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Radiography of microenterprises under Coface radar

When the public sector’s capacity to create new jobs is limited, the attention is shifted to the private sector, which may represent the foundations for economic re-launch only through investment and occupancy rate growth on the job market.

 

Generating over two thirds of the number of jobs and over half of the added value in our national economy, the sector of small and medium-sized enterprises is an important engine of the economic development.  
 
 
 
The payment discipline of SME has an important impact over the stability of the financial system, amid that approximately 70% of the balance of credits given to companies by the banking system, is directed towards the sector of SME.  
 
 
  •  the improvement of the competitive environment – due to their reduced dimensions and high number, the SME have the capacity to stimulate the competition and to weaken the monopoly positions of big enterprises in general;
  •  the strong individualization of products and services offered by SMEs and of the efficiency of their activity, which contributes to the enhancement of the competitive vibe of the market;  
  •  generating the highest number of new jobs – the SMEs create a  significantly higher number of new jobs than the number of new jobs created by the large companies already present on the market, with a lower capital cost, acting as a buffer for the fluctuations on the labour market and representing the most important alternative in fighting unemployment;
  •  high perception of the needs of the market due to unmediated contact with the market, thus resulting in a better adaptation of their offer to the clients’ needs. Through their specific flexibility, their innovative ability, fast response time, the SMEs are becoming the only enterprises compatible with the forever more complex and dynamic environment.  
 
 
Microenterprises – the most affected segment within SME. Their liquidity, profitability and solvency is deteriorating
 
 
 
Coface Romania has calculated the main financial indexes for the Romanian companies on different size categories, based on the financial statements submitted to the Ministry of Public Finances for the activity in the year 2011. Based on this analysis, it was noticed that microenterprises: 
• register the highest level of debt, respectively 99% (as weight of total debt in assets); 
• represent the only sector that registers a negative capitalization;
• have the highest loss rate, namely -4.5%; 
• register the longest days sales outstanding (DSO), namely 172 days, two months longer than the one registered before the financial crisis;  
• registers the lowest total debt coverage ratio through turnover, namely 37%.
 

 
From the point of view of the situation of microenterprises at business segment level, we notice:
 
 
• high risk sectors which register a number of insolvencies per 1,000 active enterprises above the national average (metallurgical industry, extractive industry, food and beverage industry);
• low risk ratio sectors which register a number of insolvencies per 1,000 active enterprises below the national average (IT, Health, Other services provided mainly for microenterprises).
 
 
 
Analyzing the dynamics of financial indexes for the microenterprises that have submitted the financial statements regarding their activity in the years 2010 and 2011, a growth of the liquidity and solvency problems these companies are facing is noticed due to increasing net losses, to the increase of indebtness, of the negative capitalization ratio and days sales outstanding getting longer. 
 
 
 
The deterioration of profitability indexes for microenterprises for the period 2010-2011 is noticed in the context of a more rapid increase of losses compared to the profit advance, the number of enterprises registering profit being one third lower than the number registering loss. Thus, out of the total number of enterprises registering loss, half have had an increase of loss between 0-25% and a third have registered increasing loss of over 50%. In comparison to these, out of the total number of enterprises registering profit, 73% have registered an increase in profit between 0-25% and only 12% have registered an increase in profit of over 50%.
 
 
 
Microenterprises – faulty commercial credit risk management
 
 
 
In order to appreciate the extent to which microenterprises have appropriately managed the commercial credit risk during the post-crisis period, Coface analyzed the debt variation as a result of the modification of turnover, considering at the same time both the evolution of the average days sales outstanding for microenterprises and all the enterprises active at national level1. The analyzed companies have been included in four risk categories (low, average, average to high, high), the detailed financial results being presented in section 6. Hence, considering the numerical weights of the enterprises present in the four frames, we can conclude that only 2 out of 10 microenterprises present a low insolvency risk, 3.5 presenting an average risk and the remaining 4.5 register a high to very high risk. 
 
 
 
Microenterprises under Coface magnifying glass – conclusions of the individual analysis of over 20,000 microenterprises 
 
 
 
Coface Romania CMS analyzed during 2012 a number of 23,292 microenterprises, with a total turnover of EUR 12.3 billion, representing 50% of the turnover of all active microenterprises at a national scale.   
 
 
 
Analyzing the distribution of these enterprises on risk classes, it can be noticed that only 25% of enterprises present a low insolvency risk, a similar result to the one obtained at the end of section 6 regarding the credit risk management in the case of microenterprises (according to that analysis, 21% of all microenterprises at national level present a low insolvency risk
 
 

 
The consequences of the financial problems microenterprises are facing 
 
 
 
In the context of financial problems which the microenterprises are facing being on the increase, Coface draws a warning signal from the perspective of the most important three consequences noticed in the economy:  
 
 
 
1. The increase of insolvencies – the advancement of insolvencies among microenterprises was more rapid than the one registered for the entire economy. Thus, the number of microenterprises which have entered insolvency in the past two years has registered an annual average increase of 14.5%, while the increase registered for the entire economy, for the same analyzed period has not surpassed 10%. In the context of this dynamic, the numerical weight of the insolvent microenterprises has grown from 78%, level registered in 2010, to 85%, level registered in 2012.
 
 
 
2. The slowdown of the rhythm of economic regeneration – to be noticed the fact that the year 2012 was the first year after 2008 that registered, during the entire year, a more rapid annual increase of insolvencies than the number of new registered enterprises. Thus, according to the numbers published by the National Trade Register Office during 2012, 66,611 new companies were registered (Registered Sole Traders and Individual Enterprises excluded), representing a growth of 2.70% in comparison with the previous year, when the number of newly registered enterprises was of 64,860. By contrast, according to the preliminary data published by the National Bankruptcy Register, the number of newly opened insolvencies during 2012 has increased by approximately 10% in comparison with the previous year.  
 
 
 
 
3. The increase of bad loans – during 2012, the small and medium-sized enterprises have registered a credit risk on the increase (the rate of bad loans for the SME was of 23.2% in July 2012, in comparison with 15.1% in December 2010, while in the case of corporations, the bad loan rate was of 4.3% in July 2012.  
 
 
 
 
The increase of the risk in the case of SMEs was produced in the context of:
 
• a subunit rate of coverage of expenses with the interest rate from the profits (0.8 in December 20112);
• cash flows generated from an activity diminished by 7.3% (December 2011 compared to December 2010);
• the decrease of margin of gross profit.
 
 
 
Thus, following the analysis presented in this section in particular, and in the other sections in general, the segment of microenterprises shows a growing insolvency risk. Thus, on the background of erosion of the companies’ sustainability because of the effects of the financial crisis in the last three years, of the high financing constraints and of the deterioration of the payment discipline at the level of the entire economy, the companies represent a higher vulnerability degree to the exposure to internal or external shocks, liquidity pressures increasing.
 
 
 
Read the full report in pdf document attached.
 

Authors

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COFACE ROMANIA CREDIT MANAGEMENT SERVICES S.R.L.