Many ‘top performing’ UK businesses are operating with debts that put their future in jeopardy and make them risky trading partners, a new study has warned.
The research, conducted by ReadSoft, suggests that in the event of another economic downturn, many top UK businesses would struggle to maintain their payments and the problem could be so severe that it could threaten supplier contracts and business stability.
Simon Shorthose, Managing Director of ReadSoft UK, said: “The financial inefficiency we see in this research is a symptom of lack of insight into business processes. This leads to poor control and introduces risk, potential for fraud and breach of regulatory compliance.”
He added: “This might be expected of small companies and those struggling to keep their heads above water in recent economic times but to see this level of inefficiency so commonplace across well known businesses, both small and large, is real cause for concern.”
ReadSoft investigated the financial leverage of the UK’s 600 top performing companies by turnover. They used a ‘gearing ratio’ to establish the degree to which the actions of individual organisations were funded by owner versus creditor funds and assumed companies most at risk to be those with the highest gearing ratio. This risk was derived due to the obligation that companies have to service their debts first, possibly to the detriment of suppliers and partners.
Small businesses appeared to perform relatively well but actually exhibited the widest fluctuations in gearing ratio (0.32 to 889.04). Medium businesses were less vulnerable on average, though gearing still ranged from 583.84 at worst to 2.56 at best. Large enterprises, despite very high turnovers, were on average more vulnerable and slower to react to market fluctuation than their smaller equivalents.
Large scale wholesale enterprises were the most risky propositions based on gearing, followed by large insurers and travel companies. Smaller retail, insurance and finance companies also fared poorly in the research when compared to other market sectors. Manufacturing presented a relatively constant response across all scale of enterprise, with a higher risk factor as scales of operations increased.
The timing of the news couldn’t be much worse given David Cameron’s recent trip to China to encourage trade with UK businesses.
During the visit, the Prime Minister was keen to push the strengths of the UK as a potential business partner for China and played down comments made by the Chinese press suggesting that Britain is no longer in the economic situation it once was and has ceased to be a lucrative business ally.
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