Risk downgrades less prevalent among small firms: D&B

More than 145,000 businesses suffered a risk downgrade in the March quarter, according to the latest report from Dun & Bradstreet, with older firms faring worse than their younger counterparts.

 

Dun & Bradstreet manages a commercial database with information on more than three million Australian companies. The database is refreshed more than 1.5 million times daily.

 

According to Dun & Bradstreet’s Corporate Health Watch, which examines the risk profile of Australians firms, the number of downgrades in the March quarter was 75% higher than at the same time last year.

 

Alarmingly, it was nearly 125% higher than the number of downgrades that occurred during the global financial crisis.

 

Dun & Bradstreet points out that the March 2011 downgrades coincided with rising business payment terms, which rose to 55.6 days during the quarter – the highest level in three years and the second highest level in a decade.

 

Meanwhile, expectations for sales and profits continued to decline. This, along with record-high payment terms, is impacting business cashflow and increasing the risk profile of many firms, particularly older ones.

 

The research reveals that 16% of businesses aged 20 to 49 years saw their risk rating deteriorate in the March quarter, compared to less than 5% of businesses aged one to four years.

 

The findings also show the number of older businesses downgraded has tripled in the 12 months to the end of March, as more established firms struggle to adjust to the multispeed economy.

 

Dun & Bradstreet chief executive Christine Christian says while younger firms fared better than larger companies, the data should serve as a reminder that firm level risk is associated with business management fundamentals, rather than macroeconomics alone.

 

According to Christian, strong economic conditions can in fact heighten a firm’s risk profile as rapid expansion puts pressure on cashflow, which is the key driver of business failure.

 

“Almost exclusively, business failure is a result of poor credit risk and negative cashflow. These factors are the primary cause of insolvency and can occur at any time regardless of the macroeconomic outlook,” Christian says.

 

“It is a reminder of the need for firms to pay attention to the fundamentals, particularly at times when rapid growth places pressure on a firm’s cashflow.”

 

Dun & Bradstreet’s data reveals no individual sector has seen its risk profile improve in the last 12 months, highlighting the fact no business is overly safe, regardless of size.

 

The manufacturing sector was one of the more volatile industries, with 16% of businesses receiving downgrades during the March quarter.

 

The construction sector had a 75% jump in the number of businesses downgraded during the March quarter, compared with the same period in 2010.

 

The number of firms suffering a downgrade in this sector jumped to 13.7% in the March quarter, from less than 8% a year ago.

 

Not surprisingly, a significant percentage of businesses in the retail industry are also at greater risk of financial distress than 12 months ago. Retail downgrades rose to 12% in the March quarter, from 7% in the first quarter of 2010.

 

Unfortunately, the trend looks set to continue, with interim results for the June quarter revealing more than 62,000 firms were downgraded in April and May.

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