24 January 2012
Business confidence levels among credit managers representing a broad cross-section of UK industry dipped to their lowest level for 15 months in the quarter ending January 2012, according to the latest Moore Stephens Credit Managers Survey. Amid general concern about a marked increase in payment delays, the cost of credit management looks set to increase over the next twelve months, and insurance limits appear to have hit a ceiling. There was, though, evidence of renewed confidence on the export front.
Respondents expressed an average confidence level of 6.4 in the industries in which they operate. This was down on the 6.6 recorded in October 2011, to the lowest level since October 2010, when confidence was also rated at 6.4. Although overall confidence in London and the South-East corresponded with that for the rest of the country, it was noticeably lower in the South-East specifically (6.2) than in Greater London (6.8) and the South (7.0).
There was a 2 percentage point increase, from 37% to 39%, in those who expected their days’ sales outstanding to increase, while the number of respondents expecting their key customers to impose longer settlement periods rose from 31% to 38%.
32% (25%) of respondents anticipated that their export volume turnover would increase, while the number of respondents expecting the payment discounts required by their key customers to increase fell from 26% to 23% and those expecting the overall cost of credit-managing their key accounts rose by 12 percentage points to 50%.
There was a 4 percentage point fall to 41% in the number of respondents who expected to ask their credit insurers for an increase in limits. Those expecting their insurers to respond favourably to such a request fell from 49% to 31%.
Jeremy Willmont, a Moore Stephens corporate recovery partner said, “2011 was a tough year for the UK economy. The further dip in confidence recorded in our latest survey is no surprise. Indeed, the surprise may be that it was not bigger. And the immediate future looks as if it will be equally problematic.
“The government’s strategy for economic recovery is based on reducing debt through a mixture of austerity cuts and economic growth. But the failure to bolster economic growth sufficiently is putting that plan under threat. At the end of last year, the Office of Budget Responsibility downgraded its projection for 2012 economic growth from 2.5% to 0.7%, while the projections which had been made for 2011 growth are now looking over-optimistic. Furthermore, prospects for stronger economic growth remain doubtful, especially given the eurozone crisis.
“The situation on the UK high street is not encouraging. According to the Office for National Statistics, sales volumes for November 2011 were down by 0.4% compared to the same month in the previous year. And the British Retail Consortium (BRC) says sales values fell by 1.6% on a like-for-like basis over the same period. BRC figures do show that UK retail sales values were up in December 2011 by 2.2% on a like-for-like basis compared to the previous year. This, however, was on the back of widespread heavy discounting. The comparison must also be seen in light of the adverse weather which hit sales in December 2010, and the fact that Christmas Eve 2011 fell on a Saturday.
“In real terms, any boost to retail sales figures over the Christmas/New Year period is likely to be too little, too late for those traders struggling to keep afloat. With retailers and the government – as well as the public itself – looking to sort out their finances, less money is being spent. Although this might be seen as a recipe for aiding the long-term recovery of certain, individual companies, it holds little promise for those facing more immediate financial difficulties. Moreover, extrapolating the argument to cover the entire retail sector throws up more problems than solutions; if everybody cuts back on spending, things will grind to a halt.
“Some big names have gone into administration, and more are expected to follow. But businesses do not enter administration overnight. Companies whose financial difficulties have recently been made public, for example, are likely to have been in talks with their banks and shareholders for several months – in some cases, years. Confirmation of their insolvency or entry into administration may be seen as almost inevitable. For many, the chickens are coming home to roost.
“One common factor which seems to be emerging in relation to many of the failures involving high street chains is that they simply have too many branches, at a time when consumer spending is significantly down. Many businesses have been over-expanding for a number of years, despite a fall in demand for their products and services. The high street is changing in nature, too. Much of the trade it once enjoyed has now moved to out-of-town retail parks and big shopping centres, while internet selling is now consistently featuring as a serious challenge to traditional retail footfall.
“Our survey revealed that businesses are looking for more time to pay, which is a clear indication that money is not circulating quickly enough. Neither does it seem likely that the banks will be keen to step into the breach for companies other than those who can present a sound business plan covering both the short and long term. Credit insurers seem to have little or no appetite for increasing limits under their policies. Government spending cuts are sure to further hit demand for products and services. The real impact of quantitative easing is still largely unknown. And the economic fall-out from the massive eurozone debt is likely to be with us for years.
“On a more positive note, the comparative weakness of sterling continues to make UK products cost-effective in overseas markets. With national spending and demand both significantly down, increasing exports is currently one of the few options which hold genuine promise for the UK economy. Both the government and the CBI have recently emphasised the need for the UK to expand its markets abroad, particularly into new markets outside the EU, and it was encouraging to note that there was an expectation of increased export activity on the part of respondents to our survey.
“The indications are that we could be entering the second phase of the recession. The picture looks fairly grim across the board. The options available to struggling UK businesses appear to be narrowing. Effective credit management is becoming increasingly important, as is the wisdom – sadly, only available retrospectively for too many businesses – of undertaking some form of financial health-check before being threatened with administration or bankruptcy. More than ever before, this is a time for those who are in business for the long haul.”