The number of UK construction firms facing critical financial problems fell 18 per cent between the first and second quarters of this year, new research has found.
The red flag alert report by accountants Begbies Traynor found the number of construction firms experiencing critical problems, namely county court judgements totalling over £5,000 within three months, winding-up petitions or corporate voluntary arrangements, had fallen from 630 in the first quarter of the year to 516 in the second quarter.
Similarly, the number with critical difficulties had nearly halved across the year from 988 in the second quarter of 2012 to 516 in the same period of 2013.
The number of companies in the sector with significant financial problems, such as CCJs of less than £5,000 or deterioration in financial indicators such as working capital or retained profit, fell 8 per cent in the quarter and 30 per cent in the year to 11,451.
However, construction still had the largest number of businesses facing critical problems of any sector surveyed.
The improvement in the financial health of construction mirrored an upturn in the wider economy. Across all sectors, the number of businesses experiencing critical financial problems reduced from 4,947 in Q2 2012 to 3,001 in Q2 2013 and fell 9 per cent from 3,283 in Q1 2013.
Businesses experiencing significant financial distress declined 18 per cent year on year and 7 per cent in the quarter.
But Begbies Traynor warned that SMEs could still face tough times.
Begbies Traynor partner Julie Palmer said: “With critical distress levels falling at a record pace, this quarter’s improvement appears to be the first real sign that the UK economy has turned a corner towards a sustained recovery.
“However, we have real fears that many SMEs will have serious financial difficulties at the time they least expect: during a recovery. Our experience has shown time and time again that many SMEs run out of cash during the recovery phase, as there is a real temptation to overtrade.
“Many of these companies at risk have been labelled as ‘zombies’ in the past but, with the majority having survived the worst of the recession, they are now chronically under-funded; benefiting from low interest rates and improving confidence but in desperate need of finance and, crucially, guidance to help them take advantage of the dawning economic recovery in an unfamiliar post-crisis market.”
She said the firm is writing a “corporate health manifesto” for these companies.