Twin track economy puts Yorkshire’s SMEs in the slow lane

According to the latest Begbies Traynor Red Flag Alert research, published today (19 October), there has been a marked increase in ‘significant’ financial distress among Yorkshire’s SMEs in the third quarter of this year, compared with larger companies based in the region, which have shown improvements in financial health.

In Yorkshire, levels of significant business distress symptoms (such as minor CCJs and a marked deterioration in key financial ratios) across all sectors and sizes of business have increased an average of 8% between Q2 and Q3. The relatively modest increase disguises a clear divide in fortunes between SMEs – companies employing fewer than 250 employees – and larger businesses based in the region. While Yorkshire’s SMEs saw a 17% climb in business distress levels, (from 12,027 firms in Q2 to 14,075 in Q3) larger firms witnessed a hefty 61% drop in levels of financial distress (from 1,487 in Q2 to 586 in Q3).

The picture in Yorkshire reflects business distress figures for the UK as a whole, which showed an average 1% rise in significant financial problems. This breaks down into an 11% increase in distress for SMEs and a 61% decrease for larger companies. The trend also indicates the growing impact of so-called ‘zombie businesses’ – those companies that are in debt and only just generating sufficient cash to survive – and the choking effect they are having on the natural UK recovery cycle.

“These figures reveal that an increasing number of SMEs in Yorkshire, and in the UK as a whole, are bearing the brunt of the current challenging credit and trading conditions,” said Julian Pitts, regional managing partner for Begbies Traynor in Yorkshire. “Meanwhile, larger companies are able to exert pressure on SMEs by enforcing lengthier payment terms on smaller suppliers. Added to the heavy impact of high energy prices and the limited availability of funding support, these factors are combining to create a perfect storm for smaller businesses in Yorkshire.”

David Wilson, regional senior partner for Begbies Traynor in Yorkshire added: “Unfortunately the outlook for many of these SMEs is poor. These zombie companies are only just generating enough cash to pay the interest on their debts and keep their creditors at bay. While many of these SMEs may survive in a climate of low interest rates and creditor forbearance, they are in no position to deal with unexpected costs, lost orders or bad debts, or to fund increases in working capital and invest in growth.”

He continued: “At a time when hopes for a UK recovery are pinned on the private sector delivering growth and investment, it’s clear the government needs to act quickly to ensure credit conditions for SMEs are improved or risk choking off a recovery before it really gets started.”

Across the UK as a whole, the research revealed an economically divided nation, with businesses based in the North suffering significantly higher levels of business distress than those in the South of the country. Northern businesses saw a 9% rise in levels of ‘combined’ (significant and the more serious ‘critical’) levels of distress in Q3, while businesses in the South witnessed a 7% decrease.

The report also reveals diverse levels of distress across industry sectors in Yorkshire. Hardest hit among sectors in the region over the last quarter has been real estate, which has seen a 137% jump in significant business distress levels, compared to a national increase of 111%. Also badly affected has been industrial transportation, which has undergone a rise of 77% in significant distress levels in Yorkshire, and a 58% increase across the UK as a whole. Businesses in the region’s print and packaging industry have seen an increase in significant distress of 57% (38% nationally), while significant distress among Yorkshire’s hotels has risen by 45% (40% nationally).

In Yorkshire, companies experiencing critical distress (the most severe risk level) were down 9% to 334 (Q2 2012: 366) compared to the previous three months. Across the UK as a whole critical distress levels were down by 17%.

The fall in critical distress however does not indicate a picture of improving corporate health. Actions measured within the critical problems category – such a winding up petitions and serious CCJs - are typically at their lowest level during Q3 due to seasonal factors including Court holidays. Companies in the significant problems category are an earlier stage indicator of trends in corporate health.

www.begbies-traynorgroup.com

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