 New survey warns on dangers of growing dependency on supplier credit
15 December 2011: Businesses are relying more than ever on credit from suppliers to manage their cashflow, potentially re-establishing a dependency on unsustainable credit in the corporate sector - according to a study released today by PKF Accountants & business advisers.
The survey of over 100 AIM listed companies also reveals that increasing demand for customer credit, together with growing concerns about the credit worthiness of those same customers, is putting businesses at all levels – and especially smaller companies – under ever greater financial pressure.
The leading accountancy practice found that 75% of respondents experienced demands from customers for longer credit terms in the past year. The survey also discovered that fewer than 15% of companies are paid by their customers on time, with over 50% having to wait 15 days or more beyond agreed terms before receiving payment. This may explain why 80% of those surveyed stated that they were now spending more time collecting debt than 12 months ago, and why half are expecting this time commitment to increase still farther in the coming year.
These developments risk pushing many companies towards severe financial difficulties: a significant proportion of respondents calculate that even a small change in the number of days’ credit taken could have a major impact on their cashflow. Just under a quarter said that an increase in days’ credit taken of between 11 and 15 days would have a high or very high impact on their businesses, with the proportion rising to 44% if the increase in days’ credit taken was over 15 days.
Despite the risks, nearly three quarters of the companies in the survey have two or fewer credit management staff, and more than half have no documented credit management policy. More worryingly, given their other responses, well over two thirds of respondents planned to leave their credit management systems untouched.
The study also found that smaller companies are less likely to have a formal policy for credit management – and most of those that do have not revised them in the light of the present economic climate.
Dennis Horner, head of financial management and technology at PKF, said: “The survey reveals a tension at the heart of UK business. We are seeing a rise in the number and proportion of customers seeking credit at a time when suppliers can least afford to provide that credit – potentially giving rise to the all-too-familiar problem of a corporate environment propped up by an unsustainable credit culture.
“Although not entirely unexpected given the challenging economic environment that we find ourselves in, these findings should nonetheless act as a wake up call to businesses: tighten up your credit control now – or you may face serious consequences later.
“For many businesses, good credit management may end up being a matter of survival. The immediate priority for companies is to get their working capital under control. Having done so, the next step will be to try to minimise the risk of similar problems occurring in the future. This means taking a long hard look at credit management policy, systems and processes in the light of the current economic situation – not the one from ten years ago. The credit management function must give early warning of problems, so that action can be taken before it’s too late.
”Smaller companies, in particular, could reap measurable benefits by taking steps to improve payment times and maximise cashflow.”
Ends
For further information, please contact: Andy Konieczko, 020 7065 0537, andrew.konieczko@uk.pkf.com
Notes to Editors:
1. PKF (UK) LLP is a leading firm of accountants and business advisers with more than 1,500 partners and staff operating in 23 offices in the UK mainland firm, incorporating a wholly-owned financial planning company and associated offshore practices. The firm specialises in advising growing and entrepreneurial/owner-managed businesses, AIM and fully listed companies, and also has extensive experience in the public and not-for-profit sectors. Principal services include assurance and advisory; taxation; consultancy; corporate recovery and insolvency; corporate finance and forensic. The firm has particular expertise in advising sectors such as hotels and leisure; mining and resource; public sector; real estate and construction; professional practices; not-for-profit; and medical. The firm’s web site is www.pkf.co.uk
2. PKF (UK) LLP also offers financial services through its FSA authorised company, PKF Financial Planning Limited. PKF (Isle of Man) LLC is a limited liability company registered in the Isle of Man. PKF (Channel Islands) Limited is incorporated in Guernsey.
3. PKF (UK) LLP is a member firm of the PKF International Limited (PKFI) network of legally independent member firms. The PKFI member firms have around 2,200 partners and more than 21,000 staff in around 125 countries.
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