Start-up numbers soar in 2010 – but so do business failures

More than 160,000 businesses started up last year, a 13% increase over 2009, but new research suggests the prospects for many appears bleak due to continued cashflow problems.

A Dun & Bradstreet report shows that strong growth in start-up numbers last year was in stark contrast to the 2% decline in new businesses in the GFC-affected days of 2009.

However the news for start-ups is decidedly mixed, with the D&B report revealing that business failures soared by 23% in 2010.

More than 10,000 firms ceased trading last year compared to just over 8000 in 2009.

Of particular concern is the vulnerability of small firms – businesses with between one and five employees experienced a 46% increase in failures in 2010 while those with between six and 19 members of staff suffered a 20% increase in closures.

Micro businesses accounted for the largest number of start-ups during past year.

D&B says the increase in failures was driven by increasing rates of late payment and points to its December quarter research which shows a 7% increase in businesses taking more than 90 days to make payment.

Christine Christian, CEO of D&B, says she expects a similar rate of business failures this year.

“There were a lot of redundancies in 2009 and people have used that to start-up businesses or buy franchises,” she says.

“They thought the worst was over and that confidence was largely unaffected in Australia in comparison to other countries following the GFC.

“The next couple of years will be shaky. Unless banks become more responsive for small businesses by loosening credit terms we’ll see similar rates of delinquency and decline this year.”

Christian says late payment was the “number one” driver of business failure in Australia. 

“Around 90 to 95% of businesses fail due to cashflow problems,” she says.

“If you have sufficient cashflow you don’t need to go to your bank to ask for further funding.

“You would be able to meet your commitments on time and not have creditors applying pressure on you.

“Business-to-business payments is the leading indicator of cashflow problems.

“The GFC was a big wake-up call and smart businesses made big changes to speed up debtors and slow down creditors. The ones that didn’t step up fell over last year.”

Christian advises start-ups to have “professional” terms of trade with suppliers and not make “new, profitable revenue take precedence over regular, sustained revenue”.

This article first appeared on StartupSmart, Australia’s top site for starting a business.