Firms warned that corporate collapses could increase in early stages of recovery

Leading credit reporting agency Dun & Bradstreet has warned SMEs not to become complacent in the early stages of the recovery, pointing to research that shows company collapses actually increase in the second and third year of recovery.

D&B examined the corporate landscape following the dotcom bust and subsequent downturn in 2000.

The research shows that company failures jumped 20.5% as the economy returned to positive growth in the 2001 financial year. This was followed by business bankruptcies increasing a further 5.1% in the 2002 financial year, when Australia recorded GDP growth of 3.8%. D&B says failures did not begin to decline until the third year of recovery.

Dun & Bradstreet’s director of corporate affairs, Damian Karmelich, says the research should provide an important reminder that a failure to plan properly for improving economic conditions can bring new stresses for business executives.

“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,” Karmelich says.

He also points to Dun & Bradstreet risk ratings, which show that 38,000 firms are at a high risk of experiencing financial distress in the 12 months to the end of June 2010.

Ramping up for recovery can leave companies with a number of challenges around the area of cashflow. Given many firms have reduced stock holdings and forward orders during the downturn, the scramble to fill new orders can leave firms scrambling for cash to pay for raw materials and labour.

“Business executives need to plan adequately for an economic recovery and maintain a tight focus on the fundamentals of cashflow and risk assessment. Failing to do so could result in financial disaster,” Karmelich says.