Tough Times Highlight Fundamental Failings
So, what’s to be learned from the fact that Australia’s record 10,757 business demises for 2011-12 (a third in the building and retail sectors) was 928 more than the previous financial year, and 752 more than the previous record established in the immediate aftermath of the global financial crisis?
The two-speed economy and problems stemming from the high dollar have of course also contributed to insolvencies, in manufacturing businesses.
Yet according to Australian Securities and Investment Commission (ASIC) poor strategic management, inadequate cash flows and trading losses - exacerbated by failure to maintain proper records – continue to be the most common causes of collapses of small to medium enterprises (SMEs). These factors led in 2011-12 to 98% of creditors receiving less than 11c in the dollar.
A very high price has therefore been paid by all parties concerned with these businesses, simply because many of their managers either forgot to apply what they knew of business fundamentals, had never really understood them, had ignored professional advice about them, or had failed to seek professional help in time.
And because many still refuse to learn lessons from a history of such errors, they’ll be bound to repeat them until they do.
Reports to ASIC from administrators graphically illustrate this.
Inevitably it is psychology and perception that drives economic sentiment. This point was not lost on Tim Reed, the CEO of MYOB who quoted recent research conducted by his organization found fewer than one fifth (19 per cent) of the 1004 business owners and managers surveyed nationally expected the domestic economy to improve with the next 12 months. “Fewer than one in five small to medium business operators have enjoyed revenue growth in the past year while more than two in five have seen their revenue fall.”
Poor strategic management of businesses was reported as a cause of failure of 44% of businesses that went belly up in 2009-10, precisely the same percentage as reported for 2010-11 and 2011-12.
Inadequate cash flow or too-high cash use was reported as a significant cause of 41% of business collapses in 2009-10, exactly the same as in 2010-11, and there was a mere 1% improvement in this statistic in the financial year ended on 30 June 2012.
Poor financial control made worse by lack of records was a substantial cause of a third of business insolvencies in 2009-10, as were trading losses in the past two financial years.
In the past three financial years;
- Between 77% and 78% of failed businesses had fewer than 20 employees,
- Between 84% and 85% had estimated assets of $100,000 or less,
- Between 42% and 46% had estimated liabilities of $250,000 or less, and practically all of the others had estimated deficiencies of $500,000 or less.
Under the Corporations Act 2001 external administrators must lodge statutory reports with ASIC for corporate insolvencies as soon as practicable (and in any event within 6 months) where they identify possible misconduct by company officers and/or where unsecured creditors are likely to receive less than 50c in the dollar of the money they’re owed.
As a result of 7,253 reports received so far relative to 2011-12 insolvencies, ASIC has asked administrators for 738 supplementary reports where misconduct has been alleged (that is in 10.2% of initial reports). The top three types of allegations involved insolvent trading, failed obligations in keeping records and breaches of directors’ duties. ASIC is pursuing investigations to decide whether or not to lay charges.
There’ll always be elements of skullduggery and fluctuations in the economy that will hurt businesses. But by the same token these figures make it clear most corporate failures would never happen if managers would only learn, remember, and consistently apply business fundamentals – and heed the lessons of history.
Access to details of ASIC’s statistical data for the five largest industry classifications over the eight years from 2004 is available on its web site.
So we asked earlier, what is to be learned from an increase of 928 business demises? To us the answer is Australia firmly remains susceptible to the precariousness of the world economy. The Australian dollar is artificially high with the current flight of investment into the country and our high interest rates. So while we do not suffer the problems of America or Europe, we are nevertheless adversely impacted. Australia still enjoys the Chinese demand for our raw materials creating wealth in the mining and associated industries, however, the cheap competition presented by an internet based marketplace and the difficulties in selling our products overseas due to an unfavourable exchange rate, coupled with uncertainty on the world stage firmly underpin the two-speed economy.
As such, all is not rosy for the SME market and while the figures support the old adage “there are no new ways to go broke”, the downside of the two-speed economy means those that fail to plan, plan to fail at a greater rate.
