More small businesses insolvent as poor trading conditions lead to cashflow crises

The percentage of small businesses collapsing is on the rise, as Australian Securities and Investments Commission figures reveal businesses are under pressure from inadequate cash flow.

Figures released yesterday from ASIC reveal 81% of businesses which became insolvent in 2012/2013 were small businesses with less than 20 employees.

The construction sector was the worst affected, with 24% of the insolvent companies in that sector, matched by the “other” category which is mainly composed of business and personal services firms.

The next highest sector for collapses was retail, making up 10% of all collapses.

Rodgers Reidy director Brent Morgan told SmartCompany when larger firms collapse, many small businesses end up being impacted.

“We’re finding firms which deal with SMEs are getting busier, while the big insolvency businesses have quietened down,” he says.

“There have been a number of large corporate insolvencies over the past few years and now it’s filtering down to the SMEs. It happened to the multi-chain retailers and now it’s happening to the smaller businesses.”

Morgan says it’s not a surprise many businesses in the construction sector are feeling the pressure.

“In construction we’re seeing that trend and those statistics are no surprise. Anything relating to the sector is struggling. Building, excavation and even transport businesses,” he says.

“They’re toppling over and there are tighter margins in all industries involved in the sector.”

In January SmartCompany reported a major Victorian trucking business, Wettenhalls, collapsed putting 500 jobs at risk.

In June, the fallout from the Reed Construction collapse in mid-2012 became evident as Advance AirCon, a Sydney-based air conditioning installation and servicing company went under.

The business had encountered cash flow problems when Reed Construction collapsed. Another 500 small businesses were estimated at the time to have been impacted.

According to ASIC the primary cause for company failure was poor strategic management of the business, as 42% of businesses reported this as a cause.

Forty-one per cent also said inadequate cash flow or high cash use was a driving factor and 32% were trading at a loss.

Morgan says the Australian Taxation Office has also been more vigilant in chasing debts recently.

“We’re seeing more ATO involvements. It’s cranked up its pressure giving rise to more insolvencies. There has been a firmer approach on unpaid superannuation and there are a number of director penalty notices coming through which is giving rise to a lot of formal appointments of liquidators,” he says.

ASIC’s top three concerns for possible misconduct in the collapsed businesses were trading while insolvent, obligation to keep financial records and care and diligence of the directors and officers.

Morgan predicts the situation will get worse as the year goes on.

“With the change of government confidence has increased, but I think there will be a bit more of a dip before it gets better, hopefully there will be some improvement in the New Year,” he says.