The April 2023 CreditorWatch Business Risk Index (BRI) has revealed concerning trends for businesses, indicating increased pressure and ongoing challenges.
Despite some positive indicators, such as improved economic conditions, the average value of invoices (trade receivables) remains at elevated levels. This suggests that businesses are grappling with financial strain and delayed payments.
The situation in South-East Queensland is particularly concerning, where businesses are facing heightened difficulties. The BRI report identifies four out of the ten worst-performing regions in this area, with Brisbane ranking as the worst-performing capital city in terms of business performance. This underscores the significant impact of the economic landscape on businesses in this region.
Recent data indicates that B2B trade receivables have observed a significant surge of 36 per cent compared to the previous year. This notable increase can be attributed to two key factors: rising inflation and the resumption of more normal trading activity following the COVID-19 pandemic. As economic conditions stabilise, businesses are engaging in increased trade transactions, leading to higher receivable values.
Although the number of external administrations experienced a slight decline from March to April, as is typical for this time of year, there has been a noteworthy 13 per cent increase compared to the same period in the previous year. This indicates that despite the seasonal dip, businesses are still facing challenges and financial difficulties.
Similarly, court actions decreased in April due to seasonal factors but saw a significant rise of 26 per cent compared to the same period last year. This suggests an escalation in legal proceedings related to debt recovery and financial disputes.
An intriguing trend has emerged in credit enquiries, which have witnessed an astounding growth rate of 139 per cent year-on-year. This surge reflects a heightened interest among businesses in seeking credit to support their operations and growth strategies.
While B2B trade payment defaults have experienced a slight decrease from March to April, they have still surged by 35 per cent compared to the previous year. This indicates that businesses are encountering challenges in meeting their payment obligations, which may be influenced by factors such as cash flow constraints and economic uncertainties.
Analysing regional performance in terms of business failures, Port Phillip (VIC), Cairns–South (QLD), and Warringah (NSW) have exhibited the most significant improvements. These regions have managed to reduce their rates of business failures, reflecting favourable economic conditions and effective business strategies. Conversely, Chatswood-Lane Cove (NSW), Wyong (NSW), and Gosford (NSW) have witnessed substantial increases in business failures, signifying the challenges faced by businesses in these areas.
Among the top 10 regions in Australia with the highest probability of default, four are located in South-East Queensland. These regions share common characteristics such as above-average commercial rents, high rates of personal insolvency, and lower median incomes. These factors contribute to the heightened risk of default among businesses operating in these areas.
Unley in South Australia has emerged as the region with the lowest insolvency risk among regions with more than 5,000 businesses. It is closely followed by Norwood-Payneham-St Peters, also situated in South Australia. These regions have demonstrated strong financial stability and resilience, reflecting favourable business conditions and effective risk management strategies.
The Food and Beverage Services industry continues to face the highest risk of default. This vulnerability is primarily attributed to the sector’s reliance on discretionary spending, which has experienced a decline, as well as ongoing challenges such as labour shortages. Businesses in this industry must navigate carefully and implement strategies to mitigate financial risks.
External administrations have shown an upward trend in the construction industry, reaching their highest point since June 2020. This suggests that businesses in the construction sector are facing financial strain and need help managing their operations effectively.
Within the Healthcare and Social Assistance sector, external administrations remain relatively low. However, they have reached their highest rate since CreditorWatch began reporting this data in January 2015. This indicates that even in industries with lower default rates, businesses are only partially immune to financial challenges, and proactive measures must be taken to ensure stability and sustainability.
The rise in trade receivables aligns with the Australian Bureau of Statistics’ (ABS) Monthly Business Turnover Indicator findings for March. According to the indicator, there were year-on-year increases in turnover across 11 out of 13 industries.
The Arts and Recreation Services industry experienced the highest month-on-month surge in business turnover, reaching 9.7 per cent. Conversely, the retail trade sector saw the largest decline in business turnover, with a decrease of 2.0 per cent. These statistics further support the notion of a recovering economy with varying performance across different industries.
CreditorWatch CEO, Patrick Coghlan, says that the increase in trade receivables is encouraging, but other leading indicators are of concern. “The pick up in trading activity is great to see, but my excitement is tempered by our data on external administrations, in particular, which are rising across almost every industry,” he says. “While this is a return to pre-COVID levels in most instances, the rate of external administrations in industries such as healthcare and media/telecommunications is beginning to exceed that.”
CreditorWatch Chief Economist, Anneke Thompson, says we are at an unsustainable stage in the economic cycle where business conditions are generally good, but consumer demand is plummeting. “Given all the incoming data, there is little doubt that default rates and external administrations are going to increase,” she says.
“The areas that are going to be particularly impacted are those that are most reliant on labour, as labour supply still appears to be in strong demand, despite high overseas migration.”
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