SMEs should heed the warnings of rising insolvencies

The Australian economy is facing headwinds for the remainder of 2016 and into 2017 following the decline in commodity prices. Local bankruptcies are expected to rise by 8%, according to Atradius forecasting, so it makes good business sense to look for ways to reduce risk exposure to let the company trade confidently. Australian businesses must start implementing strategies to avoid being another bankruptcy statistic.

It’s no secret that business risks have significantly increased this year. We have seen low commodity prices continue, which is affecting the economic outlook of Australia’s commodity-dependent environment, where commodity-related exports account for more than 60% of the total export volume.

Coupled with the commodity prices slump, Australia is still being affected by fluctuations in emerging markets. Many of these have been driven by the economic slowdown in China. This is becoming challenging for businesses in a variety of industry sectors.

The global uncertainty following the United Kingdom’s decision to withdraw from the European Union hasn’t helped Australian businesses either. The UK is one of Australia’s most important and significant trade partners, ranking sixth in two-way trade. Exports are also a significant driver of Gross Domestic Product, with Australia trading $8,585 million in exports to UK, according to Austrade.

With all of this happening, it’s important to note that the Australian economy is generally stable compared to many other countries in the region and around the world. Australian businesses need to be aware however of the deteriorating insolvency landscape.

Insolvencies on the rise

After a sharp increase in Australian business insolvencies between 2008 and 2009, and a steady, historically-high level between 2010 and 2013, insolvencies decreased by almost 20% in 2014, according to Atradius data. Business insolvencies are estimated to have increased again during 2015 by up to 10%, according Atradius research from last year.

This rising insolvency trend appears to be continuing. Australian Securities and Investments Commission statistics show there was 3,634 insolvencies from January to May this year. It’s no surprise that the mining, oil and gas, and construction industries make up the majority of businesses facing increasing insolvency rates. The mining sector has been experiencing difficulty for some time thanks to the slowdown in China putting pressure on the insolvency landscape, alongside the continuing slump in the commodities market.

Between January and May this year, the metals, mining and steel industry saw 167 insolvencies, while the construction industry was the hardest hit by insolvencies during the same time period, with 625 insolvencies recorded in Australia. Startups and small businesses are also feeling the pinch, with SMEs with assets under $100,000 making up 85% of collapses in this category.

The printing sector is another highly competitive market. It is in a period of adjustment as the demand for traditional printed products, such as books, drops and is gradually replaced by demand in other areas of print, such as wide-format signage and other advertising material. This has also contributed to the pressure on many companies in the paper and pulp industry. Industries such as construction, printing, and paper have been driven primarily by domestic pressures.

On the retail front, recent retail collapses such as Dick Smith and Laura Ashley have highlighted the need for retailers to consider protective measures. Experts have already warned that these recent high-profile collapses may be just the start of a broader retail industry slowdown. The end of the resources boom and increased competition from overseas, as well as the rise of online competitors, have made it harder for local retailers to compete effectively. When consumers stop spending money, it’s a sign the economy is uncertain. Retailers are vulnerable because they’re involved in a cost-intensive business. They must carry stock, maintain premises, and pay labour costs, among other overheads, so protecting cashflow is essential.

Insolvencies are being felt right across Australia. In the third quarter of the 2015-16 financial year, a total of 658 businesses in New South Wales entered into external administration. This was followed by 594 Victorian businesses, 444 Queensland businesses, 102 in South Australia, and 241 in Western Australia. These statistics highlight the need for businesses to actively implement a risk-management plan. This includes thoroughly researching the potential customer and supplier, and the market it operates in, before signing a deal.

Speaking to an expert is a great way to further understand business risks, and how to protect your products and profit. For example, not fully understanding the impact of import duties on the market value of your product in various countries before you invest in exporting can create huge problems.

Businesses need to recognise that, with the increase in insolvencies putting pressure on the entire market, they need to protect themselves. With a clear idea of the potential risks, businesses can begin to plan to minimise their exposure.

Mark Hoppe is the managing director of Atradius in Australia and New Zealand.