SME insolvency figures reveal areas for concern


A report released by the Australian Securities and Investments Commission (ASIC) has been analysed by commercial credit reporting bureau CreditorWatch, and the findings have identified key learnings that may benefit SMEs and business owners.

The ASIC report presents an overview of 10,073 external administrators’ reports lodged in the financial year from 1 July 2013 to 30 June 2014. The amount of reports lodged has increased by almost 3 per cent from last year’s statistics, culminating in the second highest number of reports lodged in the last 10 years.

80.6 per cent of reports lodged related to companies with less than 20 full time employees, while 61.8 per cent of reports indicated companies had assets of $10,000 or less.

A grim picture was painted for SMEs, where insolvency numbers are at their highest.

Inadequate cash flow or high cash use was highlighted as the number one cause of failure (41 per cent), followed by poor strategic management of business (37 per cent) and trading losses (33 per cent).

The ASIC report revealed the 3 industries with the highest rates of failure. Miscellaneous business and personal services come in at number one with 2,482 reports (26 per cent). Construction came next with 2,153 reports (23 per cent), followed by the accommodation and food services with 916 reports (10 per cent).

Colin Porter, Managing Director of CreditorWatch, says he is not surprised by the findings, pointing out the pressure that customers can place on SMEs.

“It is no surprise that SMEs are being hit the hardest,” Porter says. “They are the first to be defaulted on by their customers as debtors will always pay their big, critical suppliers first. This puts a significant strain on cash flow and can have a serious domino effect.”

Porter adds, “Don’t expect to receive anything from the administration either, in 97% of cases, the dividend estimate was less than 11 cents in the dollar.”

CreditorWatch, a commercial credit reporting bureau that enables businesses to identify a new or existing customer’s creditworthiness, has released similar figures. The company identified accommodation and food services as the industry with the highest number of defaults registered on their bureau from 1 July 2013 to 30 June 2014, with the average amount being $35,123 and $9,998 respectively.

Colin Porter says it is imperative that business owners and SMEs “get the basics right”, and gives 5 tips to help them do so:

1.     “Invest in a credit report on new customers. This will give you a good indication of their creditworthiness.”

2.     “Start off with a manageable credit limit for new customers in the beginning and increase it overtime as necessary.”

3.    “Monitor your existing customers for important changes with a credit reporting bureau. That way you’ll receive email alerts when a customer gets into financial trouble or defaults with a competitor.”

4.     “The squeaky wheel gets the grease. It might sound like a cliché but it works! You should actively chase overdue invoices.”

5.     “Have a written and formal strategy for collecting payments and stick to it. Diarise invoices, statements and follow up calls. This will ensure you don’t miss chasing a payment and it will also train your customers to pay on time.”