Worsening cash flow is a major concern in both the manufacturing and service sectors, according to the third quarterly economic survey from Birmingham Chamber of Commerce and Industry.
High energy and raw materials prices throughout most of the year have aggravated the problem.
In the manufacturing sector the number of companies reporting a deterioration in cashflow rose to 29 per cent compared to 25 per cent saying there had been an improvement.
And 64 per cent said their companies were not working at full capacity, a rise of four per cent on the last quarter.
Now the Chamber is pleading with the Bank of England not to go for another rates rise.
The BoE Monetary Policy Committee meets later this week.
Tough trading conditions because of the strong pound saw those exporting drop from 64 to 52 per cent, while 47 per cent of manufacturers said the cost of raw materials is putting pressure on them to raise prices.
The skills gap in the local labour market is affecting recruitment on a greater scale with 46 per cent of manufacturers reporting difficulties compared with 26 per cent in the same period last year. And the number of firms looking to recruit has fallen back to 40 per cent compared to 54 per cent in the second quarter.
Companies making an improved profit over the past 12 months have dropped to 38 per cent from 45 per cent in the second quarter, with those confident of better profitability to come going down to 52 per cent - the lowest figure recorded since the second q uarter of 2005, which reflected the aftermath of the Rover crisis.
Firms experiencing worsening cashflow in the service sector rose three per cent to 21 per cent compared with the second quarter with those reporting improved profitability in the last 12 months dropping from 60 to 50 per cent.
There was slight cheer in that firms confident turnover will improve in the next 12 months went up one per cent to 80 per cent, but there are worries over service sector
exports - 19 per cent saying they had decreased compared with only 14 in the last quarter.
Fifty-one per cent said they were attempting to recruit, a drop of eight per cent over the last quarter, and of those 54 per cent said they had hit recruitment problems.
J ames Cooper, policy adviser at the Chamber, said: "Worsening cash flow across the Birmingham economy is a serious concern - in general, it represents the single biggest reason for business failure.
"There are a number of reasons that can explain it, although high energy prices seen throughout most of 2006 could be exacerbating the problem.
"The number of businesses in both sectors expecting prices and costs to rise remains high, and that also reflects high energy prices.
"However, more spare capacity is apparent among respondents this quarter, which suggests that the local economy may be in a better position to absorb inflationary pressures.
"Nearly two-thirds of manufacturers say they are working below full capacity, the highest figure since June 2005 while competition from abroad is making exporting tough for both sectors.
"The Chamber continues to call for interest rates to be put on hold.
"There appears to be sufficient spare capacity in the economy to negate inflationary pressures, while any further rise would risk making the pound stronger and our exports even less attractive."
