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AIM companies’ profits suffer from rising overheads

Written by Dara Jegede on Monday, 03 February 2014. Posted in Financial management, Finance

Surprising increase in spend on non-core operations has taken its toll on growing companies

AIM companies’ profits suffer from rising overheads

There can be little doubt that inflation and regulatory matters have contributed to companies on the alternative investment market (AIM) slipping from profit to loss in recent years. However, new figures released by SKS Business Services, an accountancy firm, show that rising overheads are having just as damning an effect on AIM companies’ coffers.

The evidence of this so-called ‘endemic over-spending on non-core operations’ comes from a study of the financial reports 670 small-cap businesses (companies with an overall market valuation of less than £1.2 billion), which found that costs such as rents, legal and other professional services have soared 21% in the last five years from £4.53m in 2008 to £5.47m in 2012.  The consequences of this have been predictably dire, especially where profitability is concerned. For, in the same period, profits have fallen from an average of £9.6m to an astounding average loss of £1.52m. That’s equates to a fall of almost £10m, with companies’ profits having been more than wiped out in some cases.

Where, then, are these cost increases being felt most? Well, firms operating in alternative energy and chemicals have been spending the greatest portion of their revenue on general and administrative (G&A) expenses as they require support infrastructure to develop their products. Meanwhile, companies in traditional sectors such as food production and construction were found to have kept their non-core operational costs under control.

More worrying, however, is that only three of the 134 AIM companies surveyed have management discussion and analysis (MD&A) reports, or provide any form of explanation to investors on why G&A expenses are rising and profits are falling, and what they are doing about it.

"Although AIM-listed companies are not required to produce MD&A reports, their absence and the increases in costs in this area suggests that overhead and administration costs are not being properly managed at many,” commented Sanjay Swarup, director of SKS.

SKS Business Services estimates that these companies could reduce their G&A costs by up to 20% by restructuring their finance function and through a smarter use of outsourcing. Other suggested solutions to reducing spend on non-core operations include cutting unnecessary costs and negotiating better terms with suppliers.

Swarup added: “Investors like to hear about profits new sources of revenue and also what management is doing to control costs to ensure increased revenue actually boosts profits.” 

 

About the Author

Dara Jegede

Dara Jegede

Jegede recently left the London School of Journalism having previously embarked on a soul-searching stint in the city of love. That's Paris, by the way.

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