Leading credit reporting agency Dun & Bradstreet has warned SMEs not to become complacent in the early stages of the recovery, pointing to research that shows company collapses actually increase in the second and third year of recovery.
D&B examined the corporate landscape following the dotcom bust and subsequent downturn in 2000.
The research shows that company failures jumped 20.5% as the economy returned to positive growth in the 2001 financial year. This was followed by business bankruptcies increasing a further 5.1% in the 2002 financial year, when Australia recorded GDP growth of 3.8%. D&B says failures did not begin to decline until the third year of recovery.
Dun & Bradstreet's director of corporate affairs, Damian Karmelich, says the research should provide an important reminder that a failure to plan properly for improving economic conditions can bring new stresses for business executives.
"As economic conditions improve, there can be a tendency for firms to let out an audible sigh of relief and simply expect their own business conditions to improve," Karmelich says.
He also points to Dun & Bradstreet risk ratings, which show that 38,000 firms are at a high risk of experiencing financial distress in the 12 months to the end of June 2010.
Ramping up for recovery can leave companies with a number of challenges around the area of cashflow. Given many firms have reduced stock holdings and forward orders during the downturn, the scramble to fill new orders can leave firms scrambling for cash to pay for raw materials and labour.
"Business executives need to plan adequately for an economic recovery and maintain a tight focus on the fundamentals of cashflow and risk assessment. Failing to do so could result in financial disaster," Karmelich says.
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written by Mike Williams, October 27, 2009
A reduced cash flow at a time when a buyer is looking at your business can often mean a lower price is offered than what the business is really worth. The value of a business is dependent on its overall cash flow, not just forward profits.
So if someone starts making on offer for your business and you feel it is too insulting to consider, bear in mind they may be taking into account your current cash flow rather than the future opportunities your business can provide.
And the best way to combat this is to present a cash flow budget, showing why the bank balance is taking a hit and where the real value of the business is hidden. And at the same time, a cash flow budget will also help manage the cash as the business recovers from the financial crisis.
1) during a recession banks more often than not say no.
2) property values are queried increasingly and downgraded from a security perspective
3) An upturn in business means more finance is required - for inventory, increased staff etc etc
4) balance sheets are battered by a downturn with losses increasingly seen
The Upshot is that companies need more cash to fund increased opportunities but the banks (and other lenders) are lagging behind still viewing a company's historic results and reacting to credit departments that are still in control. As a result cash from banks is tight coming out of recession ......and companies only fail because of a lack of cash
If you do begin to see an up tick in your business do seriously have a look at factoring (or its confidential equivalent invoice discounting) or even inventory finance - both these sources of finance grow directly in line with the asset that secures them - debtors (ie your sales) and inventory (of which you need more as expansion returns) - and in many cases real estate security will not be required.
Good luck to all.
Regards
Tim Lea