A severe lack of liquidity means that 51 per cent of mid-sized businesses would have to turn to external sources of funding after just three days, in the event of an unexpected drop-off in trading. The findings are the result of a new study by international accounting and advisory firm Mazars, which analysed 72,011 mid-sized businesses in the EU over a four-year period.
Liquidity for days
Across all business models, the companies within the bottom tier held an average of under a single days’ cash on hand, and the middle tier fared little better with an average of two days. Even when factoring in the companies within the highest tier, which are the most liquid with around 15 days of cash on hand to cover operating costs, the median time for all of the surveyed companies before external funding sources would be required was just 2.5 days. This raises the likelihood of businesses assuming expensive short term finance to cover ongoing liabilities.
Growth intervention
The surveyed mid-sized companies had a turnover of between €10 million and €200 million across a 4 year period. Businesses were split by model, adapted from the MIT categorisation, and analysed according to four key performance indicators: profitability, return, liquidity, and strength. The best performing 20 per cent are categorised as top tier, the middle 60 per cent represent the middle tier and the weakest 20 per cent are considered the bottom tier.
The survey found that with the right interventions, business performance can improve dramatically over a short period: 49 per cent of the poorest performing companies were able to move up to the middle or top tiers over four years. It also revealed that management decisions have far greater impact on business success than local economic conditions, as there was very little variation between countries.
IP-rich companies are better off
Top tier intellectual property (IP)-owning companies enjoy 17.8 per cent profitability or more, whereas equivalent businesses in the retail and distribution sector can expect to generate profitability of just 8.7 per cent or more. This suggests that owners and managers who adopt the right business model at the outset, or who position themselves correctly in the market, stand to reap far greater rewards than others.
“These findings demonstrate the tight margins and challenging market conditions within which most mid-sized businesses operate. Although they’re a vital cog in the economy, it seems that many of these companies simply aren’t living up to their potential,” Gareth Jones, head of entrepreneurial business services at Mazars, said. “However, the news is positive for those companies willing to step back and take a strategic look at their operations: this study emphasises clear areas of focus which can help owners and managers carve a competitive advantage and generate capital value in the long term.”
