Businesses that operate in the Australian construction industry are at most risk of defaulting in the next 12 months, according to a report prepared by advisory firm SV Partners.
The SV Partners Commercial Risk Outlook March 2016 report places firms that offer professional, scientific and technical services as the next most likely to experience financial distress, while retail is the third most likely industry in which businesses are at risk of default.
Manufacturers and transport, postal and warehousing providers are also in the top five industries most at risk of default.
According to the report, which analysed retrospective commercial data, the next 12 months will be trying for Australian retailers.
The report predicts as many as 14 large and medium size retailers are at serious risk of financial distress, following in the high-profile cases of Dick Smith and Laura Ashley.
Three of these unnamed retailers have turnover of at least $1 billion in turnover, which SV Partners said “implies further adverse impacts within the retail industry with key retail players in financial distress”.
A further 11 unnamed retailers with annual turnover between $100 and $500 million are in the “highest risk category of financial failure”, according to the report.
Overall, SV Partners predicts close to 50,000 or 2.1% of Australia’s 2.34 million operating businesses will face “adverse financial events” within the next year.
Approximately 10,000 businesses are placed under external management in Australia each year, with the rate of external administrations appearing to be on the rise.
Appointments of external administrators increased by 8.3% in the September quarter of 2015, compared to the previous quarter, with retail appointments increasing by 9.8% in the same period.
Of the appointments in the September quarter, the construction industry accounted for 16.7% of administrations and the business and personal services category accounted for 41.2% of appointments.
According to the SV Partners report, businesses in the Northern Territory and Queensland are under financial pressure, with the two regions indicating the highest levels of potential defaults relative to the number of businesses operating there at 2.8% and 2.4% respectively.
However, specific locations along the east coast of Australia top the list of the locations where businesses are most at risk of default.
Melbourne’s inner suburbs lead the way, where 2% of the 2,552 businesses operating are at risk of financial distress.
Next in line is Queensland’s Gold Coast, where 3% of the 2,027 businesses are at risk, followed by Sydney’s city and inner south, where 2% of the 1,938 businesses are at risk.
Businesses operating in Sydney’s inner south west also make the top five (2.8% of 1,792 businesses, as well as businesses in Melbourne’s south east (2.6% of 1,730 businesses).
Colin Porter, managing director of CreditorWatch, told SmartCompany March and April are often critical months in terms of cashflow for many SMEs.
One reason for this is tax returns to the Australian Tax Office are often due in March.
“Tax returns are critical large payments that some businesses hope to finance through miracles,” Porter says.
“The Tax Office is generally a good creditor and will provide funding, however at certain times they won’t and don’t.”
Porter says the first quarter of the year can also present cashflow problems for some businesses if invoices have not been issued and paid following the Christmas slow-down.
One a more personal level, Porter says the new year is often a time when business owners will also re-evaluate their business.
“There can be a realisation that this is how my business is and with starting the year, they will consider what needs to be done,” he says.
News Editor
Prior to joining SmartCompany, Eloise was news editor at Books+Publishing, the trade press for the Australian book industry. Eloise has degrees in media and communications, marketing and business management, and political science. You can follow her on Twitter at @ellykeating.
