According to the Chancellor, Britain faces a ‘dangerous cocktail’ of economic risks.
Tensions in the Middle East, slowing growth in China and falling prices for commodities such as oil and copper are pushing thousands of British companies to the wall.
Begbies Traynor’s latest Red Flag Alert found that 268,898 UK companies closed the year suffering significant financial distress, up 17% from last year. This is said to be the highest increase in distress levels since the second quarter of 2014. The reason for such an increase seems to be a combination of factors. There has been an increase in the number of winding up petitions presented at court as well as county court judgements of over £5,000 per claim against companies, indicating that more and more companies are failing to pay their debts as they fall due, causing creditors to take proactive and litigious action. There has also been an increase in average, poor, very poor, insolvent and out-dated accounts, signifying further that the number of companies facing distress is on the rise. Other factors include marked deteriorations in sales, working capital and profit and escalating costs. This news follows a gloomy warning from George Osborne that anyone who thinks that it’s ‘mission accomplished’ with the British economy is making a grave mistake.
The Red Flag Alert revealed that all sectors of the economy suffered an increase in financial stress over the past 12 months and the weakened manufacturing sector is among the hardest hit as a result of continued slow-moving growth in Europe. The construction sector is also a growing concern with 50,000 construction and real estate firms beginning the year in significant financial distress due to labour shortages and building materials inflation.
In contrast to Begbies Traynor’s statements that ‘struggling businesses should not expect any respite in 2016’, a separate report from R3 found that the percentage of distressed businesses was actually at a record low since its own research in 2012.
The pending EU referendum, potential interest rate rises and additional cost pressures such as the introduction of the new National Living Wage in April give cause for yet more uncertainty for UK businesses over the coming months.
According to Ric Traynor, executive chairman at Begbies Traynor:
“A proactive, not reactive, approach will be crucial to businesses’ financial strength in 2016, both in terms of managing their cost bases while also driving expansion in a low growth environment.”
John Longworth, director general of the British Chambers of Commerce (BCC), has called for a “year of action” after what he described as a number of “wasted opportunities” in 2015. Longworth said:
“At the start of 2016, neither ministers nor businesses can afford to be complacent. We may have solid levels of economic growth, but there are many clouds on the horizon that could ultimately push Britain into a new economic storm. There’s so much that needs to be done, from infrastructure and tax to skills and export support. 2016 must be a year of action.”
Carolyn Fairbairn, director-general of the Confederation of British Industry (CBI), has also urged the Government to focus on long-term prosperity, rather than what she describes as the “short-termism of modern politics”. Fairbairn goes on to say that:
“Success in 2016 depends on business and Government working more closely together. Business and Government will need to collaborate closely to make it work for our young people and for firms. This will be particularly important for smaller scale-up firms, which have been such an important driver of UK growth and have a pressing need for skilled people.”
For small firms that employ fewer than ten employees, the struggle to find workers is particularly critical, with vacancies rising by 13% in the last quarter.
2016 will see the introduction of new policies like the National Living Wage, the small business rollout of the workplace pension, changes to dividend taxation and the introduction of the Apprenticeship Levy. John Allan, national chairman of the Federation of Small Businesses (FSB), said that:
“Each of these changes will bring their own challenges and require all businesses to adapt – but they also present opportunities. It’s right for businesses to share the fruits of success with their staff, help them save for retirement and invest in training the next generation of employees.”
Although these changes may pose short term implementation issues for businesses, they will also force companies to become more innovative in improving productivity and business.