Not enough capitalist destruction

An interesting view, eh?

E&Y said that although companies are struggling, the number of administrations actually fell last year, despite a 42pc rise in profit warnings among listed companies. It said the mismatch could be explained by a change in attitude among the government and creditors, which have allowed more breathing space for businesses since the onset of the crisis. ……..E&Y argues that because lenders continue to fund these businesses, capital is not being recycled and reinvested as it should be. Although it said the number of zombie companies was difficult to estimate, R3, the business distress specialists, said around 30pc of companies are regularly reliant on their maximum overdraft facility – a good gauge of whether a company is viable.

Everyone loves the creative part of capitalism: few like the destructive part. But we do need both and we\’re not going to get the former unless we allow the latter and thus free up resources to be reallocated….

8 thoughts on “Not enough capitalist destruction”

  1. Man whose job depends on charging vast sums to provide state-regulated services in a cartel environment in “upset that creditors and debtors are coming to their own arrangements rather than paying him gbp500 an hour to extract all the value from the company” shock. Film at 11.

  2. It depends what is keeping these companies alive; it is taxpayers money it is a problem, if is manager workforce and banks meeting minds and sharing the pain to keep them alive with a view to a better future then it is highly laudable and the goons at E&Y can fuck off

  3. What happens if a company goes into Administration?
    Don’t the accountants take over i.e. E&Y?

  4. (the bloke in question isn’t a generic economist or accountant at E&Y either, he’s the senior partner of their administration business.)

  5. Oh good grief. Surely this guy knows the difference between insolvency and illiquidity? Being persistently up against your overdraft limit is NOT an indicator that an insolvent company is being kept alive by creditor forbearance. It is much more likely to be an indicator that customers are taking longer to pay their bills and suppliers are demanding money up front, which is known to happen in difficult economic circumstances – and speaking personally, it is happening to my business at the moment. If a business has a broad customer base, a good financial history and a solid future orders book, but is experiencing cash flow difficulties and an increase in bad debts, it is always – in my opinion – better to provide liquidity and keep it going until things improve. In which case creditor forbearance is absolutely reasonable. This guy represents the sharks, doesn’t he?

  6. I’m not sure that I would want to be drawing links between numbers of profits warnings in listed companies, and number of business failures in the wider economy.

    Firstly, let’s get one thing out of the way… a 42% increase in profits wearnings tells us nothing. It could mean that profits warnings went from 6 to 10 amongst a population of (I think) around 3000 companies.

    Secondly, profits warnings arise when companies get their forecasts wrong. Now, that might be because the economy is sluggish.. or it might be because their forecasting was flawed, or because that company suffered from specific problems. We’ve had profits warnings from the likes of BP and Tesco recently… but I don’t see either of them calling in the administrators.

    Listed companies tend to forecast growth all the time.. for that is what demanded. The economy is stagnant. Smaller businesses can deal with a stagnant economy.. the key inputs are not getting much more expensive (wages, property) so most are ticking over just-about OK. The listed companies are ticking over fine too… but that’s percieved as a problem.

  7. In addition to Frances’ comment – the banks are also cutting back on overdraft lending to businesses. Why? Oh, that old “unintended consequences” thing. Overdrafts, apparently, aren’t measured when calculating this “lending to business” thing some of the politicians seem temporarily keen on.

    So they want you to move to fixed-term loans. I’ve hit my business overdraft limit a couple of times in the last few months because a drop in the limit has coincided with an even-later-than-usual customer payment.

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