Scottish businesses face steep rise in financial distress

The business rescue and recovery firm’s Red Flag Alert research revealed 30,435 businesses in Scotland experienced ‘significant’ financial 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). This represents a 46.1% increase compared with the same quarter of 2023 and a rise of almost 9% since Q1 2024.

The year-on-year figures were markedly higher than the national picture which showed a 36.9% increase, while the quarter-on-quarter level was close to the UK-wide figure of an 8.6% rise. Across the UK, almost 602,000 businesses saw ‘significant’ distress in Q2 2024.

Looking at more advanced or ‘critical’ distress from April to June 2024, in Scotland there was a 40.5% increase compared with Q2 2023, with another 2,031 businesses suffering from this type of distress. However, the country saw a fall in critical distress of 1.7% since the previous quarter, while in the UK as a whole, it rose by 1.1% quarter-on-quarter and by 34.5% year-on-year, with over 40,600 businesses affected.

Ken Pattullo, managing partner for Begbies Traynor in Scotland, said: “Despite some encouraging signs of a return to growth in the UK economy, such as the slight rise in GDP in May, there’s no doubt that over the last few years businesses have battled a deluge of challenges and, unfortunately, their cumulative effect is continuing to be felt, particularly by SMEs, with early-stage financial distress once again on the rise.”

In terms of early-stage distress across the sectors, in Scotland none of the 22 sectors analysed saw a fall and only one experienced less than double-digit growth in the second quarter of this year compared with the same period the previous year – significant distress in utilities increased by just 2.7%. The greatest increases year-on-year were in health and education (up by 68.8%); bars and restaurants (up by 64.6%); retail (up by 64.5%); and food and drug retail (up by 60.8%).

Mr Pattullo continued: “With the UK election now firmly behind us, many businesses are hoping for a more stable environment in which to consolidate and plan for future growth. However, after seismic events from Brexit to Covid, plus further elections around the world and ongoing global conflict, the future is far from certain.

“In such a precarious scenario, we urge any owner managers who see escalating financial problems to take the initiative and seek professional help at the first signs of trouble when experts will have more tools at their disposal to help these businesses get back on track.”