There was a year-on-year increase of over 6% in businesses experiencing “significant” or early financial distress in Q2 2023 in Scotland. However, the increase in Scotland was smaller than the increase for the UK as a whole.

These findings come from Begbies Traynor’s — the business rescue and recovery company — Red Flag Alert, which has been measuring and reporting corporate financial distress since 2004. Its algorithms measure business distress signals drawn from company accounts, legal and financial data, and insolvency intelligence.

The Red Flag Alert data showed that from April through June of this year, the number of Scottish businesses experiencing significant distress rose by 6.3% compared with the same period the previous year.

However, this category of distress — which refers to deterioration in key financial indicators and ratios, such as working capital, retained profits, contingent liabilities, and more — also rose across the UK as a whole at the higher rate of 8.5%.

When comparing quarter-on-quarter figures, Scotland’s levels of significant distress increased by just over 1% in Q2 of 2023, compared with Q1. Across the UK, early distress rose by 3.7% since the previous quarter: of the 438,702 businesses across the UK suffering from early distress in Q2 2023, around 20,820 were in Scotland.

Somewhat positively, Scottish IT and telecommunications was one of just three sectors out of a total 22 to report decreases in the number of companies in significant financial distress compared to last year, at -0.4%. Manufacturing, meanwhile, reported a decrease of -2.2%, and the printing and packaging sector reported a decrease of over a quarter at -26.9%.

The sectors suffering the biggest increases in significant distress compared to last year included: utilities (+19.8%); leisure and cultural activities (+19%); financial services (+16.7%); real estate and property (+15.6%); and travel and tourism (+14.7%).

Speaking on the findings — and highlighting the reasons behind these numbers — Ken Pattullo, managing partner for Begbies Traynor in Scotland, commented: “Businesses are facing a perfect storm of challenges – as they struggle to recover from the catastrophic impact of the Covid pandemic, they are also now having to find funds to repay bounce back loans during the worst cost of living crisis in living memory.

“What’s more, interest rates are continuing to increase leading to unmanageable debt, and material and labour costs are also continuing to spiral along with rising inflation, the impact of the conflict in Ukraine and higher energy bills.

“In the midst of ongoing economic uncertainty, many businesses feel they are at the end of the road and simply cannot afford to continue trading. While companies in Scotland appear to be performing slightly more strongly than those across the UK, for many, time is simply running out and we expect to see a surge in company collapses in the coming months.”

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While the data from Begbies Traynor’s Red Flag Alert highlights the difficulties that British businesses are facing amid a barrage — as well as the aftermath — of various external factors, it does also bring to light the regional differences between Scotland and the UK as a whole.

Relatedly, last week, DIGIT reported on a study from KPMG UK — the professional services firm — that more than a third (37%) of local areas across Scotland have been identified as High Investment Areas; places which share an expected high rate of growth in business investment.

This is in comparison to the 22% of locations across the UK that were considered to be High Investment Areas.