margins within supermarket supply chains, combined with higher input costs which cannot be passed on to customers.
