Beyond The Accounts

 
For those who like to see the glass as half full the good news is that the chances of a trading partner going out of business are still far slimmer than generally imagined. Experian subsidiary The pH Group, which has analysed historical data from five million companies of all sizes, says things are not yet anything like as bad as during the last recession of 1991.

Nevertheless, most experts feel the worst is yet to come. Even though anticipating some sort of recovery in the final stages of this year, the Centre for Economics and Business Research (CEBR) forecasts a 4.5 per cent fall in GDP growth during 2009—the biggest decline in a single year since 1931. Doug McWilliams, chief executive of the CEBR, says: “Businesses are facing the toughest economic climate that most people will experience in a lifetime. Seventy per cent of corporate loan agreements are up for renewal between the beginning of 2009 and the end of 2011 and, because they are unlikely to get such good terms, companies are hoarding cash, cutting investment, squeezing pay and slashing employment.”

And it could last some time. Graeme Leach, chief economist at the Institute of Directors, believes that recessions induced by a financial crisis, have a nasty habit of being much longer and deeper. “We’re a long way into the financial crisis but the economic crisis is only just beginning. We now expect both business optimism and performance to take a further step down as the recession hits the wider economy,” he says.

Few businesses can therefore afford not to keep track of the financial health of their key customers and suppliers, even if they have longstanding trading relationships. Organisations that would normally seem safe bets can find themselves facing situations outside their control—the availability of bank finance being a particularly key issue.

Robin Fieth, executive director of finance and operations at the Institute of Chartered Accountants in England and Wales (ICAEW), says: “The majority of small businesses are funded by overdrafts rather than loans, and these can be withdrawn overnight. There is no harm in asking suppliers about their relationship with their bank, but it could be more difficult to ask customers, and I would certainly only do so in conversation. For smaller businesses, in particular, a lot depends on personal relationships and this might be the time when a pint of beer at the pub will be a good investment.”

Checking public companies

It is normally easiest to find financial data about companies that are publicly quoted because of their obligations to provide key financial and other information to the markets.

Useful data can usually be found on the investor relations pages of a listed company’s website—these often include interim and final results as well as details of company announcements. You can even register on the London Stock Exchange website to get announcements from a company sent directly to you. Other valuable indicators can come from newsfeed services, equity analyst bulletins and other third-party analysis such as rating agency reports.

Paul Brice, partner at KPMG, says: “In the current turbulent world, great results from one period can be followed by more difficult conditions or events in the next, so a quick look at the last annual accounts may not be enough to gain an up-to-date picture of a company’s financial performance.

“Where you have important trading relationships, it’s a good discipline to regularly monitor financial

performance by a structured look at a whole range of financial and other information to establish the direction in which the company is heading.

“If the signals coming show cause for concern you can then identify a clear action plan to understand the situation in more depth and, if necessary, protect your position.”

Monitoring private firms

With less information about private companies available in the public domain, it can be more difficult to identify problems. They may be more reluctant to share confidential data. The extent to which you can gain access to, for example, management accounts or detail of their borrowings will depend both on your contract with the company and the nature of your relationship. This is an area where it can be helpful to obtain legal advice if you have particular concerns. Nevertheless, the signs that can be picked up on a company visit (see panel, facing page) can be every bit as important as financial information in the current economic climate.

Mike Brookes, senior procurement specialist at the Chartered Institute of Purchasing & Supply (CIPS), says: “Times are changing so quickly that you need to get close to suppliers and you can’t do this from behind a desk. It’s about getting out there and being open as to why you are doing it. People tend to focus on buyers being worried about the condition of suppliers, but in many cases suppliers are worried about buyers, so it’s also an opportunity to sell yourself. It’s a question of

both parties trying to get through this together.”

Dialogue is a valuable commodity during an economic downturn and companies able to work in partnership to address difficulties could be well placed when the upturn comes. After all, the future could be markedly different from the past, so businesses capable of adapting together are more likely to make the most of the opportunities available.

 

Further Reading  Click here

 

Danger Signals-Top Tips

Is a good customer turning bad? Look out for these 10 warning signs

1 Changes in order patterns. Instead of regular orders, they become more spasmodic.

2 Unfamiliar faces. Staff you’ve dealt with in the past leave suddenly. New people appear.

3 Complaints increase. A satisfied customer becomes less impressed for no apparent reason.

4 Payment patterns worsen. Regular payers start to settle late. Regular late payers begin to delay

payment further.

5 Credit lines are exceeded. A customer tries to take unauthorised credit or ask for credit lines to

be extended.

6 Customers change banks. You find you’re paid with cheques drawn on a new bank.

7 Industry in decline. The customer’s sector is going through a hard time—and it, too, may be

feeling the pain.

8 People are hard to contact. Regular staff you’ve dealt with for years suddenly find reasons

not to talk to you.

9 Calls are intercepted. Unhelpful secretaries won’t put you through, or claim the person you

need to speak to is away.

10 Debt alert. A customer hammered by bad debts could become the source of a chain reaction.

Further Reading  Click here