The fourth quarter 'Red Flag Alert' report from business recovery specialist Begbies Traynor has shown the first year on year increase in the number of companies in distress since the second quarter of 2009.The number of companies experiencing 'significant' or 'critical' financial problems rose 20% to 141,527 in the fourth quarter of 2010 from 123,361 in the third quarter.Those with 'critical' financial problems are struggling with £52.7bn worth of liabilities, Begbies revealed, though this number is down from £57.5bn in the third quarter, even though the number of companies in a 'critical' state rose from 2,943 to 3,018.The decrease in the average size of liabilities from the third quarter to the fourth quarter indicates that a higher proportion of small and medium enterprises (SMEs) are suffering increases in financial distress.The report, which monitors the early warning signs of companies in difficulties, revealed a 24% quarter on quarter increase in the number of companies in distress, with more than 61,000 struggling companies in the industries exposed to public sector spending.The retail sector is also under the cosh, with the report showing a 17% increase in the number of struggling businesses, which now exceeds 10,000, while the wholesale sector experienced the largest rise in distress, up 30%."Today's figures show that UK businesses are demonstrating real signs of distress and that trade creditors are both losing patience with their debtors and in need of collecting cash into their own businesses," said Ric Traynor, executive chairman of Begbies Traynor Group."Coming against a backdrop of the largest decline in house prices for a year, higher inflation, an accelerated decline in business confidence, and higher unemployment forecast for 2011, these figures indicate the renewed challenges facing businesses across most industries in 2011, particularly in the SME sector," Traynot added.