Half of mid size businesses have less than 3 days liquidity.
19th October 2017.
If your customers have a turnover over 10 million you probably think you don’t have much credit risk.
This is illusion is shattered by new research that shows that half of companies turning over between 10 million and 200 million would face a cash flow crunch within 3 days if they had an unexpected drop off in trading.
3 Days!
In just three days they would run out of cash within the business.
That is just a bit scary!
A “severe” lack of liquidity means that 51% of mid-sized European businesses would require external sources of funding after just three days in the event of an unexpected drop-off in trading, according to Mazars, which analysed over 70,000 mid-sized businesses in the EU over a four-year period.
Gareth Jones, Head of Entrepreneurial Business Services at Mazars, said: “These findings demonstrate the tight margins and challenging market conditions within which most mid-sized businesses operate. Although they’re a vital cog in the economy, it seems that many of these companies simply aren’t living up to their potential.” He added “The news is positive for those companies willing to step back and take a strategic look at their operations: this study emphasises clear areas of focus which can help owners and managers carve a competitive advantage and generate capital value in the long term”.
Mazars analyzed 72,011 companies from across Europe with a turnover between 10 million and 200 million euros, over a four-year period.
Mazar’s report included finding that a Business model is the clearest determinant of success. The best performing Intellectual Property (IP) owners are twice as profitable as Retail and Distribution companies.
With the right interventions, business performance can improve dramatically over a short period of time. 49% of the poorest performing companies were able to move up to the middle or top tiers over four years of Mazar’s study.
However, there is little variation attributable to country of origin as management decisions have far greater impact on business success than local economic conditions.
The results showed few differences connected to the country within which a business operates. Instead, there was a strong and consistent correlation between the business model and all measures of business success.
Top tier Intellectual Property (IP)-owning companies, for example, enjoy profitability of at least 17.8%, whereas equivalent businesses in the Retail and Distribution sector can expect to generate profitability of just 8.7%.
This suggests that owners and managers who adopt the right business model at the outset, or who position themselves correctly in the market, stand to reap far greater rewards than others.
Conclusion.
No matter how big our customer is, we need to maintain a credit policy. We need to watch for changes in payment patterns, we need to set and hold them to credit limits. We need to review their credit scores regularly.
Don’t be under the illusion that these big companies are all sitting on a mountain of cash and they will always have the ability to pay us, even if their credit pattern is changing.
Big companies are no different to small ones. We need to expect them to honour our credit terms and act decisively when they don’t.
The Credit Protection Association is a credit management company established in 1914. If you supply goods or services on credit then we can help you!
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