Figures recently released by National Credit Insurance (Brokers) showed that the number of bad debt claims in February 2011 was almost 80% higher than claims for the previous month. The spike has caused cash flow finance specialist Oxford Funding to warn businesses to keep an eye on their debtors.
“I’d take it as an early warning for future economic conditions,” advised Rob Lamers, CEO of Oxford Funding. “For businesses planning ahead, this is just a sign to note risk factors and to proactively manage your cash flow.”
The data showed a rise of 17% on average February claims from 2004 to 2010—including the years of the GFC. The default rate is comparable to July 2008, the beginning of the global economic recession, but is not as high as in 2009 when the aftershock of the GFC caused many businesses to default.
Colin Porter, CEO of bad debt registry CreditorWatch, agreed that small businesses should regard the rise in bad debt claim as a warning. “This is further evidence of the need for small businesses to be more vigilant and to tighten up their credit policies,” he advised. “Small businesses need to be performing all the necessary checks to ensure they are limiting their exposure to bad debts.”
He conceded that recent natural disasters, the high Australian dollar and poor retail sales in the December period could have caused the increase, and said it was too early to tell if the trend would continue.
Lamers was in accord, also saying it was too early to tell from one month’s results whether we are headed for another period of struggle, but said businesses should pay careful attention to cash flow because the Australian Taxation Office appeared to be taking a firmer stance on businesses behind on tax payments.
“It is not just about your profit and loss statements—it’s about cash flow. Many profitable businesses fall over when they neglect cash flow,” reminded Lamers. He recommended products such as debtor finance or debtor insurance to assist with cash flow problems.
Of the industries recording the most defaults, the steel sector outside of major steelworks had the highest debts, worth more than $850,000, while debts in each of the manufacturing and plumbing industries exceeded $650,000.