Business be wary, despite positive indicators

IS THE OUTLOOK for businesses improving? Every day conflicting statistics are published.

The Insolvency Service published Q3 statistics showing company liquidations in England and Wales were down 2.6% on the previous quarter and 2% down on last year. Other corporate insolvencies, including administrations, were down 2.6% on the previous quarter and 3.8% on last year. Yet an insolvency expert claimed the number of SMEs in distress rose by 10.5% in the period.

In addition, the Office of National Statistics (ONS) says that business investment fell, and whilst there was growth (0.9%) in new businesses registering for VAT or PAYE, it was significantly lower than the 1.8% seen in 2011-12.

On the other hand, there is no doubt that the economy is picking up.

The ONS says that GDP is at a three year high and consumer spending is growing, albeit slower than forecast, and job vacancies have hit a four year high. We are also told that IPOs have raised £3bn in 2013, twice the total for 2012. This figure excludes the Royal Mail sell-off. Further positive news is that ‘StartUp Britain’ expects there to be 500,000 new start-ups in 2013 and we are told that 80% of entrepreneurs expect their businesses to grow at least 10% over the next year – more than at any time in the past five years.

The picture is confusing: should we be up-beat or be wary? My view is that businesses should remain cautious despite the positive indicators.

Pressure created by growth

Too often businesses can’t cope with the pressure created by growth. They will need additional capital to buy goods and employ more staff to meet increased demand, but the cupboard is bare and bank lending continues to appear slack.

The Bank of England reported that lending to businesses fell by £2.4bn in August, the sharpest fall since December. In the SME sector, lending fell by £893m in July and a further £678m in August. The British Chamber of Commerce said that “Britain’s business finance system remains broken”. Whilst the clearing banks remain bullish about the amount of new lending they are achieving, the figures show that money isn’t reaching the right hands in sufficient volumes to make a real impact.

Sadly, growth could deal the final blow. Businesses will be at risk of overtrading. Companies must preserve their working capital and ensure they have cash to fund their growth. They need to bridge the gap between financing growth and being paid by customers. Until new receipts start to flow in, companies should maintain the pressure on suppliers to extend better terms and on debtors to pay promptly. Even historically reliable customers will be under the same pressures and could wobble. Sales teams make a great set of eyes and ears for constantly monitoring their customers’ financial health.

Companies must also look after their key employees who, having experienced years of wage stagnation and lack of promotion prospects in a dead market, can now, once again, look to change jobs for better pay and prospects.

But keep your wits about you, and watch out for what may be creeping up behind.

John Alexander is a partner and head of corporate recovey & insolvency at CBW

This article originally appeared in CBW’s Economic Update