12/11/13 | Economy on the mend but risk of bad debt remains
There has been some good news recently about the outlook for the UK economy with GDP figures showing steady and increasing growth throughout 2013.
2013 Q3 0.8%
2013 Q2 0.7%
2013 Q1 0.4%
Unemployment is drifting gently downwards (not fast enough to cause worries about interest rate rises in the near future) and inflation remains stable, if a little higher than the 2% target.
Figures from the Insolvency Service show that the rate of company liquidations is down by 2.6% on the previous quarter and down 2.0% on the same quarter a year ago. So does all of this mean that the recession is over, we’re returning to growth and that the risk of bad debts has now gone away?
Well, most optimistically, two out of three.
Historically, bad debts have risen as the economy starts to grow out of a recession. The logic of this is that many companies have been using up cash reserves to survive the recession and now need to fund increasing levels of output. However, increasing output demands more cash, which is still in short supply, suppliers may not be willing (or able) to increase credit limits and may anyway be seeking to increase their own prices. So margins remain tight and cash flows out more quickly than it flows in. Patrick Hoskings in the Times on Saturday cited the UK brick market as an example of the problem – the recession saw 30 out of 80 brickworks closed / mothballed and supply is now failing to keep up with demand. He quotes one example of a brick costing 45p last year as costing 85p now for immediate delivery. That causes inflationary pressures and also spells disaster for any contractor who has tendered and won work on a fixed price based on bricks being available at 45p each. Make no mistake, insolvencies are a feature of the market in all stages of the economic cycle and each company insolvency leaves suppliers unpaid.
Credit insurance starts delivering quantifiable return on investment as the economy picks up – it allows companies to take an aggressive approach to new customer orders by securely extending credit in support of new orders without the anxiety of “why have they come to us?”
On typical pricing, a £5m turnover company using credit insurance to confidently accept a single new order of £100,000 will generate enough profit to pay the full annual credit insurance premium. The cover on the remaining £4.9m of sales effectively comes free of charge. You’ve just traded through 5 years of the worst recession of a lifetime, why risk your business now there is a glimmer of light at the end of the tunnel?