Begbies warns of rise in business failures

INSOLVENCY specialist Begbies Traynor is predicting a rise in business failures in 2011 as the Government's budget cuts start to bite.

This follows a recent reduction in the number of companies going bust.

Begbies, which has an office in Leeds, said the number of companies falling into administration remained lower than expected in the fourth quarter of the year because of temporary Government support initiatives.

Creditors showing lenience has also helped a number of companies to stay afloat.

Begbies said Yorkshire had seen a reduction in the number of businesses experiencing "significant" or "critical" financial distress in the third quarter of 2010.

Yorkshire companies experiencing "critical" problems fell by 35 per cent.

The three worst hit sectors in Yorkshire were construction where 17 per cent of companies reported "significant" problems, business to business services where 16 per cent have been hit and property companies where nine per cent have been damaged.

Other hard hit areas in the region include transport, communications and retail.

Begbies' Red Flag Alert, which monitors the early warning signs of company distress, found that over 10,370 companies in Yorkshire are struggling under the weight of nearly 58bn worth of liabilities.

Julian Pitts, of Begbies in Leeds, said: "Our Red Flag Alert statistics show that the sectors likely to be most impacted are already starting to shows definite signs of financial distress.

"With confidence in the construction sector falling to an eighteen-month low, recruitment activity at its slowest for almost a year and a strong increase in distress in the advertising sector, there is a growing risk that even if the wider UK avoids a double dip recession, public-sector dependent industries face higher levels of financial distress."

David Wilson, also from the firm's Leeds office, added: "The rise in winding-up petitions by HMRC show an appetite to recover more tax revenues from both businesses and individuals alike, and businesses will see this activity increase, coupled with more pressure as VAT rises in January.

"We will be monitoring the extent of the domino effect of public sector cuts in our region, where the secondary market of suppliers to the public sector and their suppliers in turn suffer as less business flows downstream from Government."

Begbies said that although the number of companies experiencing distress has fallen by 10 per cent compared to 137,268 in the third quarter of 2009, the rate of recovery is the slowest for five quarters.

The third quarter was also marked by a significant increase in the number of Revenue and Customs winding-up petitions – up 39 per cent between August and September.

Begbies said adjusted pre-tax profits for the six months to October 31 are expected to be 16 per cent lower than a year earlier, down 700,000 to 3.6m.

The company was hit by a nine per cent reduction in insolvency revenues as the economic recovery saw fewer firms go bust, while Begbies also took 800,000 in restructuring costs.

Government statistics recently showed the number of UK insolvencies in the third quarter of 2010 were 18 per cent lower than the same period the previous year.

It added the reduction in revenues from administration work had been offset by a better performance in its non-insolvency operations, which will help keep revenues broadly the same as last year.

Shares in Begbies, which is due to report results for the six months to October 31 on December 16, fell 6.3 per cent last night, down 4.25p to 63.5p.

Begbies has benefited from the recession in recent years as the number of companies falling into administration soared. Adjusted pre-tax profits rose 40 per cent to 9.8m in the year to April 2009.

Begbies' high profile insolvency cases include Southampton Leisure Holdings, the holding company of Southampton Football Club, in April 2009.

Waving the red flag

Begbies' Red Flag Alert measures corporate distress signals, drawing on factual, legal and financial data from a wide range of sources for British companies that have been trading for longer than a year.

The survey monitors the number of companies experiencing difficulties in two categories: "significant problems" and "critical problems".

Companies with "significant problems" are those with either a court action and/or poor, very poor, insolvent or out-of=date accounts.

Companies with "critical problems" are those with county court judgments totalling 5,000 or more and/or Wind-Up Petition related actions.

The Red Flag Alert is designed to help companies better understand risk and exposure and help prepare them for the future.