Early distress continues to grow as Scottish businesses fight for survival post-Covid

Ken Pattullo (Begbies Traynor)

THE LEGACY of the pandemic with loss of income plus increased costs, is continuing to haunt businesses in Scotland, combined with the additional challenge of spiralling interest rates causing rises in the cost of debt. According to leading independent business rescue and recovery specialist Begbies Traynor, in the second quarter of 2023 there was a year-on-year increase of over 6% in those experiencing ‘significant’ or early distress in the country. 

The latest Red Flag Alert data from Begbies Traynor shows that in the second three months of 2023, the number of businesses in Scotland experiencing significant distress rose by 6.3% compared with the same period the previous year. This type of distress (which refers to businesses showing deterioration in key financial ratios and indicators including those measuring working capital, contingent liabilities, retained profits and net worth) also rose across the UK as a whole in Q2 2023 compared with Q1 2022 at the slightly higher rate of 8.5%.

Comparing quarter-on-quarter figures, Scotland’s levels of significant distress increased by just over 1% in the second quarter of 2023 compared with the first quarter of the year. Across the UK as a whole, early distress rose by 3.7% since the previous quarter. Of the 438,702 businesses across the UK suffering from early distress in Q2 2023, just over 20,820 were in Scotland.

This latest data is sourced from a completely new Red Flag dataset that has involved deep dive analysis of eight years’ company data by data scientists over the past two years to track key factors behind company distress and failure rates.

Ken Pattullo, managing partner for Begbies Traynor in Scotland, said: “Businesses are facing a perfect storm of challenges – as they struggle to recover from the catastrophic impact of the Covid pandemic, they are also now having to find funds to repay bounce back loans during the worst cost of living crisis in living memory. What’s more, interest rates are continuing to increase leading to unmanageable debt, and material and labour costs are also continuing to spiral along with rising inflation, the impact of the conflict in Ukraine and higher energy bills. 

“In the midst of ongoing economic uncertainty, many businesses feel they are at the end of the road and simply cannot afford to continue trading. While companies in Scotland appear to be performing slightly more strongly than those across the UK, for many, time is simply running out and we expect to see a surge in company collapses in the coming months.”

Of the 22 sectors monitored in Scotland by Red Flag Alert, just three reported decreases in the number of companies in significant financial distress compared with a year ago: printing and packaging (-26.9%); manufacturing (-2.2%) and telecommunications and IT (-0.4%). Sectors suffering the biggest increases in significant distress compared to last year included: utilities (+19.8%); leisure and cultural activities (+19%); financial services (+16.7%); real estate and property (+15.6%); and travel and tourism (+14.7%).

Mr Pattullo continued: “While the prospect of the UK economy officially entering recession seems to be diminishing, it appears to be stagnant at best. In the face of increasing energy prices and higher interest rates to curb inflation, we are certainly not out of the woods yet. The impact of rising mortgage and loan repayments puts consumer-facing businesses at particular risk as people tighten their belts. It is vital that directors regularly review cash flow and are vigilant for the first signs of financial problems – seeking professional advice early could make all the difference.”

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