Begbies Q3 Red Flag report shows rise in firms with 'significant' financial distress as uncertainty persists

The UK economy is far from being 'out of the woods' as shown by the third quarter Begbies Traynor Red Flag Alert, which showed an upswing in UK businesses in "significant" financial distress with yet more potential uncertainty ahead as firms await the Autumn Budget.

The report showed the number of businesses in 'significant' financial distress in the three months was up 5.1% (at 632,756), and in 21 of the 22 sectors covered, compared to the second quarter this year and, markedly, 32.3% higher than in the same period of 2023.

READ MORE: Begbies Red Flag report highlights significant stress on UK businesses

That said, the number of businesses in 'critical' financial distress dropped by 23.2% in the quarter versus the second quarter this year, and was down 17.3% on the level seen in Q3, 2023.

"As we move into the final quarter of 2024, the decline we have seen in 'critical' financial distress is a welcome surprise after a challenging year," noted Ric Traynor, executive chairman of Begbies Traynor.

But he added it was "too early" to say if this is a trend that will continue into autumn, which is traditionally a busy period for corporate insolvencies.

"While there are tentative signs of a recovery, uncertainty continues to loom over UK businesses. In response, many business leaders are holding their breath as they await clarity over what the forthcoming Budget will bring," he said.

"So far, the mood music in the lead up to the Budget has led many business leaders to expect companies and investors to bear the brunt of changes to the tax regime.

"On top of this, the government's Employment Rights Bill could cause further pain, making it more difficult and more expensive to employ staff at a time when businesses are seeking flexibility through an uncertain period, whilst they grapple with an array of other issues," said Traynor.

Meanwhile, Julie Palmer, partner at Begbies Traynor, added: "With over 630,000 firms now in significant financial distress, more than thirty per cent higher than this time last year, no section of the country's economy is immune from the legacy debt built up by many businesses during the pandemic."

Palmer added that many British companies must now be looking ahead with a cautious degree of optimism for what 2025 has to offer after a difficult year.

The Red Flag Alert showed sectors experiencing the highest numbers of companies in 'critical' financial distress in Q3 were support services (4,860), construction (4,324) and real estate and property services (4,099).

In the three months to September 30, numbers of firms described as in 'significant' financial distress rose particularly rapidly in utilities (up 19.3%), food and drug retailers (up 10.4%), financial services (up 9.94%) and bars and restaurants (up 8.7%).

Palmer highlighted the "toxic" effect of high inflation, which was still filtering down to businesses - notably in the construction sector.

"This is a trend that I expect to continue, and I do not believe ISG will be the only major casualty in this sector with the domino effect likely to hit the sub-contractor community in due course," she said.

Ric Traynor also pointed to the current geopolitical risks companies face, which could derail any domestic policy, including the escalating conflict in the Middle East.

"Added to this is the upcoming election in the US, which has the potential to impact both foreign and economic policy," he said.

"Against this backdrop, the only certainty is uncertainty, and we know this is bad for both business and investment alike.

"Combine this high level of uncertainty with the expectation of higher business costs post the Autumn Budget and it is clear that the UK economy is far from being out of the woods."