Of companies which fall behind with their social security contributions, one in seven fails (*)
The company reports overdue debts to the NSSO (National Social Security Office) at the end of the financial year in its recently filed annual accounts (item 9076). This may indicate serious financial difficulties, especially if the company in question also shows liquidity problems. This is often followed by a summons from the NSSO.
Please note that this information is based on recent annual accounts and thus reflects the state of overdue debts as of the closing date of the financial year.
(*) Source: Companyweb: results based on our own study into causes of bankruptcies.
A business is liquid if it can meet its short-term payment obligations; if not, it is illiquid.
A liquidity of > 1 is considered very good
(= in theory, this business can pay its short-term liabilities if it realises its current assets).
The way this ratio has changed in recent years is highly significant.
If liquidity falls steadily, this means things are getting increasingly worse, and will end up being unsustainable.
How liquid and profitable a business is gives a good idea of how well it is doing.
| Liquidity | Profitability |
|---|
| + | - |
| + | Healthy | Chronically sick |
| - | Temporarily sick | Dying |
(**)
(**) Source: Handbook "Financial analysis process" by Hubert Ooghe and Charles Van Wymeersch (Intersentia)
If a business's customer credit levels are falling, that could be a sign it is not selling so much (so has less receivables) or has tightened up its payment policy because it is short of liquidity.
Most businesses which fail have very low customer credit levels.
If a business's supplier credit levels are rising continuously, that may indicate it cannot pay its suppliers on time and hence is fighting liquidity problems.
NB: with a healthy business, this may be due to a conscious or new payment policy
Setting your customers shorter credit terms means they have to pay sooner.
The longer your payment terms, the more uncertain you are that you will be paid what you are owed.
(= more risk)
If a supplier allows a customer more time to pay, that may mean they have great confidence in them.
Customer credit = cost
Supplier credit = income
