ASIC’s annual insolvency data shows corporate business failure (those companies entering external administration) is up 39% in 2023-2024, compared to the previous financial year. The industries with the highest representation were construction (27% of all business failures), accommodation (15%) and food services (9%) at the top of the list.

Restructuring appointments grew by over 200% in 2023-24. Small business restructuring allows eligible companies – those whose liabilities do not exceed $1 million plus other criteria – to retain control of its business while it develops a plan to restructure its affairs. This is done with the assistance of a restructuring practitioner with a view to entering into a restructuring plan with creditors.

Of the 573 companies that entered restructuring after 01 January 2021 and had completed their restructuring plan by 30 June 2024, 89.4% remain registered, 5.4% have gone into liquidation, and 5.2% were deregistered as at 30 June 2024*.

*https://asic.gov.au/about-asic/news-centre/news-items/annual-asic-insolvency-data-reveals-increase-in-companies-failing/

Annual insolvency statistics: 2023-2024

In the latest statement from the Reserve Bank of Australia, Governor Michelle Bullock stated that,

...there’s also some signs that the business sector is under a bit of pressure, that the business outlook isn’t as rosy as it was.

Strategically, business managers need to be on top of their numbers to identify and manage problems before they get out of hand. If you don't know what the key drivers of your business are – the things that make the difference between doing well and going under – then it’s time to find out.

A business becomes insolvent when it can’t pay its debts when they fall due.

The top three reasons companies fail are:

1. poor strategic management;
2. inadequate cashflow or high cash use; and
3. trading losses.

It’s easy to miss the warning signs and rely on optimism that things will get better if you can just get past a slump. The common problem areas are:

1. significant below budget performance.
2. substantial increases in fixed costs without an increase in revenues – fixed costs are costs that you incur irrespective of your business activity level. When fixed costs go up, they have a direct impact on your profitability. If your fixed costs are increasing, such as leasing more space, hiring more people, buying more plant and equipment, but there is no measurable increase in your turnover and gross profit, it might tip you over.
3. falling gross profit margins – your gross profit margin is the margin between your sales, minus cost of goods sold. Every dollar you lose in gross profit is a dollar off your bottom line.
4. funding your business primarily from debt rather than equity finance.
5. falling sales – if sales are falling, it is going to have a ripple through effect on your business, reducing profit contribution and inhibiting growth.
6. delaying payment to creditors – your sales are good but you don’t seem to have enough cash in the business to pay your creditors on time.
7. spending in excess of cash flow – trying to pay today’s expenses with tomorrow’s income.
8. poor financial reporting systems – driving your business with a blindfold over your eyes!
9. growing too quickly –you’re making more sales than your business can sustain.
10. substantial bad debts or ‘dead’ stock – customers who won’t pay their accounts and stock that you can’t sell.

Our Accounting Directors – Robyn Henshaw, Brad Roberts and myself – each have in-depth knowledge and experience in working with small and medium size businesses to navigate the inevitable cash flow concerns many companies face.

Like most things in life, the first step is to acknowledge when there is a financial issue in your business and then taking remedial action sooner rather than later. If you don't feel like you have the time, resources or financial expertise to work through your business's issues and understand the possible solutions, reaching out to an experienced business adviser is the best second step.

We're here when you need us to support your business, so fee free to contact us.