Characteristics of Zombie Companies
With the tough economic climate predicted to continue well into 2012, it is increasingly important that businesses recognise the characteristics of a zombie company. These are companies that, although not technically insolvent, are operating on their working capital and are heading for trouble. Their profit margins are low and they may already be on the HMRC “Time to Pay” schemes.
Unless zombie companies take early action to adapt their businesses to become more profitable and control their costs, the writing is pretty much on the wall for them.
Zombie companies are something we have been dealing with for some time, but we are now seeing the signs that will lead to an increase in businesses that are heading for failure.
So what are some of the characteristics of a Zombie Company? Usually they have weak management that has an inability to identify problems and there is a lack of a robust business model. The poor quality of the management team has meant that there has been failure to implement necessary operational changes as the market has moved and with pressure on prices and poor customer loyalty, profit margins have been squeezed for the last few years. The retail sector is being hit particularly hard at present with “out of town” shopping malls and retail parks, consumers moving more of their spending online, and the general pressures of a depressed economy. The retail sector is a classic example of exposing management teams that have not been up to the job. The speed of change has been such that only the best are doing well, with the rest that are still trading, hanging on for as long as they can.
But it is not all doom and gloom. Directors of zombie companies should be urged to take early action and seek professional advice in order to better explore the options open to them. At an earlier stage, there are likely to be alternative solutions available.
If we are to get the economy in the UK back on track, it is important that focus is shifted to directing working capital to viable companies and not to companies that are already experiencing financial distress and which are beyond being able to be turned around.
