Fear over raised debt levels

Accountants and other financial services advisers are increasing debt levels, despite warnings that an economic downturn may be imminent, according to a new survey.

The poll of more than 300 providers of accounting and bookkeeping services, due to be published next month, found that some 47% of firms have increased their debt over the past year.

David Pattison, general manager of Plimsoll who conducted the survey, said that debt was increasing because a handful of companies appeared to be borrowing to fund losses, while a larger number were investing in a bid to become more competitive.

The survey also found:

  • 74% of firms have some form of debt
  • 47% increased debt levels last year
  • 35% have twice the average level of debt
  • 26% have no debt at all
  • 17% increased their level of debt to finance increases in fixed assets last year
  • 14% of capital is typically financed and
  • of the firms that increased debt, 62% saw an increase in sales and 50% saw an increase in profits.

The findings suggest businesses and their advisers are more confident than many regulators. An emphatic 80% of 300 finance directors questioned by Accountancy Age last week said they were confident turnover will increase over the next 12 months.

However this contrasted with comments from Bank of England governor Sir Edward George last week who cautioned that the US federal Reserve’s decision to cut interest rates last week in an attempt to stave off the threat of recession could hurt business on this side of the Atlantic. ‘I think it is still true that if America really sneezes we all catch cold,’ he said.

And this week Accountancy Age reveals that the Auditing Practices Board is to issue a warning to auditors to be more vigilant in policing companies given that there could be an economic downturn in the UK later this year.

But Pattison said debt was not necessarily a bad thing. ‘Keeping too much cash can be dangerous,’ he said. ‘Cash rich companies should watch out. It is not going to earn a great return sitting there; it needs to be put to good use.

‘I am in no doubt that it would be an opportune time to seek out an exposed competitor and snap them up.’

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