Signs of early financial distress across the Scottish business community levelled off during the first quarter of this year, but firms are being urged to prepare for tougher times ahead as consumers cut back amid the cost-of-living crisis.

Latest data from the Red Flag Alert published by Begbies Traynor shows a one per cent fall in "significant" or early-stage distress in Scotland between the final quarter of 2021 and the first three months of 2022. Compared to the same period a year earlier, when the country was still in lockdown, early-stage distress fell by 22%.

Ken Pattullo, head of Begbies Traynor in Scotland, said business owners should not be misled by these figures.

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“There is often a lag between the rising cost of living and impact on businesses," he said. "Already, people are seeing prices for food and fuel increasing, and by the next energy hike in the autumn, this will have filtered through to almost every sector.

"While discretionary spend will be affected first, we fear that all types of businesses will feel the impact of consumers tightening their belts as strain on household incomes is felt."

In Scotland, 29,538 businesses experienced instances of early-stage distress, which refers to companies that have financial problems such as minor decrees of less than £5,000 filed against them, during the first quarter.

Those experiencing "critical" distress, which refers to firms with winding-up petitions or decrees of more than £5,000 against them, fell by 17% from the final quarter of 2021. This compares with a rise of 12% across the UK as a whole.

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Scottish businesses also fared well year-on-year, with advanced distress falling by 37% while the whole of the UK saw an increase of 19%.

In Scotland, only real estate and property (up 3% ), construction (up 2%) and professional services saw an increase in early-stage distress since the previous quarter. Printing and packaging showed the biggest improvement (down by 11%), followed by sports and health clubs (down 6%) and food and drug retailers (down 5%).

"After the turmoil of the pandemic, many have already eaten into cash reserves and with soaring energy prices being exacerbated by the situation in Ukraine, as well as continued supply chain disruption as China enforces further lockdowns, we expect the next 12 months to be far from easy,” Mr Pattullo added.