SMEs continue to dominate corporate insolvencies

Almost 80% of corporate insolvencies in Australia during the 2014-15 financial year were for small businesses, according to the corporate regulator’s annual report into company collapses.

Read more: The consequences of liquidation for a director: not as bad as you might think

The report from the Australian Securities and Investments Commission, which was published on Tuesday, analysed 8354 reports from external administrators and found 79% of the insolvencies were for incorporated businesses with less than 20 employees.

The vast majority of these insolvencies (85%) had assets of $100,000 or less, while 41% had liabilities of $250,000 or less.

The figures are almost identical to the results from ASIC’s insolvency reports for the 2013-14 and 2012-13 financial years as small businesses continue to dominate official insolvency statistics.

In the latest report, ASIC found inadequate cash flow or high cash use was the top cause of company failure in 2014-15, having been nominated in 3647 or 44% of reports from external administrators.

The second most common cause for insolvency was poor strategic management of a business, which was nominated as the cause of failure in 3518 or 42% of reports.

Trading losses were nominated as the cause of company failure in 2836 or 34% of reports.

Unsecured creditors of these companies were largely unable to recover all of the debts owed to them, with ASIC reporting in 97% of cases the dividend to unsecured creditors was less than 11 cents in the dollar.

The industries with the highest incidence of external administrations were business and personal services (28%), construction (21%) and accommodation and food services (10%).

When it comes to allegations of possible misconduct, trading while insolvent was the most common claim, occurring in 58% of reports, followed by companies failing to meet obligations for financial records (38%) and concerns about directors and officers not showing due care and diligence (33%).

ASIC referred 14% of insolvencies for compliance surveillance or enforcement during 2014-15, which compares to 15% in the year before.

What to do if you fear your business is on the verge of collapse

Colin Porter, managing director of CreditorWatch told SmartCompany this morning there are several things business owners should do if they believe their business is on verge of collapsing.

“For an SME, the first point of call is your accountant,” Porter says.

“As a small business, you should have a relationship with your accountant and not just see them when its time to do your annual tax return.”

Porter says SMEs should be proactive about building this relationship, with scheduling a meeting at least on a quarterly basis good practice – even when business is going well.

“It’s their area of expertise, not just in terms of helping in difficult situations or reducing your tax or doing the financials,” he says.

“They are mixing with hundreds of businesses and have a wealth of knowledge and expertise. They can potentially predict when you will face a few challenges.”

Porter says a close working relationship with an accountant is essential for growing businesses that may be winning new clients but need assistance in managing that cash flow to fund future growth.

A trusted accountant can also help a business secure new sources of funding, Porter says.

“It should be a resource you use more and more of,” he says.

“You should be on a first name basis with your accountant so that you are always in a position when you call them and say your name, they know who you are and what you business is.”

Porter also reminds business owners that if they are concerned about the financial viability of their company, to take action as soon as possible.

“You have obligations as a director of a company and if you don’t act appropriately and trade while insolvent, you can lose everything and your personal assets may be targeted,” he says.