Respondents recognised that it’s incumbent on business owners to take active steps – like improving budgeting and cashflow management skills – to minimise insolvency risk.
A resumption of normal interest rates and more stringent collection efforts by the ATO will leave a record number of companies – mostly SMEs with unserviceable higher-than-average debt levels – liquidation ‘time-bombs’ waiting to explode.
This is the major finding from our newly released national survey of 1500-plus Australian business owners, consultants, and directors.
Just over half survey respondents claim harsher collection actions by the ATO directly contributed to a 31.9% increase in official liquidations recorded by ASIC last year.
With around two thirds of survey respondents, 64.8%, noticing an increase in ‘walking dead’ – aka Zombie companies trading with varying degrees of insolvency, artificially propped up by historically low interest rates, and a hitherto benevolent ATO approach to tax recovery –we expect wind-up notices to increase over the next 18-24 months.
While all industries will be affected over the next two years, research suggests industries directly impacted by the ‘tax debt issue’ are financial and insurance services, construction, professional/scientific services, agriculture, forestry and fishing.
Given that they lack the capital needed to grow, ‘walking dead’ companies with insufficient profit to service debt are increasingly vulnerable to higher interest rates, and an ATO that’s taking greater action to recover its money.
Cashflow outweighs ATO crackdown
Survey respondents – 23% – thought insufficient cashflow exposed companies to a much greater risk of insolvency than any policy tightening by the ATO –11% – while forcing companies to pay GST in advance of receipt, was seen as accentuating cashflow problems with long-term debtors.
But instead of blaming the ATO for wanting to recover outstanding tax, respondents also recognised that it’s incumbent on business owners to take active steps – like improving budgeting and cashflow management skills – to minimise insolvency risk.
Insufficient cashflow is often symptomatic of more complex problems, which emanate from falling profit margins or failure to adequately plan for growth. This is reflected in almost half respondents identifying poor planning and cashflow systems as the driver of increasing company liquidations.
Over one in five respondents also suggested inadequate financial systems for making informed planning decisions was the second single biggest contributor to insolvency risk. Respondents suggested online accounting systems would help the ‘walking dead’ monitor profitability in real time, and not just once problems arise.
Alarm bells
Almost 40% of respondents identified cashflow shortage as the single biggest tell-tale sign of ‘walking dead’ status. Other indicators of struggling companies trying to address cashflow warning signals are the number of respondents witnessing an increase in late or altered super and tax payments – 16%, rising extended credit terms and overdrafts – 14%, redundancies and higher staff turnover – 12.7%.
These numbers suggest the insolvency issue is considerably bigger than those companies being wound-up annually would suggest, with expectant tightening of banking regulations and higher wages, adding to the number of companies heading towards ‘walking dead’ territory.
A common precursor to trouble is a rising number of days outstanding for payments, and may be a sign that if they’re in trouble, late payments might get worse. Similarly, GST, PAYG, and super payments are not monies that ever belonged to a company, and failure to meet these obligations is only delaying the inevitable.
Reverse exposure to insolvency risk
By refocusing on what they can control, utilising up-to-date information and accounting systems, preparing business plans, budgets, and cashflow forecasts, SMEs can reverse their exposure to insolvency.
Given that their underlying business might be quite profitable, there are numerous steps within SMEs’ control – including good debtor systems, early discussions with bankers to better anticipate future debt provisions or even going into voluntary administration to restructure the business – to help get them back on track.
Going well beyond repaying creditors, restructuring arrangements can also make SMEs profitable again. While companies wait far too long to get help, seeking proper advice early enough can not only prevent them from going bust – typically by defaulting on debt provisions – but can also restore shareholder value.
Peter Marsden, Director and National Head of Restructuring & Recovery, RSM Australia
