Newsletter #435 (View other news stories)
Economic recovery poses risks
Melbourne, Victoria, Australia
Thursday, 5 Nov 2009
 New orders can place significant pressure on cash flow.
Photo source: Shutterstock
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Businesses remain vulnerable to financial stress and failure in the early years of economic recovery following a downturn, according to new research from Dun & Bradstreet.
The report warns that an economic recovery following a downturn can catch many businesses by surprise. Firms that are under-stocked and under-resourced as demand rises are left scrambling to fulfil new orders which can place significant pressure on cash flow.
"Firms are forced to outlay funds for items such as raw materials and labour to provide their products, but the payment gap results in negative cash flow," says CEO Christine Christian.
"As economic conditions improve, there can be a tendency for firms to let out an audible sigh of relief and simply expect their own business conditions to improve," says Christian.
"However, D&B's research provides an important reminder to business executives that they need to plan adequately for an economic recovery and maintain a tight focus on the fundamentals of cash flow and risk assessment. Failing to do so could result in financial disaster."
Adding further pressure to financial stability, Australian firms are currently averaging 51.8 days to settle accounts, meaning that firms will be forced to wait an additional three weeks on top of the standard 30-day term to receive payments for their goods.
The research examined business failures in the recovery period following the ‘Dot Com’ bust of 2000. Rather than improving, business failures actually jumped 20.5% as the economy returned to positive growth in the 2001 financial year following the 7.1% contraction in the March 2000 quarter. This was followed by business bankruptcies increasing a further 5.1% in the 2002 financial year, when Australia recorded GDP growth of 3.8%. Failures did not begin to decline until the third year of recovery.
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