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Home Australian Budget 2020 Insolvencies rise by 11% as businesses face reality of Government support cuts

Insolvencies rise by 11% as businesses face reality of Government support cuts

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Following the first round of JobKeeper cuts, and the presentation of the most significant Federal Budget since World War II, businesses are starting to face the reality of insolvencies and liquidations.

New data from digital credit reporting bureau CreditorWatch the number of businesses entering into administration rose by 11 per cent in September to 436.

While the amount of businesses in administration is still 48 per cent lower than last year (833) – understood to be due to a government-enforced ban on insolvent trading in September 2019 – as stimulus measures such as JobKeeper are due to be rolled back, businesses reliant on government support are realising the severity of their situations and shutting up shop.

“Seeing businesses enter into administration is never something you want to celebrate,” said Patrick Coghlan, CEO of CreditorWatch. “However, September’s increase in default and administration rates does indicate that some businesses which have been reliant on government support are starting to accept the reality of their situation and are taking steps to settle with their creditors.”

“What we don’t want to see is businesses that are doomed to fail continuing to operate and taking healthy companies down with them. The long term-trend is that Zombie companies will continue to survive on government support and so the next six months are crucial in determining what position we start our economic recovery from.”

There was significant variance between states, according to CreditorWatch Business Risk Review data for September 2020:

  • Victoria recorded a 23.8 per cent increase in business administrations, following a 49.3 per cent decrease in August
  • QLD recorded a 24.1 per cent increase in business administrations, following a drop of 25.4 in August
  • NSW recorded a further 1.6 per cent decrease in business administrations, following a 34.3 per cent decrease in August

Credit enquiries on the CreditorWatch platform, a live indicator of business activity, dropped 6 percent in September after four months of positive increases. However, enquiries were higher on average over the past four months compared to the previous eight, signifying that businesses are trying to remain active.

Considered to be a key indicator of business cash flow, average payment times were down 10 percent across industries in September, with 11 of 19 industry groups recording a decrease in the number of days it took to pay bills. The figures remain high, however, up 222 percent year-on-year on average.

“For a signal of how Australian businesses are faring, payment times provide a glaring picture of how tough the environment is, especially when juxtaposed against 2019,” said Harley Dale, CreditorWatch’s Chief Economist.

“It is encouraging to see big declines in many sectors, such as IT and Telecommunications and Real Estate because when companies get paid quicker, it puts liquidity back into the economy, enabling firms to plan, invest and grow.”

“However, payment times still remain too high and some sectors are being particularly stubborn, such as the Financial Services and Insurance sector, which jumped up in September, and the Transport, Postal and Warehousing sector, which remains at a staggering 90 days. As government support is rescinded, which way this metric tracks will be crucial in determining how well Australian firms fare in our new economic world.”

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Ellie Dudley
Ellie Dudley is a journalist at Dynamic Business with a background in the startup space and current affairs reporting. She has a specific interest in foreign investment and the Australian economy.