Member Article

North East businesses facing cash flow problems

Around one in eight regional businesses are experiencing serious cash flow problems, according to new research by insolvency trade body R3.

R3’s latest insight into the so-called ‘Zombie Business’ phenomenon found that 12 per cent of firms in the North East, Yorkshire and Humberside were experiencing at least one of four specific measures of distress relating to the capital they had readily available.

The research found that these firms were collectively negotiating payment terms with creditors, just paying off the interest on their debts, rather than the debts themselves, struggling to pay their debts when they fell due or in a position where just a small increase in interest rates would leave them unable to meet their obligations to their creditors.

Across the UK as a whole, around 134,000 businesses said they were struggling to pay their debts when they fall due, which is the highest figure recorded by R3 in the last 12 months.

This represents an increase of 24,000 businesses when compared to the number in this position a year ago, and is especially concerning as failing to pay debts when they fall due is a technical definition of insolvency.

Although the overall number of zombie businesses across the UK – those that can only pay the interest on their debts – has fallen over the last year from 146,000 to 108,000, the rise in businesses with acute cash flow problems indicates that the outlook for struggling businesses is deteriorating.

And Steve Ross, chair of R3 in the north east and a partner in the Restructuring department of the Sunderland office of accountancy firm RSM Tenon, believes that the time may be fast approaching for lenders, including suppliers and banks, to decide which businesses to continue to support and which to let go.

He says: “Businesses struggling to pay debts when they fall due are clearly in a very perilous position, and while they have yet to enter formal insolvency procedures, those with such serious cash flow problems may find that the day of reckoning is not too far off. “A fall in the number of zombie businesses in the UK should be welcomed, but the recent decline we have seen is not necessarily because businesses that have been in this position are showing signs of improvement.

“With the economy recovering, it could be crunch time for struggling businesses as lenders start to make their minds up about which businesses to continue to support and which businesses to call time on.

“Not all struggling businesses are doomed to failure, but the prolonged period of low interest rates and government support schemes has made it hard to distinguish between businesses that are struggling but viable and those businesses that do not have a future.

“Company managers who find themselves facing stubborn, long-term cash flow or debt problems need to take decisive action to address and resolve their situations sooner rather than later, so they have the best possible chance of working through their difficulties and improving their companies’ long-term prospects for renewed success.”

This was posted in Bdaily's Members' News section by Steve Ross .