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Company distress on the rise with inflation

For an insolvency practitioner few things are as cheering as the misfortune of others, but Begbies Traynor's Red Flag Alert suggests we're all on the hook as supply chain costs ratchet up
April 20, 2017

As if more evidence was needed of cost-push inflation seeping into the economy, it has come in the form of Begbies Traynor's (BEG) Red Flag Alert analysis for the first quarter of 2017. The insolvency practitioner revealed that levels of significant financial distress were up 26 per cent across key supply industries. This represents the 14th consecutive quarter in which the financial health of UK corporations has deteriorated. It follows on from the previous quarterly release showing that 276,518 businesses were feeling the strain at the close of 2016 - at the time, a relatively modest 3 per cent increase year on year.

Matters have seemingly become more acute - at least on the cost front. Most of the pain, according to Begbies Traynor, is borne by small- and medium-sized enterprises (SMEs), a quarter of which are located in London. In a sense this is hardly surprising, for leaving aside matters outside government influence, one of the most frequently levelled criticisms from SMEs centres on the iniquity of the existing business rates regime, in which charges are calculated on a business premise's 'rateable value', rather than the success or profitability of a business. Critics claim that this leads to major distortions in the market and places undue financial burdens on businesses least equipped to meet them. And, although the Treasury initiated a £300m relief package as part of last month's Budget, it has subsequently emerged that half a million companies have started paying higher business rates without knowing whether they can benefit from the scheme.

Julie Palmer, partner at Begbies Traynor, pointed to sterling's depreciation post-referendum as the major underlying factor for financial pressure. This exacerbates the effects of the rise in dollar-denominated Brent crude prices, with transportation costs a major component of the 2.3 per cent March inflation rate - the highest level since September 2013. Food producers are also coming under pressure, partly as a consequence of their reliance on eurozone migrant workers. Sterling's decline acts as an effective 10 per cent wage cut on remittances sent back to workers' home countries, thereby reducing incentives for temporary workers.