Cash & Liquidity ManagementCash ManagementPracticeUK Businesses ‘at Risk from Poor Finance Efficiency’

UK Businesses ‘at Risk from Poor Finance Efficiency’

Despite an improved performance by the UK economy this year, many of the company’s top performing businesses would struggle to maintain payments in the event of a renewed downturn, according to research conducted by software group ReadSoft.

ReadSoft investigated the financial leverage of the UK’s 600 top performing small, medium and large companies by turnover. Using a ‘gearing’ ratio enables an understanding of the degree to which an organisation’s activities are funded by owner versus creditor funds. A company should be considered more risky to deal with as the gearing ratio climbs. This is because the company must service debts first, to the detriment of suppliers and partners.
  

ReadSoft UK business efficiency

Small businesses appear to perform relatively well, but actually exhibit 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.

Despite assessing ‘best of breed’ organisations, the range of gearing and lack of consistency across all three groups and variation within vertical markets suggest turnover alone cannot be taken as an indication of a healthy business.

“The financial inefficiency we see in this research is a symptom of lack of insight into business processes,” said Simon Shorthose, managing director, ReadSoft UK. “This leads to poor control, introduces risk, potential for fraud and breach of regulatory compliance. This might be expected of small companies and those struggling to keep 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.”

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