A Recipe for Failure?

The latest analysis from Plimsoll on the UK Telecommunications Services industry pulls no punches: 2008 has not been a comfortable year and economic conditions are accelerating the rate of change in the market. Companies are faced with a stark choice: hold on to sales at reduced margins, or opt to reduce in size and scale.

Senior analyst David Pattison says, “To put this into context, 312 of the 1000 firms analysed are losing money, a direct consequence of rising costs and price reductions set against a slowing market.

Of most significance, is the amount of telecommunications services firms using an overdraft as a permanent means of finance – a dangerous position for any company to find itself in. The banks are taking a critical look at all unsecured finance and are reassessing their exposure to small businesses- this could leave these firms in a position where their overdraft would need paying back on demand. Many of these firms simply cannot afford to do this.

At least 239 companies identified in the analysis are running a dangerously high chance of failure, unless their problems are addressed.

Plimsoll have analysed previously failed companies, and noticed two characteristics in particular of failing or failed businesses.

1. The financial performance of the company is allowed to slide. Costs are not brought under immediate control. As a knock-on effect, debts increase and interest payments then further deplete profitability.

2. The final blow- an outside factor hits the company, such as the loss of a large contract, a bad debt, or a slow down in business. The failing company simply does not have the financial resources to adjust in time and the inevitable occurs.

When analysing previously failed business, Plimsoll found that 8 out of 10 previously failed businesses showed these features.

However, the latest report is not entirely doom and gloom, as there is some good news. Proving their resilience, 140 of the 1000 firms prove what can be done to improve your performance. These companies have reported a return to profit after having previously reported losses, a result of tighter cost control and a reduction in overheads.

Looking towards the end of the year, the analysis predicts increased acquisition activity, this is been driven by two clear objectives. We predict will be seeing two distinct types of acquisition:

1. The classic distress sales as predators are able to profit from other’s misfortunes, snapping up essentially sound businesses at bargain prices

2. Larger players in the market may use the opportunity to snap up smaller players in the market who add value to their core business. These companies will be prepared to pay well for these niche companies as they offer a clear and easy route to new markets.