Posted on Wednesday 30 October 2013 by Ulster Business

Joan Houston

The number of Northern Ireland firms facing critical financial distress sharply declined in the third quarter of the year, according to a Red Flag Alert Report published by business rescue and recovery company Begbies Traynor.

The report showed a there was a drop of 61%, from 104 firms in distress in the second quarter to 41 in the third quarter of the year.

Belfast-based Begbies Traynor partner Joan Houston (pictured) says signs of relative stability in certain sectors are now clear.

"Construction, Telecoms & Information Technology and Travel & Tourism sectors have shown better performance judging by the fewer numbers of firms in financial distress," said Ms Houston.

"This is, however, only a partial recovery picture as the number of firms in financial distress during Q3 in sectors including automotive has grown."

Begbies Traynor said that, comparing financial problems by region on an annual basis, all regions experienced an improvement in "critical" distress with Northern Ireland and the North East of England seeing the largest reduction in distress levels, falling 61% and 44% respectively.

"While transactional volumes in SMEs have picked up across the sectors, they have remained at historically low levels, meaning that smaller, people businesses have struggled to maintain market share during the fallow summer months in the face of competitive pressure for new business from their larger peers. Given their significant high fixed cost bases and working capital requirements, the hopes of these SMEs will be firmly pinned on strong trading in the final quarter of the year, while effective management of their cost base and an improvement in the lending environment will be crucial to reverse this worrying trend," said Ms Houston.

"The overall UK's consumer-facing industries have seen significant reductions in 'Critical' distress levels, both on a quarterly and an annual basis, following a strong summer of sales aided by the extended period of good weather across the country. With market sentiment improving and rising house prices giving homeowners increased confidence, consumer spending is proving to be the engine driving this recovery; good news for the consumer-facing sectors, which are so dependent on a positive Christmas trading period," she added.

"However, with pay growth still lagging behind inflation, this consumer-led improvement could have worrying consequences for the wider economy as new research from the British Bankers' Association1 suggests that this resurgence is being funded by a rise in household credit, which has increased for the first time in four years."

Ms Houston also said there was evidence of a dual-track economy with larger companies fairing better than SMEs.

"The contrast across the UK between large and SME business is stark and SMEs are bearing the brunt as endemic late payments and higher costs of funding take their toll on smaller companies' cash flows," she says. "This has been reflected by similar experience in Northern Ireland."

"The past three months have shown a worrying spike in 'Significant' distress levels across all sectors covered by the Red Flag Alert, which from previous experience is a consistent trend during this fragile stage of the economic recovery.

"This represents a major step backwards in the Government's efforts to improve the fortunes of this group and suggests more support is needed to nurse vulnerable SMEs back to health before this backbone of the economy is dragged into deeper distress. We welcome the Government's consultation on penalties for late payments to small suppliers and hope that this is a shot across the bow of larger businesses which rely on paying late to fund their own cash flows. However, our statistics show that the SME community needs swift action on late payments, reducing the regulatory burden and business rates, and improving funding availability; without a rapid improvement in funding for the working capital and investment required to compete effectively with larger companies during the economic recovery, we could see an increase in insolvencies in the New Year."



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