Close to 9,000 New Zealand firms had their rating downgraded in the first three months of 2010 while 10,500 firms received a rating upgrade, according to research released today by credit reporting agency Dun & Bradstreet.
The firm expects more companies to continue experiencing financial distress over the coming year despite the economic recovery.
Younger and smaller firms accounted for the greatest number of company downgrades however, these groups also experienced significant numbers of upgrades, the company said in a press release.
These findings demonstrate that the business environment is currently in a state of flux, with some firms well positioned to take advantage of the recovery and others struggling to manage its demands.
Cash flow and liquidity are vitally important during a recovery as firms require funds to take on new staff, increase their inventories and invest in their business to meet growing demand.
In an environment where access to credit remains difficult for many firms, cash flow becomes even more critical.
According to Dun & Bradstreet’s general manager, John Scott, the latest figures provide an important reminder to New Zealand executives.
“Close to 20,000 firms have had their company risk rating revised since the start of the year,” said Scott.
“Positively, more than 10,500 revisions resulted in an improvement in company risk ratings however, close to 9,000 firms were downgraded and are now classified as a higher risk of financial distress in the coming 12 months.
“These results provide an important message. Now, as the economic recovery in New Zealand begins to gather steam, it’s important that executives maintain constant vigilance. This will allow those firms who have effectively managed their risk and cash flow throughout the crisis to take advantage of the opportunities a recovery presents,” he said.
The services, wholesale trade and retail trade sectors accounted for the biggest number of downgrades in the March quarter 2010. However, these same sectors also topped the list of upgrades.
The services, wholesale trade, manufacturing and retail trade sectors also accounted for the highest number of payment downgrades, indicating that some firms in these sectors are now more likely to pay their trade accounts delinquently.
These sectors were also some of the slowest payers in the March quarter according to Dun & Bradstreet’s latest trade payment data.
Dun & Bradstreet data shows that more than 80% of business failures are related to cash flow pressures rather than poor sales.
Scott believes many businesses underestimate the challenges an economic recovery presents.
