Despite a seemingly prosperous economy, Australian businesses are facing unprecedented hurdles that threaten their very existence. The challenges are multifaceted, ranging from the complexities of regulatory compliance to the difficulties of scaling operations and the scarcity of skilled workers.
Scott Rawson, the Managing Director of Instant Products Group, a successful construction services company, has shared insights into the ongoing challenges faced by Australian businesses in today’s economic climate. With over two decades in the industry, Rawson has firsthand experience navigating the complexities of red tape,managing growth, and securing top talent. He notes that these challenges remain persistent, even as businesses grapple with rising interest rates and costs. The construction industry, in particular, has been hit hard, with a 39% increase in businesses entering external administration in 2023-24 compared to the previous year, according to ASIC figures.
Rawson founded Instant Products Group in 2003, capitalizing on a growing demand for portable buildings. Despite facing numerous economic hurdles, including the global financial crisis and the COVID-19 pandemic, the company has thrived,expanding its operations and establishing a strong reputation. However, Rawson acknowledges that growth comes with its own set of challenges. “Managing growth requires a delicate balance,” he explains.
“We must ensure we have sufficient resources to meet demand while maintaining a strong financial position.” One of the most pressing issues facing businesses today is the tight labor market. Finding skilled workers can be a daunting task, even in times of high unemployment. Rawson emphasizes the importance of building a positive company culture to attract and retain top talent. Product development is another critical area that businesses must prioritize. “Staying ahead of the curve requires constant innovation and adaptation,” Rawson says. “We must continually evaluate our products to ensure they meet the evolving needs of our customers.”
Rawson’s advice to other businesses navigating these challenging times is straightforward: “Hard work, adaptability, and a commitment to providing exceptional customer service are essential for long-term success.”
The toll of rising costs
A new report from CreditorWatch has sounded the alarm on a surge in business failures across Australia. The August results for the Business Risk Index (BRI) reveal that the rate of business failures has reached its highest level since the height of the COVID-19 pandemic in January 2021. The average business failure rate now stands at 4.95%, a significant increase of 17.3% since January. CreditorWatch predicts that this trend will continue, with the rate expected to climb to 5.20% over the next year. Several factors have contributed to this alarming rise, including low consumer spending, soaring inflation, and consecutive interest rate hikes. These economic pressures have proven particularly challenging for certain industries, with the food and beverage sector bearing the brunt of the impact.
The food and beverage industry is facing a perfect storm of challenges. Rising costs, declining demand, and aggressive tax collection efforts by the Australian Taxation Office (ATO) have combined to put immense strain on businesses in this sector. Additionally, the high rents associated with prime retail locations, which are often essential for restaurants and cafes, have further exacerbated their financial difficulties.
The increase in the business failure rate is also reflected in CreditorWatch’s data on business payment defaults, which have leapt 68.1 per cent in the past year and are now at record levels, indicating that an increasing number of businesses are unable to pay their invoices from suppliers.
More businesses than ever are finding it difficult to pay their invoices on time, which points to increasing stress in the business sector, both on those businesses unable to pay their bills on time and the businesses waiting to receive payment.
CreditorWatch has identified a strong correlation between B2B payment defaults and business failures in the following 12 months. A business with one default has a 28 per cent chance of closing in the next 12 months, rising to 74 per cent for four or more payment defaults.
CreditorWatch CEO, Patrick Coghlan, says the rising business failure rate shows how urgently businesses need interest rate relief.
“One of the biggest contributing factors to this increase in our business failure rate is the lack of consumer demand,” he says. “This is reflected in the ABS household spending and Westpac Consumer Sentiment numbers.”
“Consumers won’t be inclined to open their wallets in any significant way until they get a reduction in their mortgage payments. A couple of rate cuts would also mean that credit becomes more affordable for businesses, and they are able to get back on the growth track as well.” CreditorWatch Chief Economist, Anneke Thompson says tomorrow’s (Thursday 19 September) ABS Labour Force data will be very illuminating on what the next few months holds for the Australian economy.
“Our data, consistently and for some time now, indicates that Australian businesses are operating under extremely challenging conditions – particularly those in the Food and Beverage, Arts and Recreation, Retail Trade and Construction sectors,” she says.
“Under these circumstances, it is almost certain that unemployment will continue to rise – the question is by how much? So far, very strong public sector employment, especially in the NDIS sector, has masked weakening underlying job creation in the private sector.”
“We don’t expect businesses to feel more confident until there have been at least two or three cuts to the cash rate. Unfortunately, this means it is likely things will get worse before they get better.”
Other business risk index insights for August:
- Court actions are now well above pre-COVID levels as large creditors such as the banks and the ATO resume collections activity. Actions were up 15.4 per cent year-on-year in August.
- Credit enquiries are largely flat across 2024, reflecting the subdued trading conditions in the Australian economy. Fewer businesses are applying for commercial loans and trade credit.
- Food and Beverage Services is also the leading industry for outstanding ATO tax debts above $100,000, with a rate of 1.73 per cent. Construction and Transport, Postal and Warehousing are next at 1.20 per cent and 0.89 per cent respectively.
- The lowest risk region in Australia is Norwood-Payneham-St Peters in inner-city Adelaide. Businesses in that area had an average failure rate of 3.4 per cent over the past 12 months. As well as inner-Adelaide, the lowest risk regions were concentrated around regional Victoria, North Queensland and the northern suburbs of Sydney.
- The highest risk regions were in Western Sydney and South-East Queensland. Businesses in Bringelly-Green Valley in Western Sydney had a failure rate of 8.2 per cent over the past 12 months.
- Perth had the lowest rate of business failures among the capital city CBDs (4.08 per cent), followed by Adelaide (4.14 per cent), Melbourne (4.57 per cent), Brisbane (4.72 per cent) and Sydney (5.23 per cent).
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