Why companies go broke: ASIC data reveals pain for food and accommodation businesses

Companies regulator ASIC has released its annual report on corporate insolvency, finding the number of SMEs going broke in the last financial year was broadly consistent with the 2016-17 year.

However, there has been a jump in the number of accommodation and food services businesses becoming insolvent, amid ongoing difficulties for smaller retail and travel businesses.

Overall, there were 8202 insolvencies in the 2017-18 year, 78% of which were businesses with less than 20 workers, down from 79% in the 2016-17 year.

While the number of firms going broke in the construction category and the broad ‘other’ category remained broadly consistent, accommodation and food services insolvencies jumped from 884 in the 2016-17 year to 1,064 in the 2017-18 year (or 11% of insolvencies to 14%).

So far this year a string of cafe businesses have collapsed, including Max Brenner, Oliver Brown and Nuts About Tella.

Others, such as Retail Food Group-owned Gloria Jeans, have struggled.

Accommodation businesses are also wrangling disruption, particularly in relation to an increasing reliance on online travel agencies, which often take large commissions for referrals.

Motel and hotel owners SmartCompany spoke to earlier this year said they were being driven out of business by the platforms, which they were being forced to rely on for new business.

Why do SMEs go broke?

The top reason companies went broke in the 2016-17 financial year was inadequate cashflow or high cash use, which was the top reason in the two previous financial years as well.

However, the proportion of businesses reporting issues with cashflow increased from 47% of cases in 2016-17 to 49% of cases in 2017-18.

Cashflow and small business finance has been a hot topic for some time, with various advocates expressing concern a lack of available and affordable funds is holding the sector back.

Yesterday the federal government unveiled a $2 billion plan to make it easier for small businesses to access finance in a bid to improve the position of SMEs.

The plan will create a securitisation fund that will help smaller lenders compete with the big banks in offering business loans.

Labor has outlined its conditional support for the proposal but says it needs to see more detail, while small business advocates have welcomed the plan.

There is, however, concern about the way the system will work, and whether high-risk businesses will be funded, only to fail.

Other factors such as poor strategic management (46% of reports) and trading losses (39% of reports) were also identified in the top three causes of business failure.

The top three indicators for insolvency identified by ASIC were the non-payment of statutory debts such as GST (77.1% of cases), difficulties paying other debts when they were due (50.3%) and a shortage of working capital or unprofitable trading (53.5%).