The Squeezed Middle: Breaking Free

Our latest Credit Check Survey paints a worrying picture of an MSB sector beset by a cashflow squeeze. The issues facing medium-sized businesses are genuine and pressing but Venture’s Peter Ewen asserts that owners should be looking beyond the problems to the solutions.

Medium-sized businesses (MSBs) are the bedrock of our economy and without growth in this sector, it’s unlikely that the economy as a whole can recover in a robust and sustainable way.

So it is a matter of some concern that the latest Credit Check Survey by Venture Finance and Accountancy Magazine suggests that rising prices on the supply side combined with pressure from customers is inhibiting the ability of MSBs to grow. Based on the responses of accountants and business advisors, the study finds that many medium sized companies are struggling to cope with the impact of inflation at a time when corporate buyers are demanding lower prices and extended credit terms. It’s a scenario that has clear implications for cashflow and growth unless MSBs recognise the problem and take action to source the funding solutions that are available to help them not only survive but thrive in difficult times.

A double threat

Half of the accountancy firms taking part in the survey reported that their MSB clients were struggling to cope with the demands and practices of large customers. Late payment was cited as one of the biggest issues, with 63% of respondents reporting that their clients faced this problem.

There was also clear evidence that larger businesses were taking advantage of their power in the market to push for changes to extend their existing credit. Fifty-six per cent of accountants reported increasing debtor days over the past six months. The imposition of less favourable credit terms would be a problem in itself, but large customers have also been negotiating hard, with 69% of survey respondents witnessing downward pressure.

There is scant comfort on the supplier side of the equation. Unlike their corporate customers, MSBs lack the market power to take a robust line on credit terms and prices and as a result they are also facing severe cost pressures. Eight per cent of accounts have seen supply side prices rising while 72% have noticed that suppliers are chasing payment earlier than was previously the case.

Half of respondents state that they have clients who face the threat of legal action over outstanding bills.

Feeling the squeeze

This combination of upward and downward pressure represents a classic squeeze on Britain’s medium sized companies. With higher costs and lower customer prices affecting the ability of businesses to make profits, 80% of accountants reported their clients were seeing margins falling.

Also of concern is the impact of working capital. The report shows depressed margins and less favourable credit terms combining to create potentially critical cashflow problems for a great many MSBs.

For instance, when asked about the greatest risks facing their clients 72% of accountants identified lack of cashflow. Evidence of that perceived risk was seen in 65% saying they had clients who were having problems paying suppliers on time and 62% reporting clients who were unable to honour their taxes.

Historically speaking, cashflow tends to be an issue during periods of recovery. Problems with working capital tend to occur as businesses take on staff and build inventory in expectation of higher revenues. If there isn’t sufficient working capital in place to bridge the gap between the upfront spend and payment by customers, the result is, all too often, financial stress or business failure.

However, this latest report suggests that businesses are facing a different set of issues. In the face of a patchy recovery there is less pressure to overtrade. Instead the cashflow pressures are coming from customers and suppliers who are themselves struggling with a challenging commercial environment.

The threat to growth

All of these factors pose a threat to the growth prospects of MSBs, and by extension, the wider economy. Around half of the survey’s respondents said the majority of their clients were currently static. Certainly this was the view of many of those taking part in the survey – 69% warned that a failure to address the problems faced by medium sized companies would inhibit the economy’s ability to grow.

The bigger picture

But in my view the problem extends beyond the short-term impact of customers and suppliers protecting their own cashflow to the detriment of MSBs. The squeeze described above is, I think, contributing to a short-term mindset. Faced with lower margins and a lack of cashflow, many SMBs are reluctant and unprepared to take advantage of the opportunities that lie ahead. Companies that have emerged from the recession in a stable condition are often very well placed to take advantage of the weakness of rivals to gain market share or grow through acquisition. But in the current climate that takes a certain amount of courage and many businesses – even strong businesses - remain in crisis management mode, lacking the confidence to pursue the strategies that will deliver the growth.

Part of the key to building confidence is stable finance. Traditionally, banks have been the first port of call when otherwise viable MSBs face temporary cashflow problems but with Project Merlin still a work in progress, our survey points to a continuing lack of confidence in the High Street lenders. Seventy-two per cent of accountants feel that banks have been unsuccessful in helping medium-sized companies to operate.

Nor is there overwhelming confidence in the current state of the Government’s growth agenda. A substantial 64% said Government had done little to help businesses in this sector with more than three-quarters saying the business tax regime was an inhibitor to growth. Not surprisingly, 55% of respondents also pointed to red tape as a growth suppressor.

So what we’re seeing is a squeeze on businesses that is not – as the accountants taking part in the survey see it – being alleviated by the financial community nor indeed the Government. This is, in turn, prompting many businesses to keep the hatches firmly battened down at a time when we should be seeing robust economic recovery.

But businesses ought to be aware that financial solutions are available. Over the past few years, banks – and to a lesser extent – the Government have taken the brunt of the blame for the problems facing medium sized businesses but as the survey demonstrates, suppliers and large customers are now contributing to a cashflow squeeze.

But cashflow finance is certainly available – not least in the form of receivables and inventory-based facilities – if businesses are prepared to take advantage of it. The missing part of the puzzle is the education of all of those all involved. Businesses need to know about the support and other forms of finance available. And, in knowing what is on offer, they will be better equipped to deal with the current problems.