Zombies… what zombies?

Max FirthI was drawn to a recent article in The Independent’s small business pages on corporate insolvencies entitled ‘It will take years to solve the zombie problem – if it exists’.

David Prosser writes that there “are two contradictory ways to look at the latest statistics on corporate insolvencies….. they either make a nonsense of the idea that an army of zombie companies threatens to undermine the economy’s recovery, or confirm our worst fears.”

I’m not going to recreate the argument here (click over to The Independent for a good read when you get a chance), but I would like to share thoughts on the matter I presented at one of our Credit Excellence Workshops recently.

There has been much speculation regarding the existence of zombie businesses in the UK and some data suggest s there areas many as 160,000 business corpses  being kept from the grave by means of low interest rates and patient tax authorities.

Our business information – which draws on a wide range of sources – shows that reports of the death of our SME population are greatly exaggerated.

Over the last decade we have seen a massive clear out of the weakest companies. Business numbers fell by around seven per cent when the downturn hit in 2008, a reduction that had not been experienced in decades.

The rate of insolvencies during this difficult period was smaller than experienced in the post-recession 1990s, due to a much larger business population that had grown phenomenally as we became increasingly a nation of entrepreneurs and micro businesses.

While the majority of micro businesses found  their way through the downturn, some simply shut up shop. Public data may suggest many closed without apparently leaving any debt, but our analysis (which considers hidden insolvencies not recorded in official figures) indicates there were lots with a negative net worth.

The clear out of companies that happened since the downturn  was massively focused on those that were weak and vulnerable from a debt perspective. The worst rated companies went under in the highest numbers– they are not hanging around as zombies  hindering the growth of other  businesses.

The survivors are now more robust than ever, and once again we are seeing more businesses being created than are closing. The overall business stock is now greater than it was before the downturn and overall start-up and closure rates are now similar to the early 2000s.

The zombie argument is further questionedby data showing many companies that had stalled or stagnated are now growing again, while the proportion of companies expanding naturally is now increasing having fallen to just a quarter in 2010

This does not mean to say that there will not be insolvencies. Failures tend to occur when companies change gear (as it can cause cash flow problems) and payment performance continues to be a major challenge for businesses that will need monitoring and managing over the coming year.

And while this view calls in to question the armies of undead firms inhabiting the economy, it is wise to remember that – in any climate – commerce carries risk.  The deterioration of a business can occur rapidly. It only takes one big customer to fail or suffer significant cash flow problems to create contagion amongst other firms. It is wise to know what’s coming round the corner and through careful monitoring, businesses can stay one step ahead.