Thursday, April 02, 2009

Solving the biggest problem

Talking to people over the past few weeks it's obvious that the biggest problem companies are facing is the non payment of invoices by their clients, especially our largest organisations.

When the largest companies don't pay their suppliers there's a huge ripple effect through the whole economy, which is exactly what we're seeing.

Examples from people I know well - a small architectural firm owed more than Dh2 million by one of the majors. The entire staff has had to be laid off and the owner has to decide whether to stay to try to collect the outstanding amount, which means running up even more bills on rent and living expenses, or to move back home to try to find work.

A friend who hasn't been paid for three months because the employer hasn't been paid for more than six months - again by major players.

Companies cancelling training courses for their employees because they have to cut expenses - because they haven't been paid for many months by the majors.

One of the most important measures the government can take to get on top of the current problems is to put money into the major organisations so that they can pay their suppliers.

In today's Financial Times there's a sentence in an article headed 'Overhaul for crisis-hit Dubai' which suggests that may be on the cards.

The article is about the restructuring of government affiliated companies which is under way. That's long overdue in my opinion; competition is one thing but overlap, duplication and therefore waste is something else and has needed addressing for a long time.

In the middle of the article is the sentence: "Over the next two weeks, the emirate will start disbursing emergency loans to distressed government-linked companies, encouraging them to use the funds to pay local invoices and give the economy a significant fillip.

'A significant fillip' is putting it mildly, it's absolutely critical to keeping smaller companies in business and preserving jobs.

This measure has taken far too long but if 'the next two weeks' is an accurate timeline we'll soon see a reversal of job losses, unpaid salaries and company closures.


The FT article is here.

9 comments:

S said...

People who don't pay invoices are thieves, pure and simple. There are so many companies who do it routinely - not just here in Dubai - and they get away with it again and again because no one ever makes it too painful for them not to!

I once thought of starting a company called Rent-a-Tramp where you paid the nastiest smelliest down-and-outs to sit in a debtor's reception until they handed over their cheques!

The Spear said...

People mdon't pay because they can't. They livged of credit, now the credit is gone. In fact the banks want you to pay back...

I hope we all learn something from this.

The Spear said...

Sorry for the horrible spelling. :)

The Wizard of D said...

Exactly what we have been saying all this time. But move up one level.... the major companies (read real estate majors) don't have the money because their credit or cash flow has been significantly impacted by the banks and sudden drop in transaction value.

So unless the banks are re-capitalised, we will still not recover in time. The restructing and financing of these cos may give temporary relief only.

the real nick said...

You keyword seems to be 'by majors'. But it is a problem for everyone - we for example are owed millions by the...government! Suppliers often forget that everything comes from 'the majors', don't they? When times are good subbies will take you for a ride. Why do people think construction costs skyrocketed the last two years? Mostly because of increases in commodity prices.
Please note that most 'majors' have clauses such as "paid as (if)/ when paid" in contracts with their subcontractors. Tough; share the pain. It's a cycle of life.

Anonymous said...

I am always amazed at how individuals expect governments to bail companies out that are now feeling the crunch, especially financial institutions or banks.

Goverments earn their money from taxes etc so now that the companies are hurting, so too will the goverments.

During the last 5 - 8 years all of these large companies that did well had high paid exexcutives and owners who lived in the lap of luxury.

Giving them 'hand-outs' or paying their debts without strict control is not going to get them to pay their contractors/subbies.

A lot of this boils down to greed and corruption on individuals parts and I am afraid to say that without this being curtailed, the financial situation is not going to improve soon and definitely not within 2 weeks.

Seabee said...

I'm not talking about banks or financial institutions. The point is that, as the FT article points out, the majors are government linked companies, or government owned. They're the companies which have given out the big contracts.

If their lack of cash is causing the blockage, as anecdotally it is, then surely putting more working capital into them (called 'loans' in the FT article) makes more sense than putting bail-out money into privately owned companies and banks.

If these organisations paid their invoices their suppliers & sub-contractors wouldn't need to apply to banks for overdrafts.

Anonymous said...

It's sad that even in the good times, the government were one of the worst payers. Do this for free, we'll give you that contract. We'll pay for the last job if you do this one for free, etc, etc.

A colleague constantly chasing procurement got the impression that the people thought it was all part of a fun game to play - squeezing out every dirham, reneging on contracts, making threats, etc.

The government really should set an example and pay up on time, as per contracts signed.

Redstar

dubai property said...

Properties are bought in bank loans. Banks survived by lending.Now this cycle is affected.I don't know how this problem is going to be sloved ?