The local economy continues to gather strength but despite positive macro-economic signs, thousands of firms are hitting the wall each quarter. A new report from Dun & Bradstreet reveals that more than 2,700 firms failed during the September quarter 2010, a figure which is 73 percent higher than pre-GFC levels.
The findings demonstrate that while macro-economic conditions are positive for Australia, cash flow issues continue to be a real threat for local businesses. In addition, the research follows an earlier study from Dun & Bradstreet that identified periods of growth following a downturn as a time of high risk for Australian firms. This is due to a period of negative cash flow resulting from new orders and associated rising costs but delayed customer payments.
According to the research, 2008 marked the peak in failure rates, with figures rising a staggering 171 percent on 2007 - m ore than 4,200 firms failed during the September quarter 2008. The number of failures fell 22 percent the following year to around 3,300 and a further 18 percent in the third quarter of 2010 however they remain well above the 1,500 failures recorded in 2007.
Despite business failures falling by 18 percent year on year certain sectors continue to face significant pressures. The services and transport, communications, electric, gas and sanitary services sectors both recorded a higher percentage of failures during the September quarter 2010 than they have in any of the four years examined in the Dun & Bradstreet study. In addition, the finance, insurance and real estate sector accounts for the highest percentage of failures, a position it has maintained across three of the four years.
According to Dun & Bradstreet's CEO Christine Christian, business failures have significant flow on effects for other firms and individuals.
"Although the Australian economy is proving largely resilient to the factors impacting other developed nations, certain sectors continue to feel the brunt of the financial crisis," said Ms Christian.
"More than 2,700 firms failed during the September quarter 2010 and for every business that hits the wall there is an entire network of suppliers and customers that have already felt a tangible impact due to missed deadlines, late payments and other events.
"However, the current landscape is not completely unexpected as Dun & Bradstreet research reveals that an economic recovery can lead to a spike in failures. Firms that are under-stocked and under-resourced as demand rises are often left scrambling - they are forced to outlay funds for items such as raw materials and labour but the payment gap results in negative cash flow."
The time firms are taking to pay their trade accounts remains above pre-crisis levels. Although terms have fallen back slightly from the high of the September quarter 2008 when businesses took more than 55 days to settle their accounts, they are up by more than one day on 2009 and around two days on 2007. Firms are now taking more 53 days on average to pay their bills.
Sharp increases in delinquencies began to occur in mid 2007 and they continued until the March quarter 2009. Since then payment periods have shown some volatility indicating that firms continue to face difficulties with their cash flow. In addition, with payment trends a leading indicator of failure the recent increase in terms could indicate that further financial stress is likely in the months ahead.
Some of the sectors which were prominent in business failure statistics are also showing signs of payment trouble. The transport, communications, electric, gas and sanitary services sector in particular is demonstrating signs of risk, with this group now taking the longest to pay of any quarter over the past four years. This group is also the slowest to pay of any sector, averaging 57 days to settle accounts during the September quarter 2010. Meanwhile, the finance sector (also prevalent in failure statistics) is the third slowest paying group, taking 55 days to settle accounts.
Payment terms for the agriculture, forestry and fishing sector have risen to the highest level recorded across the past four years however, this group recorded one of the lowest percentages of failures (along with the mining industry) across all four years. Payment terms for the mining industry are on par with the September quarter 2008, while all other sectors are quicker to pay than they were during the height of the crisis.
"Payment terms are providing another indicator that some firms continue to feel the effects of the GFC, said Ms Christian."
"One third of the sectors examined had payment terms that were at the highest level recorded during the September quarter for more than four years. Meanwhile, the payment terms of the other sectors have fallen back slightly since the height of the turmoil but they remain above pre-crisis levels.
"The research is a clear sign that credit and cash flow management must remain a high priority for Australian executives despite the strength of the domestic economy."
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