Profit warnings a reflection of challenges in the wider economy

Profit warnings a reflection of challenges in the wider economy

The number of such profit warnings issued in the first half of 2014 in the UK was the highest first half seen since 2011, according to a report issued by Ernst & Young.

Companies listed on the stock exchange are obliged to issue warnings of anticipated reduced profits (or even losses) to notify potential and existing investors. The number of such profit warnings issued in the first half of 2014 in the UK was the highest first half seen since 2011, according to a report issued by Ernst & Young.

At a time when there are plenty of indicators our economy is improving, these profit warnings are a clear sign there are still obstacles on the road to recovery. It seems reasonable to assume that the same issues which affect large quoted PLCs will similarly impact on SMEs.

Across the UK, 137 warnings were recorded in the first six months of 2014. This is the highest first half total since 2011. The reasons cited for these figures included adverse currency movements. The value of Stirling is at record high levels against the $US and Euro. On the one hand, this brings down the costs of imports but it makes life tough for exporters. Their goods / services are now more expensive to foreign buyers. The fact that our goods become more expensive makes them less competitive and so exporters can lose market share.

Competitive pressures are quoted as another cause, and it’s not just exporters who may experience this. Some companies will have used up their reserves to survive the recession and have either not been able to invest in capital expenditure or perhaps were hesitant to at a time when demand for their products was depressed. A lack of capex investment can result in plant and equipment which is out of date. Consequently this equipment is not as efficient, resulting in slower and more expensive processes.  As a consequence there may not be sufficient profit margin available to sell at a competitive price.

According to EY, a variety of industry sectors have been affected including Consumer Goods Manufacturers, Support Services, Software & Computer Services, Household goods and Electronic & Electrical Equipment.

If you manage a business and are struggling with cash flow, don’t ignore it. There are a variety of options in addition to conventional borrowing, including specialist lenders and investors. However, it is essential you take action and do not allow your business to deteriorate beyond help.

Sources:

EY – Profit warnings reach highest first half total since 2011

BBC – Business News

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