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.
Credit Management - Receivables Process
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 planning 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 wakeup 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 cash flow.”
Credit Management
“It is clear that profit leakage is an issue which is prevalent within UK businesses and it’s no longer acceptable to try to trade your way out of trouble”
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