Tough operating conditions to persist for Aussie businesses

The index found the average value of invoices for Australian businesses had dropped 28 per cent over the past 12 months, while business-to-business trade payment defaults grew 86 per cent in the year and external administrations rose by 10 per cent year on year.

According to CreditorWatch, the volume of trade payment defaults recorded over the past three months has been “some of the highest on record”, flagging a noticeable increase in the trend since June 2022.

CreditorWatch chief executive Patrick Coghlan said he was particularly concerned about the drop in invoice values, suggesting it was a major concern for the Australian economy.

He said: “Over the past year, the decline in the value of invoices has been consistent and severe.

“This deterioration is reflected in our other key business indicators: payment defaults, external administrations, credit inquiries and court actions.

“It will be the industries most exposed to consumer discretionary spending such as hospitality and retail that will experience conditions across the second half of this year.”

CreditorWatch has therefore raised its business failure rate prediction for the coming year, declaring that it expects 5.79 per cent of Australian businesses to have failed by the end of July 2024, up from 4.67 per cent currently.

CreditorWatch chief economist Anneke Thompson said the index’s results supported the Reserve Bank of Australia’s (RBA) assessment that economic growth would slow over the second half of the calendar year.

Ms Thompson said: “The RBA forecasts GDP to slow to 0.9 per cent over the year to December 2023, down from 1.6 per cent over the year to June 2023.

“Household consumption has already slowed considerably with the slowdown expected to worsen as more households come off fixed rate home loans.

“Household consumption is expected to have only grown by 1.6 per cent in June 2023, and forecast growth for the year to December is 1.3 per cent.”

The group said the operating environment for Australian businesses would continue to have an elevated level of risk as “we settle into a period of higher interest rates, probably for the next year”.

It said: “Australian consumers’ cash reserves are falling away dramatically, and this slowdown in spending eventually works its way through the wider economy.”

Brokers to be needed by SME clients more than ever

However, CreditorWatch found that while credit inquiries dropped from June to July, they were still up 66 per cent year on year, reflecting the tightening of due diligence that businesses and lenders are performing on debtors.

Speaking to The Adviser, Chris Slack, broker director at The Finance Consultancy, said any industry with low margins and high turnover could “fail with even the slightest issue”, adding that the lower average invoice amount was influenced by businesses being “smarter around their cash flow, invoicing more frequently and negotiating shorter payment terms often out of necessity”.

Mr Slack stated that brokers needed to be aware that SMEs will likely be looking for additional working capital options, as a business’s growth “can’t be limited to the available equity in the directors’ properties”.

He said: “Many brokers played a critical role in the survival of SMEs through COVID-19 [and] the report certainly highlights that the struggle for many means brokers will be needed by their SME clients more than ever.

“The best brokers will be positioned with their clients to give them confidence to be more involved in acquisitions or capital expenditure, regardless of the economic headwinds that seem inevitable over the next few months.”

Default and insolvency forecast

According to the July 2023 CreditorWatch Business Risk Index, the industries with the highest probability of default over the next 12 months are:

• Food and beverage services (6.95 per cent)
• Transport, postal, and warehousing (4.43 per cent)
• Arts and recreation services (4.42 per cent)

The cost pressures and the reduction in economic activity are likely to particularly hurt the food and beverage sector, according to CreditorWatch, given both the slowdown in discretionary spending and continued high input costs.

It came as recent retail trade volume data from the Australian Bureau of Statistics found that Australians bought less in cafes and restaurants in the June quarter than previously. This marked the first volume decrease recorded since September 2021, which was a lockdown-induced reduction.

Areas with an older median age present the lowest risk of business insolvency, as these businesses are likely to have lower debt levels and more established income streams.

Merrylands-Guildford (NSW), Canterbury (NSW) and Ormeau-Oxenford (Queensland) were found to be the regions that would have the greatest default rates in the next 12 months. Meanwhile, Ballarat (Victoria), Unley (South Australia), and Norwood-Payneham-St Peters (South Australia), had the lowest expected default rates for the upcoming 12 months.

[Related: Business trade lifts despite rising costs]