Insolvencies rife in construction, retail and services sectors

Businesses in construction, retail, and personal and business services made up the majority of corporate insolvencies in the past financial year, according to a new survey by the Australian Securities and Investments Commission.

According to the survey, which takes figures from statutory reports lodged by external administrators, 24% of insolvencies occurred in the construction sector followed by personal and business services at 22% and retail at 10%.

The three main reasons for businesses failing were poor strategic management, inadequate cash flow or high cash use and poor financial controls.

The top three areas of possible misconduct – as reported by administrators – were insolvent trading, the obligation to keep financial records, and care and diligence in relation to directors’ and officers’ duties.

The number of reports lodged has increased from 7,715 in the 2007-08 financial year to 8,494 reports lodged in the 2009-10 financial year.

Alarmingly, 77% of insolvency reports in 2009-10 involved businesses with less than 20 employees, indicating small businesses are more at risk than their larger counterparts.

According to Taylor Woodings insolvency partner Andrew Schwarz, the construction sector is prone to insolvencies partly because it is heavily regulated and union-driven, which can stunt progress and affect cashflow.

“It tends to have a lot of costs that are structured into either the contract or the arrangements of the staff and therefore there’s a lack of flexibility in a lot of instances,” he says.

“[The insolvencies statistics for] personal services and retail are probably indicative of a general tightness in people’s budgets at the moment. You have massive cost increases in utilities and infrastructure services… and there’s been a number of interest rate rises.”

Jeremy de Constantin, NSW managing director of Vantage Performance, says with regard to insolvency statistics in these sectors, it still comes down to poor management.

“If they haven’t been strategic enough to take into account external factors then that’s really their own doing,” he says.

“It comes down to cash is king. It never ceases to amaze me the number of businesses that aren’t across their cashflow.”

Schwarz says small businesses must remember that the onus is on directors to keep the company afloat, who should seek professional advice if and when necessary.

“If they are experiencing cashflow difficulties and they’re struggling to pay their creditors and suppliers on time… we encourage them to seek advice regarding that,” he says.

“One thing we have been seeing recently is a lot of small businesses have been using the ATO as a funder almost through non-payment of their PAYG obligations or failing to lodge BAS returns.”

“We’re now starting to see the ATO getting a little bit more aggressive on that front.”