A recent survey from redflaghalert has suggest that there has been a significant increase in businesses experiencing critical distress; 2,289 companies are now in this category. Between Q4 2019 and Q1 2020, the increases in certain sectors have been dramatic:
- Bars and restaurants: +37%
- Real estate and property: +21%
- Construction: +11%
- Retail: +8%
- Manufacturing: +8%
The sectors that have been hardest hit by significant financial distress in the last quarter are:
- Real estate and property: +6%
- Hotels and accommodation: +5%
- Construction: +4%
- Health and education: +4%
Since 2014, several sectors have had huge increases in the number of businesses in distress. These sectors include:
- Utilities: +132%
- Real estate and property services: +104%
- Sport and health clubs: +86%
Year-on-year, all but one (printing and packaging) of the 22 sectors monitored by Red Flag Alert have seen increases in the number of companies in significant distress over the past 12 months, with the worst affected being:
- Real estate and property: +17%
- Sport and health: +8%
- Food and beverage: +7%
Many businesses are currently not failing immediately because the government support schemes. The suspension of court action has stopped many businesses from also going under. However, this will only be a short-term solution and once things start to normalise again the figures may increase.
Typically, it would be expected that 4.3% of these companies will fail each year not because of coronavirus restrictions, but because they were already at high risk of failure from any short-term drop in revenue and cash flow. However, the impact of COVID-19 will see this figure double and leave the UK economy with insolvent debts totalling £8.6bn this year.
In the report from redflagalert, Ric Traynor, Executive Chairman of Begbies Traynor, said:
“This crisis has taken all business owners by complete surprise. They weren’t ever expecting to face such a drop off in activity or footfall, and few can be prepared for such a cliff edge in revenue.
“Those businesses with strong balance sheets and access to funding will be able to reorganise their operations and survive the financial shock of this pandemic, while others will unfortunately not have the resources to carry them through this emergency and the uncertainty to follow.
“With finite resources to bail out companies, the government has difficult choices to make concerning which companies to save based on which have the strongest footing to thrive long-term.
As with the collapse of Flybe and Thomas Cook, there are going to be tough decisions ahead which must be based on sound economic principals if the money is to be recovered.”