The latest CreditorWatch Business Risk Index (BRI) reveals that payment defaults from business-to-business transactions are at record highs as a result of the increasing cost pressures facing Australian businesses due to higher interest rates, inflation, wages and labour shortages, coupled with lower consumer demand as households struggle to manage cost-of-living pressures.
CreditorWatch research highlighted a strong correlation between payment defaults and business failures. Businesses with one default have a 24 per cent chance of going insolvent in the next 12 months, rising to 42 per cent for two defaults against two businesses and 62 per cent for three defaults against three businesses.
CreditorWatch reported last month that the average value of invoices was at a record low, which was also reflected in last week’s ABS Business Indicators for the December quarter, which showed businesses were running down their inventories in anticipation of further declines in consumer demand. While the February BRI data recorded a seasonal increase in the average value of invoices from January to February (up 10.4 per cent) avalues continue to trend downward and sit at their lowest point since September.
CreditorWatch CEO, Patrick Coghlan, said that the rise in B2B payment defaults and falling invoice values is a very concerning combination.
“Trade payment defaults going up while invoice values decline is a real worry,” Coghlan said. “This indicates that cash reserves are being depleted and margins are being squeezed. An increasing number of businesses have less cash coming in, which means they are then finding it more difficult to pay their own suppliers and as such we are seeing a steep increase in payment defaults being registered on the CreditorWatch database. They are also cutting the size of their orders and running down inventories. This payment defaults data provides our members with critically important intelligence about the trading behaviour of other businesses, some of whom they could have extended credit to.”
CreditorWatch Chief Economist, Anneke Thompson, also noted that the BRI data has been pointing towards a rapidly slowing economy for some time now which is now reflected in the December quarter Australian National Accounts.
“Gross Domestic Product (GDP) grew by a very slow 0.2 per cent over the December quarter, taking the annual growth rate to 1.5 per cent,” Thompson explained. “However, in per capita terms, GDP has been negative for three straight quarters, which means Australia is in a ‘per capita’ recession. The sustained fall in the average value of invoices over 2023 was a very good leading indicator of the overall slowing of the economy.”
The rate of external administrations is also noted to be well above pre-COVID levels. And given the decline in the average value of trade invoices and the record level of trade payment defaults recorded in February, the index sees that the rate of external administrations will continue to increase over 2024.
The public administration and safety; mining and electricity, gas, water and waste services industries have all recorded the largest increase in external administrations against this time last year. There are numerous sub-sectors within these industry categories, such as security companies and waste management services that are facing very challenging conditions and a slowdown in demand. Food and beverage services sector still has the highest rate of external administrations, and this sector is expected to remain to maintain its unenviable position at the top of this table as Australians pull back their spending at restaurants and on takeaway in the face of cost-of-living pressures.
Business failures consider external administrations as well as ASIC strike-offs – so the closure of a business for various reasons. Over the next 12 months, CreditorWatch expects over seven per cent of all food and beverage services businesses to shut down for good. On the other hand, the agriculture, forestry and fishing industries are considered more stable, with only 3.28 per cent of businesses in this sector expected to close.
Given the data available, the index expects the next six months to be a very challenging period for Australian businesses. As such, businesses are reminded to be watchful of their cashflow very closely, even when the cash rate begins to decline which is expected to happen sometime in Q3 2024. It also added that it will take three or four cuts to the cash rate before Australian consumers start to feel more comfortable making purchases of discretionary items, which is unlikely to be until early 2025.
