R3 warns business confidence levels face potential dip

A strong start to 2016 for businesses may be at risk in the next 12 months, despite lower levels of insolvencies and less financing problems, according to insolvency trade body R3, which warns that improvements in 2015 may not be maintained as more companies struggle to raise finance, while a report from Begbies Traynor suggests the situation is already deteriorating

According to R3, the level of business distress in the UK hit a record low at the end of 2015, with just 17% of businesses reporting a key indicator of distress. The latest figure replaces the previous record low of 24% from April 2015 and is well below the 64% recorded in the first survey in March 2012.

Growth in business confidence in 2015 meant that only 6% of companies said they were regularly using their maximum overdraft, while 5% reported declining market share and decreased sales volumes (10%).

Phillip Sykes, president of R3, said: ‘This isn’t surprising given the current state of the economy. There has been a reasonable level of growth in recent years and the record low interest rates have facilitated high liquidity.

‘It’s particularly positive to see the drop in businesses experiencing decreased sales volumes and profits. Healthier profitability will help businesses stay on top of their cashflow and prevent over-reliance on credit.’

The R3 survey reported that growth was at a record high, with 69% of businesses reporting at least one indicator of growth, a marginal increase from the previous high (68%) in April 2015.

Sykes said: ‘While it’s positive to see the proportion of those experiencing at least one indicator is at an all-time high, the results suggest that fewer firms are seeing multiple signs of growth. Many businesses underwent a period of rapid growth in recent years, but now have started to reach a plateau.’

This chimes with Begbies Traynor’s Red Flag Alert research for the fourth quarter of 2015. It found  268,898 UK companies ended the year suffering ‘significant’ financial distress, representing a 17% increase compared with the same period the year before  (229,232 companies) and the most marked annual rise in distress since the second quarter of 2014.

All sectors of the economy saw an increase in financial distress over the past 12 months. There are now 58,955 services companies, 12,418 manufacturers, 41,373 consumer businesses and 50,122 construction and real estate firms experiencing ‘significant’ financial distress, up 19%, 18%, 18% and 17% respectively year-on-year.

Julie Palmer, partner at Begbies Traynor, said: ‘Despite an improving economy, 2015 showed no shortage of challenges for UK businesses, with a slowdown in China and collapsing oil and commodity prices leading to stock market turmoil during the second half of the year.

‘At the same time, manufacturing weakened significantly as a result of continued sluggish growth in Europe, while labour shortages and building materials inflation continued to plague the construction sector.’

Ric Traynor, executive chairman at Begbies Traynor, said: ‘Struggling businesses should not expect any respite in 2016, with the UK economy facing greater headwinds this year from slow global growth, lower levels of business investment and the highest levels of consumer debt seen for five years.

Meanwhile, the looming EU referendum, potential interest rate rises and additional cost pressures, including the introduction of the new National Living Wage in April, give cause for yet more uncertainty for UK businesses over the coming months.’

R3 warned that the impact of these developments could be particularly challenging for smaller companies, saying the growth gap between larger companies and their smaller counterparts was widening, as its research found 87% of large companies (those with 251+ employees) are experiencing indicators of growth, compared to 60% of sole traders.

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Pat Sweet |Reporter, Accountancy Daily [2010-2021]

Pat Sweet was the former online reporter at Accountancy Daily and contributor to the monthly Accountancy magazine, pub...

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