Monitoring the media for early warning signs of a company’s impending financial collapse

February 27, 2015 by Leela Bozonelis

Early warning signs

The UK is now moving out of recession, however, the economic crisis that swept through the county caused thousands of businesses to go into administration. Although the majority of businesses affected were small and medium sized, many large, even multinational brand names such as Woolworths and Kodak, felt a fatal blow from the financial pressure.

The economic impact of one high profile business failure can be far reaching for its suppliers and investors. One of the greatest challenges faced by businesses today is minimising risk in the supply chain.  By making sense of information in the media, businesses can stay one step ahead.

The key questions are what to monitor and how to use the information to anticipate impending financial collapse and manage the associated risk?  Some of the most illuminating early warning signs businesses can monitor for are the following:

Profit warnings

Profit warnings, issued when a company's profits are due to be lower than expected, are one of the most clearly identifiable warning signs.

There is a rule of thumb that says "profit warnings come in threes."  Although profit warnings can be used as a legitimate way of managing market expectations, for example if the weather or a stock or trend misjudgment has caused lower than expected profits in an isolated quarter, whereas consistent warnings tend to indicate a deeper economic struggle.

If an organization is issuing profit warnings on a regular basis it is likely to have deep seated structural issues and needs to be taken very seriously.  Examining the reason given for a profit warning is a good place to start when assessing the risk.  For example, a company that has four main customers issues a profit warning after losing one, this indicates a serious structural issue and investors or potential business partners should take a cautionary approach.

Another factor to be considered is whether the excuse is plausible.  For example if one retailer blames poor Christmas sales on bad weather, while a competitor reports sky-high Christmas profits, it probably reflects something more serious than a white Christmas.

An example of profit warnings signaling a deep irregularity can be seen in the lead up to the recent Tesco accounting scandal.  The chairman of Tesco stood down after reporting a 92% fall in pre-tax profits, revealing that the accounting black hole in its profits was far larger than previously expected.

Companies monitoring the media for signs of risk with the retailer will have noted that this announcement was the culmination of several economic warnings in the media.  Profit warnings and negative broker comments in April and the Chief Executive's resignation and more profit warnings in June and July were all signs of increased risk with doing business with the retailer.

Redundancies and dismissals

Involuntary loss of employment, particularly when it involves large groups of employees, is widely reported in the media.  A headcount reduction can be an immediately effective method of cutting bottom line costs in times of financial hardship.  If the company is in serious financial trouble, however, redundancies are a temporary fix and may consequently indicate an eventual demise.

Dismissals at senior executive, board and management level are widely reported and can indicate a number of internal problems such as unrest, misconduct, restructuring and cost cutting.  Following the widely reported accounting scandal, this move can now be seen with Tesco who's new CEO is now in the process of slashing a potential of 10,000 jobs.

A final note

There are many more signs of supplier risk reported in the media on a daily basis that when monitored, tracked and analysed, can uncover important internal issues and in turn predict the future, if not demise, of even the largest and most established companies.  Keeping a keen eye out for news about legal proceedings, corporate restructuring, divestitures and subsidiary insolvency or bankruptcy are essential next steps in a comprehensive media monitoring practice.

LexisNexis and State of Flux conducted a case study-based research project looking at 23 failed companies since 2008.  The research analyses more than 90,000 news articles written about the companies in the run up to bankruptcy and uses specific Nexis Smartindexing terms to identify trends in companies that are at risk of failure.  Click here to read the full report and find out how your company can apply media monitoring insight to minimise supply chain risk.

Would you like to monitor and analyse topics and themes in the media like this? Contact us to find out more.  

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