Corporate insolvency has been on a steady rise since the government’s COVID-19 support measures ended, and forecasts indicate that this trend will persist amid ongoing economic challenges.
Business failures have hit the construction, accommodation and food service sectors the hardest.
From July 2023 to June 2024, ASIC reported a significant increase in company insolvencies, jumping by 35.5% compared to the same period a year earlier, and totalling 10,769 cases. As insolvencies are projected to increase further, it’s crucial to understand the signs and take proactive steps to prevent failures.
Why are insolvencies on the rise?
According to the ASIC FY2024 annual statistics, inadequate cash flow or excessive cash utilisation was the primary cause of business failures, cited in 52% of insolvency practitioner reports.
Mounting inflation, elevated costs and rising interest rates have strained business and consumer finances. This economic pressure has particularly burdened heavily indebted businesses, constraining available credit and impeding their ability to navigate these challenging conditions.
Rising costs of living have caused individuals to reduce non-essential spending, which has, in turn, exacerbated business failures due to reduced consumer spending.
To add insult to injury, many businesses have also experienced supply chain issues and difficulties recruiting and retaining staff. This has led to increased staff and supply costs, squeezing business margins. Consequently, there has also been an increase in business-to-business payment defaults.
Adding to these challenges, the Australian Taxation Office (ATO) has intensified efforts to recover outstanding corporate taxes, spurred partly by legacy issues stemming from the COVID-19 pandemic. The ATO’s penalty amnesty for SMEs, which expired in December 2023, has also contributed to those businesses’ financial pressures.
How to prevent going bust once you’ve identified business distress
Early detection and intervention are critical for business survival in this volatile environment. Maintaining accurate financial records and regularly reviewing them are essential practices. Businesses should develop and monitor a 13-week rolling cash flow forecast to manage liquidity effectively. Early engagement with financiers can also prevent unforeseen issues from escalating.
Before resorting to formal insolvency proceedings, businesses can look at various pre-emptive measures. Negotiating payment plans with suppliers, banks or the ATO can buy time to implement strategies that enhance cash flow. Seeking short-term capital or financing alternatives may also provide relief. Implementing turnaround strategies focused on boosting revenue, reducing costs, or both, can help businesses improve profitability.
Business owners should explore possibilities such as business restructuring or whether a sale is advisable to ensure continuity and maximise stakeholder outcomes. Options include engaging a Small Business Restructuring practitioner or Safe Harbour advisor. Experienced insolvency practitioners can also guide businesses through alternative approaches such as Voluntary Administration, Deeds of Company Arrangement or orderly liquidation, emphasising avoidance of formal insolvency as a last resort.
Proactive management and strategic foresight are crucial for businesses aiming to weather the economic storm and emerge resilient. If you would like to have a confidential discussion on what options might be suitable for your business, please contact your local William Buck Insolvency expert.
