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The zombie apocalypse – an urban myth?

Gareth Rumsey

The financial news is plagued by stories of zombie takeover. According to some reports, the progress in the economy has been slowed by a large number of so called ‘zombie businesses’ that are only just staying afloat. Companies with few prospects for profit or investment, that are simply financing the repayments of heavy debt, are according to commentators in some circles, prohibiting the growth of healthy businesses and having a negative impact on the UK economy. Some commentators are claiming that there are more than 160,000 zombie companies operating across the UK alone.

As the expectation of an increase in business insolvencies grew, but insolvency figures continued to fall, zombies businesses were being put forward as a potential theory as many waited for an avalanche of ‘inevitable’ bankruptcies. And they are still waiting, as the insolvency rate remains stable and is hitting some of the lowest rates seen in the last five years. This begs the question – are these companies really too highly leveraged and too unprofitable to ever become successful again? Or do they just need time, understanding and a recovering economy to recuperate?

Moreover, where do messages like this leave other businesses that are looking to continue trading with a possible zombie? Their decision to trade becomes even more difficult, as they’re left wondering whether they’re doling out goods and services to companies who may never pay them, so putting themselves at financial risk; or whether they should play safe and risk losing the custom to someone else.

Making a realistic determination of a company’s situation is vital, to make sure that businesses are extending credit on suitable terms – and this is likely to be different for each business. It’s important that they’re not deterred from offering any trade credit at all. Access to trade credit is vital in helping many companies manage cash-flow, thereby allowing them to continue trading and ensuring the long term health of the economy. Most temporarily stretched companies can recover, if they’re given the right opportunity to do so.

Of course, business should always exercise caution, as feeding into terminally distressed companies won’t benefit them, their struggling customers or the economy. The lesson is not one of extreme and unwarranted restraint, but one that advocates adequate risk analysis. By assessing your potential and existing customers properly, you can make informed judgements about their underlying strength. Credit scoring systems for businesses can be used to predict the continuing stability of clients; giving an indication of their health over the next twelve months. Similarly, Payment Performance Data informs of a company’s recent payment history, which can give a clear indication of their repayment capabilities. If businesses are privy to accurate information about a customer’s payment habits, they are more prepared for subsequent conversations on why payments are being made late and what they can do about it. The possibility of extending payment terms may be an option. For ongoing monitoring and to determine if companies could be in imminent trouble, a Distress Warning Score alerts of new dangers in the credit score flagged by missed payments.

Businesses can also use their own customer data to assess the financial health of their existing clients and suppliers, which they may depend on for continuity – payment records reveal whether a company may be experiencing problems and if this is indicated it can be addressed accordingly and dealt with through positive dialogue. It’s also highly recommended for businesses to request at least three references prior to trading with another company, as this also gives a good idea of their reliability before credit is extended. In short, there are enough precautionary measures out there to protect businesses and help them make decisions that don’t, in the long run, increase their own bad debt experience and add to the economy’s problems. 

It’s true to say there are many companies experiencing problems with cash flow, and if a business finds that’s the case with one of their customers, then this must be handled delicately; as a business will either need to recoup their money before their customer goes insolvent, or maintain the integrity of the relationship for future trading once things have picked up.

There’s a significant difference between a zombie company, dead in the water with terminal debt; and one that simply needs a hand to become profitable again. Allowing 160,000 ‘perceived zombies’ to perish; could be doing more of an injustice to the economy than if they make some rational decisions about which ones are worth financing and selling to. We can’t expect a turnaround in their fortunes overnight, but if the world believes the zombie phenomenon, then the current financial challenges could last longer than they really need to.

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