UK economy: the danger zones

We re constantly being told that the UK is basking in the glow of a benign
economy, but with the business recovery sector currently booming, that statement
doesn’t quite ring true.

The British Bankers Association estimates that the main UK retail banks have
around 3.1 million small business customers with less than £1m turnover, and
it’s here where the problems lie.

Ken Stubbs, business recovery partner at BDO, says: ‘I work with a number of
the main banks and they’ve got concerns. It’s something that I’ve termed a
degree of resilience as to whether they can withstand an economic downturn –
some have very little. The companies that go belly-up easiest are the ones with
the highest exposure to their market.’

Credit bonanza

Banks have been criticised for throwing credit at wide-eyed small businesses,
which can’t quite believe the bonanza that they are enjoying. The experts
pinpointed debt exposure to borrowing as being a real problem, as private
equity-backed businesses get ‘covenant-light’ non-amortising debt, as well as
the traditional debt arrangements.

‘It’s an incredible market,’ Stubbs says. ‘There is so much opportunity for
leveraged borrowing, but easy borrowing obscures operational problems.’

Peter Spencer chief economic adviser to Ernst & Young’s ITEM club warns
that although the economic salad days seem to be in no danger of disappearing,
the access to cheap debt could be reined in. ‘Small businesses may be highly
dependent on bank credit, but there may be a rise in the price and a reduction
in availability of such credit. It’s at an exceptional level, but it may not
last.’

Industry experts are endlessly hammering home the message that cash is king
if businesses are to keep their heads above water – and for good reason: the
minnows of small business are constantly left trailing in the wake of big
business whales when it comes to late payment.

‘It continues to be a big problem in terms of working capital. Waiting for a
big customer to pay, while still needing raw supplies to keep production going
is the biggest issue and that cycle will get worse. It comes down to how you
build your relationships. Sophisticated supply and payment agreements should
definitely be in place,’ says Stubbs.

Discretionary expenditure is something that is a boon in the good times, but
a millstone when the economy goes south. Nick Hood at Begbies Traynor says:
‘There are some sectors that are really at risk, especially the printing,
construction and leisure sectors.’

The commentators advise businesses to ensure that their operations are as
efficient and sleek as possible. Undertake critical reviews of capital
expenditure, take a close look at debt gearing and operational performance –
cost reduction where possible even in a benign company has to be carried out.

Taking a good look around the balance sheet to see if there’s any surplus
assets you can sell is a good first step if the economy starts to plunge,
especially within the at-risk manufacturing, distribution and transport
businesses.

The experts believe that companies have learned a lot of lessons from the
past and the economy is a lot less volatile than it was in 1992, but it can
still be unforgiving if the situation changes. ‘At the moment, the rises in
interest rates appear to be supportable. It’s very difficult to think that the
wheels will be coming off the wagon, but if inflation begins to take-off and the
shocks get passed along into higher wage demands, then all bets are off,’ warns
Spencer.