Bleak profit expectations worsen business risk downgrades

Business Risk

Over 145,000 businesses experienced a risk downgrade in the March quarter, according to Dun & Bradstreet, as rising payment terms and bleak expectations for sales and profits put pressure on cash flow.

Results from Dun & Bradstreet’s Corporate Health Watch, which examines the risk profile of Australian firms, show the number of downgrades in the March quarter to be 75 percent higher than last year and nearly 125 percent higher than during the Global Financial Crisis. These downgrades are linked with rising payment terms, which have peaked at three year highs, as well as declines in profit expectations which influence the risk profile of many firms.

The study found the Forestry and Manufacturing industries were hit with the worst downgrades, with Forestry registering a 17 percent deterioration, and manufacturing 16 percent. The Construction industry saw a 75 percent jump in the number of downgrades over 12 months, whilst the Transportation and Retail industries were found to be at greater risk of financial struggle.

Industries such as Agriculture, Electric, Gas and Sanitary services remained relatively stable.

Dun & Bradstreet found older firms were worse off than younger firms. The number of older businesses downgraded has tripled over the last year, showing that seemingly secure businesses are not coping with the multi-speed economy as well as expected.

The Northern Territory, Victoria and South Australia were the worst performing states, with the Northern Territory host to the country’s most precarious commercial market during the March quarter.

Finally, more public companies were downgraded than private firms with over 15 percent of public companies downgraded during the March quarter.

Dun & Bradstreet CEO Christine Christian said the results show business management of a company is more important than the macroeconomic outlook.

“Almost exclusively business failure is a result of poor credit risk and negative cash flow. These factors are the primary cause of insolvency and can occur at any time regardless of the macroeconomic outlook,” she said.

“It is a reminder of the need for firms to pay attention to the fundamentals particularly at times when rapid growth places pressure on a firm’s cash flow,” she added.