Small business feels the squeeze as accountants feel the pressure

This article was current at the time of publication.

With high inflation, 12 consecutive interest rate rises and ongoing economic uncertainty, it’s little wonder Australia’s smaller businesses are under the pump.

The latest data from Australian credit reporting agency CreditorWatch shows that the number of companies placed into external administration for insolvency increased by 10 per cent in July 2023 compared to the same time last year.

CPA Australia members involved in insolvency are also seeing an increase in enquiries, particularly from trade creditors. Add the rise in debt collection activity from the Australian Taxation Office (ATO) and some increase in referrals from banks, and it’s clear that insolvency numbers will continue to rise. 

Tighter credit policies 

Data from the June 2023 CreditorWatch Business Risk Index reveals a high correlation between non-payment of tax debt and a business being placed into external administration. 

As economic uncertainty continues, it also indicates a tightening of business credit policies, with credit enquiries for new and existing clients increasing 66 per cent compared to July 2022. 

Business-to-business payment defaults reported to CreditorWatch were also up by 86 per cent year-on-year in July 2023. However, it predicts this will plateau in the next few months before gradually declining towards the end of this financial year.

The food and beverage sector shows the highest risk of default, largely due to its reliance on discretionary spending and the ongoing challenge of labour shortages. 

CreditorWatch reports a growing trend of defaults among suburban food and beverage businesses as more people return to their place of work, but the sector’s businesses in CBDs continue to have a high default rate.

Along with businesses in the food and beverage sector, mining and construction businesses are currently the most likely to be placed into insolvency, according to CreditorWatch. 

The construction industry continues to experience an increase in external administrations, however, the percentage of businesses in that sector being placed into external administration is back to pre-Covid levels. 

For the food and beverage industry, the percentage of businesses being placed into external administration has plateaued below pre-Covid levels. 

Back to normal for external administrations?

While CreditorWatch data reveals a year-on-year increase in external administrations, it also shows that they have returned to pre-Covid norms. 

Shabnam Amirbeaggi FCPA, Managing Partner of insolvency practice Crouch Amirbeaggi, describes Australia’s insolvency statistics as historically “fairly inelastic”. Indeed, CreditWatch data shows that the percentage of businesses entering external administration in any one month (as a percentage of total businesses) is extremely low – at 0.005 per cent.

“As a proportion of total GDP, insolvency activity is only ever a very small percentage,” Amirbeaggi says. 

“I think insolvency statistics should always be read in the context of Australia having about 2.5 million businesses. Each year, about 300,000 new businesses start up, and an approximately similar number shut down in the ordinary course of business, and without the need of formal liquidation.”

Amirbeaggi points to the latest insolvency figures from ASIC, which also indicate insolvency rates returning to pre-Covid levels.

“I think it’s important to reflect that the new cumulative total of insolvency appointments – 7942 formal appointments for the 12 months to August 2023 – is a return to what would be considered the pre-Covid annual average of corporate failures,” she says. 

“So, the numbers suggest we are back to normal, and not in a deep recession or a new wave of insolvency appointments.”

Pressure builds from banks

CPA Australia members in public practice are reporting more contact with banks this year, with insolvency practitioners experiencing an increase in referrals and non-insolvency practitioners seeing growth in reviews of financing arrangements by banks. 

This is leading to some clients demanding that practitioners prepare their financials much earlier than usual.

Businesses seeking to refinance are being asked for more financial information and if successful, refinancing at a higher rate. 

Public practitioners also note that many lenders, including the Big 4 banks, are demanding that business clients provide a letter from their accountant confirming their ability to repay the loan. 

CPA Australia advises members not to provide these letters. Templates and guidance are available to help you respond to requests.  

Surviving insolvency

Amirbeaggi says insolvency practitioners are also focused on findings of the recent federal parliament inquiry into the effectiveness of Australia’s corporate insolvency laws in protecting and maximising value for the benefit of interested parties and the economy. 

Its final report, released in July this year, included key recommendations for an independent review of the country’s corporate and personal insolvency laws to address complexity and to ensure it reflects modern business practices, especially for small-to-medium businesses.

“There's no doubt that Australia needs a better statutory framework that assists smaller businesses to survive insolvency,” Amirbeaggi maintains. 

“Australia is well behind most of our trading partners who have frameworks that help save jobs and businesses.

“It is always very sad to see a business fail,” she adds. “Almost every liquidation is traumatic for the operator and the stakeholders involved.”