Business Distress Index – where does the South West rank?

Neil Vinnicombe, partner at Begbies Traynor Group in Bath, who also covers the wider South West region, including Taunton and Bristol, comments on the latest Business Distress Index from Real Business Rescue, part of Begbies Traynor Group.

How are South West businesses faring?

During Q1 2025, there were 2,620 companies in critical financial distress, compared to 2,415 in Q1 2024, this shows an 8% increase. The financial position of around 200 companies drastically worsened by the end of the 2024/25 financial year, albeit on a smaller scale compared to the total number of critically distressed companies in the South East (6,860), North West (5,379) and Midlands (4,851).

The number of critically distressed companies in the South West represents around 6% of the overall population of critically distressed companies in the UK. This is a moderate share compared to neighbouring regions, including London, which is home to 33% of critically distressed companies, followed by the South East at 15%.

When looking at the sector breakdown, bars and restaurants suffered the highest spike in critical financial distress, 31%, over the last year. Two-thirds (14) of the 22 sectors analysed experienced double-digit growth in financial distress since Q1 2024, from Support Services, Real Estate & Property Servies and General Retailers, to Professional Services, Health & Education and IT.

The next release of the Business Distress Index is expected to show heightened pressure on UK businesses as higher taxes and US tariffs come into play in Q2, which also marks the beginning of the new 2025/26 tax year. With operating costs rising, including the price of labour, goods and services, companies must find ways to mitigate the financial impact and offset additional tax.

What’s in store for British businesses this tax year?

The financial burden on British businesses is growing as measures to increase business tax, as announced at the Autumn Budget, came into force on 6 April - the beginning of the new 2025/26 tax year. Businesses must now absorb higher costs due to the new rate of Employers’ NIC and National Living Wage, and potential additional costs, such as US tariffs, more interest on borrowing due to high inflation, and supply chain price increases as a result of global pressure.

Labour costs - Businesses with high employee numbers will be hard-hit by the Employers’ National Insurance Contributions and National Living Wage (NLW) increase. Young workers and apprentices will see the biggest pay rise as NLW for this category jumps. Sectors that continue to endure labour shortages, such as healthcare and construction, may grow weary as the rise in labour costs will only make skilled labour more unattainable.

Global uncertainty – Changing trading rules with the United States and the European Union will mean a combination of fresh opportunities and new cost pressures. As the US introduces a universal tariff on most UK exports, businesses will have to revise how they participate in American markets and consider the impact of US tariffs on their bottom lines.

While businesses may be unaffected by US tariffs directly, they may experience an impact indirectly through price hikes passed through their supply chain. The US is the largest export market for the UK, accounting for £59.3 billion of goods (16.2%). Machinery and transport equipment is the highest traded commodity, making up £29.1 billion of total exports to the US.

High inflation – Trading conditions are intrinsically linked to inflation, so as the rate remains high, businesses will see the price of goods and services rise, along with a drop in consumer spending as households restrict non-essential spending due to rising costs.

This trio of challenges is amongst a series of existing hurdles businesses must overcome, including reduced Business Rates Relief, higher interest on HMRC tax debts, and local council funding cuts.

How can South West businesses combat rising costs?

As businesses across the breadth and depth of the country see operating costs increase, they must formulate an action plan to combat growing company liabilities and protect company value. The remedy may take the form of company restructuring or rescue, which may involve strategic cost-cutting and operational streamlining.

This must be conducted meticulously and by expert hands to maintain the value of the business and release sufficient cash to fuel the company. If your company is at risk of becoming insolvent due to economic challenges and rising operating costs, consider professional restructuring support.