Business confidence down in 2015 despite late rally

Q4 2015 of the Chartered Institute of Credit Management’s (CICM) UK Credit Managers Index (CMI) reported growth in both the Manufacturing and Services sectors, with the results finishing a year that saw the index reach two record highs in the first half of the year.

However, at the year-end the barometer measured 58.0, equating to a year-on-year fall of 0.83 points, and finishing 0.8 points lower than the 2015 average.

With national and international stock markets falling, oil prices at rock bottom and talk of interest rate rises, the second half of the year has seen business confidence tapered. But a small year-end increase in the index ensures a downward trend is not established.

The index, sponsored by Tinubu Square, gauges nationwide levels of credit being sought and granted by credit managers across industry.

Worryingly, all three favourable factors – new applications for credit, sales and the order books – fell for the second consecutive quarter to end at 62.4, and none of the seven unfavourable factors, which include disputes, bad debt provision, and overdue debt, improved, finishing on an average of 56.2.

Asking about credit managers’ priorities for 2016, a staggering 53 per cent said that supporting export business development initiatives was their lowest priority, despite growth being seen in the manufacturing sector index. Nearly a third (29 per cent) stated that reducing Day Sales Outstanding would be their top priority for the year ahead closely followed (28 per cent) by increasing treasury cash flow. A fifth (18 per cent) said they intended to focus on implementing or improving credit management processes.

Philip King, chief executive of the CICM, explains that these results are particularly ominous for the future: “With respondents reporting that overdue debt, insolvencies and disputes are on the rise, while new applications for credit are down we might expect to see a turbulent 2016.

“Markets around the world are showing increased volatility, with the instability of emerging economies exacerbating problems at home,” he continues. “While it is good to see the index has levelled off from its fall in the third quarter, there remains a question mark over which pathway business confidence will take in 2016, and whether the uncertainly surrounding an EU exit will make an impact.

“The reliability of UK CMI is central to its offering, and its consistent tracking of major national stock exchanges, including the FTSE All Share, enhances its reputation as a trusted resource,” Philip concludes.

Looking at how credit managers use discretionary credit limits within their businesses, 30% reported that they currently use the full capacity of their limit, but nearly half (47 per cent) reported experiencing problems of some kind whilst trying to manage their discretionary limits as part of their overall Trade Credit Risk Management strategy.

Michael Feldwick, UK head of Tinubu Square, said: “It is clear from this quarter’s survey that businesses remain focused on their UK operations over export growth. Yet moving to a focus on export markets will be key to securing long-term growth, particularly in the manufacturing sector. Worryingly, the problems businesses are experiencing with managing their discretionary credit limits could impact the risks they are exposed to as they grow. For this reason, companies must ensure they have the processes and technology to control that risk.”

While Scotland was the only region to report contraction from Q3 to Q4 (44.4), possibly down to a reliance on Oil which recorded the lowest sector figure out of 20 measured (43.8), more positive signs can be seen in Ireland and the South West, which reached 65.0 and 65.2 respectively.

Despite being the lowest sector, Oil and Gas did see an increase on Q3, whereas Basic Resources (48.0) was the only sector to retract, and retail was the only other sector unable not able to rise above 50.0 – making up the three sectors with the lowest business confidence.

The latest CMI prompted some 300 responses from credit managers in companies of various sizes broadly split by region, although slightly weighted to business in London and the Southeast.

The CMI is a diffusion index, producing ‘scores’ of between one and 100 (typically in a range of 40 – 60). Ten equally weighted factors are included – three favourable and seven unfavourable – and the index is calculated on a simple average of the ten factors.