R3, the insolvency industry body, has raised the prospect of what might happen now that the economy is improving. They argue that there are 100,000 "zombie companies" which are just surviving due to the benign environment of low interest rates and supportive banks. This is a reduction of 60,000 from the levels mooted in November 2012 but nonetheless they employ some 480,000 people. They argue that these businesses are on the cusp of failing should they find themselves facing increased competition and a shortage of cash. This in turn would put up unemployment and then mean interest rates rises are further away.
This amounts to statement that unemployment will rise in the coming years or that these zombie companies, shedding jobs, will offset any rise in employment over the short term.
R3 have researched the market by asking business owners about the health of their own businesses and have pointed to a recent uptick in the number of businesses that have become insolvent over the last quarter. See our comments on these figures Other indicators have been put forward by an organization called Company Watch who claim that in their analysis 250,000 firms have negative balance sheets and a quarter of these will be unable to pay their debts over the next 3 years and their failure will amount to a reduction of 1% GDP. Wow that is quite a prediction.
It is our view that these zombie companies are overstated. Yes, there is a lack of will from banks to crystallize their losses and HMRC have been generally supportive but in reality there have always been inefficient companies in a healthy economy and if these businesses have survived the poor performance of the economy over the last few years then they must be pretty resilient!
One thing is for sure is that over the next couple of years the business environment is going to change and the impacts very unpredictable. Our advice for businesses to meet these challenges is to have tip top financial management, run a weekly, or even daily, cashflow model, and make sure they know where they stand at all times. Also be strong in collecting in debts. You won't lose customers by asking them for money owed and don't extend too much credit.
Why not download our directors toolkit for businesses. This includes our daily cashflow template.