Business Distress Index – what are the latest insolvency trends?

The Business Distress Index for Q3 2024 from Real Business Rescue investigates how small-to-medium sized companies across England, Scotland, and Northern Ireland are faring under the current trading climate. The latest quarterly release covers a period of heightened political and economic uncertainty rooted in the 2024 UK election.

While Labour’s win was largely predicted, the finer details of tax reforms that would directly influence the financial health of UK businesses were unknown until the Autumn Budget in Q4.

Businesses reeling from record inflation, an unprecedented cost of living crisis, and higher input costs rode out a four-month wait. There were strong hopes that Labour’s first fiscal statement would replenish company finances and motivate consumer spending.

UK company distress levels – regional and sector breakdown

The research from Real Business Rescue produced using Companies House and Red Flag Alert data shows 632,756 UK businesses in ‘significant’ financial distress, a 5% increase on the previous quarter (601,950) and 32.3% higher than Q3 2023 (478,176).

The year-on-year increase shows a gradual decline in the financial health of businesses across key sectors, compounded by a decline in consumer sentiment.

The Business Distress Index assesses 22 sectors, of which 21 show increasing levels of ‘significant’ financial distress, compared to the prior quarter. This equates to around 30,000 companies across sectors experiencing worrying levels of significant financial distress in Q3 2024.

• Increase in significant financial distress – The sectors experiencing an increase in financial distress include utilities (+19.3%), food and drug retailers (+10.4%), financial services (+9.94%) and bars and restaurants (+8.7%).
• Increase in critical financial distress – The sectors with more companies entering ‘critical’ financial distress include support services (+4,860), construction (+4,324) and real estate and property services (+4,099).

Companies displaying worrying levels of significant and critical financial distress often show similar signs of deterioration across key financial ratios, such as working capital, retained profits and business value.

The region with the highest levels of critical and significant financial distress is London, followed closely by the South East. London houses the highest percentage of UK businesses, which means a naturally higher turnover rate.

Shaun Barton, National Online Business Operations Director at Real Business Rescue, commented on the Business Distress Index.

“Following a year of political turbulence and unprecedented hardship as a result of the cost of living crisis and soaring inflation, businesses must now register the shock from the Autumn Budget. They must strengthen their financial position to absorb the National Living Wage and Employers’ National Insurance Contributions increase.

“With higher running costs and a tough economic climate, company directors must remain on high alert and sound the alarm bells, should financial pressure fail to subside.

“With thirty per cent more businesses in significant financial distress in Q3 2024 than the previous quarter, distressed businesses must formulate a plan to remain resilient in the face of challenging trading conditions.”

A fighting chance at recovery

While the latest release of the Business Distress Index covers the period between July and September, the following quarter (Q4) will play a principal role in shaping the health of UK businesses. The Autumn Budget in October set out the tax framework for UK businesses for the financial year ahead, and beyond.

From an overhaul of the business rates system to substantial changes to Business Asset Disposal Relief, the Autumn Budget announcement concerns most UK businesses.

As the final quarter is upon us, also known as the Golden Quarter, businesses must look to top up their pots and maximise income. This is often the highest grossing period for most businesses as it marks Black Friday, Christmas and Boxing Day.

SMEs rely on the festive season to earn a substantial proportion of their annual revenue. This period can give businesses a golden ticket and a fighting chance to meet profit targets before the end of the financial year, despite their earlier performance.

Chris Bristow is a corporate insolvency and business restructuring adviser at Real Business Rescue, the UK’s leading company closure and rescue service for limited company directors.