KPMG in zombie warning.
8th May 2019.
Accountancy giant KPMG has issued a “zombie warning” regarding failing businesses, saying . “the rise of zombie firms in the UK could spell trouble ahead”
Analysis from KPMG suggests that underperforming businesses are creating a drag on the economy, warning that “the rise of zombie firms in the UK could spell trouble ahead”.
8% were displaying “zombie-like symptoms”
The research looked at annual accounts of 21,000 UK businesses and found that 8% were displaying “zombie-like symptoms”, but added that the latest figures and other economic data points to the proportion potentially being as high as 14%.
The highest concentrations of zombie firms were in the energy, automotive and utilities sectors.
Stumbling on
Yael Selfin, KPMG’s chief economist, said: “Many unproductive businesses have been able to stumble on in recent times, generating just enough profits to continue trading but without the innovation, dynamism or investment necessary to sustain bottom-line growth. This has created, and will continue to create, a drag on UK productivity.”
As many as one in seven UK businesses is potentially “under sustained financial strain” but has been able to “stagger on” thanks to low interest rates. These struggling firms are blocking the way for new entrants, crowding out healthy rivals, when under more normal economic circumstances they would have been forced to ceased trading.
What is a zombie?
KPMG said the zombie warning referred to companies where turnover was static or falling, profitability was persistently low, margins were being squeezed, cash and working capital reserves were limited, leverage levels were high, and there was a limited ability to invest for the future.
Others have defined a zombie business as one that has been around for several years but is unable to cover its debt-servicing costs with its profits.
KPMG made the point that in previous recessions, businesses that were not productive enough would have ceased trading, thereby eventually making way for “new dynamic companies” and ensuring capital was invested in high-growth businesses but the extraordinary financial conditions had allowed many to continue on.
Interest rates
KPMG said if interest rates were to rise further, some of these businesses might soon find their debts more difficult to finance, and if the economy continued to stutter, they would be left especially vulnerable to adverse market forces or a tightening of liquidity.
Yael Selfin, KPMG’s chief economist, said: “The threat that zombie companies pose to the wider economy is very real, regardless of what the post-Brexit environment looks like. Many unproductive businesses have been able to stumble on in recent times, generating just enough profits to continue trading but without the innovation, dynamism or investment necessary to sustain bottom-line growth. This has [created], and will continue to create, a drag on UK productivity.”
the potential for contagion is very real
Of the 21,000 private companies analysed by KPMG, 60% were said to display one or more of the symptoms associated with such underperforming firms, while 8% displayed three or more.
Blair Nimmo, head of restructuring at the firm, said that in the event of a liquidity squeeze, many of these businesses would fail. If that happened, “the potential for contagion is very real, creating broader challenges for an economy already struggling to deal with a plethora of issues”.
Do you supply goods and services on credit?
If so, the above news will be of concern.
When a zombie firm eventually fails, it usually means its creditors, those who supplied it with goods and services on credit will lose out.
However, The Credit Protection Association can help!
Formed in 1914, CPA has been providing credit management services to SMEs for over 100 years.
At the Credit Protection Association, we provide first class credit information that can help you avoid being over extended to customers who are at risk. Our monitoring service can flag up warning signs long before the end, giving you the chance to adjust and reduce your exposure. We provide recommended credit limits and credit scores on a traffic light system and can help you set appropriate credit policies for your customers.
We regularly publish lists of the latest insolvencies but by then it is too late. Our credit reports however predict approximately 96% of company insolvencies long before they arrive.
Companies in trouble usually have very bad cash flow and they try to deal with it by delaying payment to their suppliers, increasing your exposure to them.
However if you are going to continue to supply to businesses on credit, CPA can help you identify the Zombies and minimise their risk.
Why use a third party collector?
As a third party collector, we can also get your payments prioritised over those who are not as hot on collections. When your customer receives a letter from the Credit Protection Association regarding their outstanding account, they are going to want to get that resolved as a priority. Our overdue account recovery service can get your unpaid invoices to the top of their “to do” list and get your invoice paid.
Over the years we have collected billions in overdue invoices for our customers.
Our debt recovery and credit management services give our members the financial freedom needed to grow and prosper, while our new Late Payment Compensation department could unlock hidden potential and offer the compensation needed to springboard your business to success.
CPA is passionate about late payment
The Credit Protection Association has been protecting smaller firms against poor payment practices for over 100 years.
We are passionate about breaking the late payment culture that holds back the UK economy and threatens many SMEs with cash flow difficulties being the single biggest killer of Britain’s small businesses.
If you were regularly paid late we can help. Those former customers used you to boost their own cash-flow, regularly paying you late.
As a result you had extra costs, you had the distraction of having to chase payment, you had opportunity costs because your capital was tied up in their late invoices.
Under little used legislation, you are entitled to compensation for those late payments.
Now you can boost your own cash-flow.
CPA can help unearth the those hidden treasures.
We have the technology to reveal the compensation you are due and we have the extensive experience and expertise to then turn those claims into cash.
Yes, CPA can help you boost your business cashflow.
Don’t let your bankers control you, contact CPA today.
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