Insolvencies in February hit 10-year high

The number of insolvencies in February hit their highest level for the month in 10 years, prompting a warning to small businesses to tighten their payment processes.

According to the latest figures from the Australian Securities and Investments Commission, the number of company failures in February was 852.

This figure is 7% higher than in February 2009, at the height of the global financial crisis, while court-ordered wind-ups were 12% higher than in February 2010.

According to Taylor Woodings partner Quentin Olde, these early trends do not augur well for rates of company failures for the year ahead.

“With the onset of the GFC, consumer confidence fell sharply and company failures increased significantly,” he says.

“While this trend may seem predicable, our analysis shows that since the GFC, company failures have not fallen in response to the rebound in consumer confidence.”

Olde says this trend suggests Australia has experienced a “significant and structural change” where rates of company collapses will remain at high levels despite increased consumer confidence.

“The more likely explanation is these figures are the strongest indication yet that the effects of the global economic crisis are still washing through the Australian economy,” he says.

Olde says SMEs are still finding debtors very slow to pay, leading to cashflow problems and ultimately company failures.

“Overall, we forecast insolvency figures will remain high over coming months as the full effect of Australian and global natural disasters are realised,” he says.

The gloomy news follows figures from the National Credit Insurers (Brokers) last week that showed an 80% increase in bad debt claims in February compared to January.

The number of bad debt claims in February was also 17% higher than that month’s average between 2004 and 2010.

Rob Lamers, CEO of Oxford Funding, says while it is too early in the year to judge if small firms are suffering a deepening debt crisis, they need to tighten up their processes.

“By supplying goods and giving customers 30 to 60 days to pay, you are effectively giving them credit. Businesses that value every single sale need to put an emphasis on the ability of customers to pay,” he says.

“Waiting for payment can cripple cashflow. Make sure you have the right cashflow tools and make credit checks. Get debtors to pay early and negotiate terms with your own suppliers.”

This article first appeared on StartupSmart, Australia’s top site for entrepreneurs starting a business.