Manufacturing recovery remains fragile, warns Begbies Traynor

The recovery in the manufacturing sector remains fragile, according to the latest Red Flag update, which shows that the companies in the sectors experiencing significant or critical financial problems rose 12% in the first quarter of 2010. While the latest data indicates improving fortunes in the manufacturing sector, Red Flag shows that 6,820 manufacturing companies experienced significant or critical financial distress in the first quarter of 2010 (Q4 2009: 6,111). Around the country, manufacturing companies were worst affected in the South West (up 46%), West Midlands (up 16%), the North West (up 12%) and the North East (up 12%).
 
Nick Hood, Partner of Begbies Traynor, said: While the economy appears to be showing positive signs of recovery, these figures demonstrate that those green shoots are fragile and that we cannot take a continued recovery for granted. The manufacturing sector, in particular, has received a boon as its customers plan for the recovery by replenishing inventories. However, we believe that this short term boost will tail off, leaving manufacturing companies which have boosted their own stocks and resources more exposed than ever to potentially more subdued levels of demand. We would, therefore, urge manufacturing companies experiencing financial problems to keep costs and cash flow tightly under control during this vulnerable period.
 
The recovery phase poses special problems for those manufacturing businesses seeing much-welcomed growth, as they struggle in the current climate to access the extra working capital they will need to fund their expansion. Across all sectors we are seeing trade creditors increasingly seizing the opportunity of an improved economic climate, to take action against their debtors in order to raise much needed working capital. This shift in behaviour heralds a new phase in the cycle, putting manufacturing companies experiencing financial problems at greater risk of failure than ever.
 
There is also the threat that the government support measures which have provided welcome support for companies in difficulty may inevitably be switched off. This will need to be handled sensitively to ensure a soft landing. The growing problems in the manufacturing sector reflected the economy at large, where Red Flag showed that the number of companies experiencing significant or critical financial problems has risen by 20,074 or 14% to 161,601 in the first quarter of 2010 (Q4 2009: 141,527). More worryingly, those companies together owe over 55bn to creditors, suppliers and service providers.
 
Hood added: The magnitude of the liabilities at risk of default represents a serious risk to creditors and suppliers, indicating the potential far-reaching impact of these levels of distress. It is this ripple effect which represents a real threat to a smooth economic recovery.
 
About Begbies Traynor Red Flag Alert
Red Flag Alert measures corporate distress signals through a comprehensive and complex methodology, drawing on factual legal and financial data from a wide range of relevant sources for companies that have been trading for over a year. The survey monitors the numbers of companies experiencing difficulties in two categories: "Significant Problems" and "Critical Problems". Companies with "Significant Problems" are those with either a court action and/or poor, very poor insolvent or out date accounts. Companies with "Critical Problems" are those with CCJs totalling 5,000 or more and/or Wind- Up Petition related actions. Since November 2009, Red Flag Alert has been commercially available to all businesses, on an annual subscription basis, to help them better understand risk and exposure and help prepare them for the future.
 
About Begbies Traynor Group
Begbies Traynor Group plc is a specialist professional services organisation providing independent professional advice and solutions to businesses, financial institutions, the accountancy professions and individuals in the areas of corporate finance, recovery, investigation, risk management, commercial finance and specialist tax advice. It is listed on AIM (Ticker: BEG).