How to avoid ‘risky business’, CreditorWatch paper explains

The paper, titled Risky Business and how to avoid it: financials stripped bare, draws attention to the various risks that businesses are exposed to in the current economic environment, with the top three challenges being inflation, interest rates, and skills shortages.

Other issues touched on were productivity, climate change, the accommodation crisis, supply chain disruptions, and geopolitical uncertainty.

The paper gives insights into the methods businesses can utilise when customers might be feeling financial pressures and struggling to meet ongoing financial commitments.

The insights were compiled from a range of industry experts including John Field, chief executive, Reworq Consulting; Roberto Bastos, head of credit rating, ANZ; and Nick Pilavidis, CEO of AICM.

CreditorWatch CEO, Patrick Coghlan, highlighted the importance for businesses to have as much information as possible during this time on various factors such as what current economic outlooks mean for businesses, finding new ways of optimising working capital, and how credit managers see the commercial outlook.

“It’s important to be judicious when extending credit. A trend which businesses should be aware is customers entering insolvency without any warning,” Mr Coghlan said.

“As COVID-19 stimulus payments have been unwound, this has exposed some businesses that were artificially supported during that period but have not addressed problems in their operations. These are among the businesses going into insolvency at the moment.”

Business risk index reveals businesses most at risk of default

According to CreditorWatch’s October 2022 Business Risk Index (BRI), the industries most likely to default over the next year include food and beverage services (7.25 per cent); arts and recreation services (4.62 per cent); and transport, postal, and warehousing (4.57 per cent).

Additionally, the BRI revealed the risk of default over the next year increased in all regions across Australia, excluding the Lower Hunter and Wyong regions of NSW.

Chief economist for CreditorWatch, Anneke Thompson, stated that October BRI “broadly reflects the wider economy”, and that while trade activity is strong, medium and longer-term risk is heightened.

The data also revealed the change in the balance between company cash holdings and debt levels between June 2021 and June 2022.

Companies reduced debt from pre-pandemic levels by approximately 25 per cent when COVID-19 first emerged, while cash holdings rose by 30 per cent.

However, this has “significantly reversed” since June 2021, according to the BRI, with cash holdings declining for most companies while debt levels have risen.

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Written by Adrian Suljanovic

Last Updated: 01 December 2022

Published: 02 December 2022