In the world of corporate insolvency, the list of industries at the highest risk of insolvency has changed very little over the last ten years. According to ASIC’s Insolvency Statistics, of the over 11,000 corporate insolvencies in Australia annually, 76% come from five industries: Construction (19%), Accommodation and food services (10%), Retail trade (7%), Transport (5%) and Other (business and personal) services (35%). The Other services is largely made up of small contractor type businesses largely associated with the construction industry.
If you break this data down by state, New South Wales, Victoria and Queensland share the same top five industry profiles and ranking, while the Northern Territory, Tasmania and Western Australia share the top four profiles and ranking. South Australia and the Australian Capital Territory share the top three industry profiles.
81% of Australian corporate insolvencies occur in Queensland, New South Wales and Victoria, with almost one in three in New South Wales.
With these startling statistics in mind, what are the main reasons for the insolvencies? There are some systemic to the industry.
In the construction industry, for instance, the six most commonly reported reasons cited are:
- Inadequate cash flow or high cash use
- Poor strategic management
- Poor financial control including lack of records
- Poor economic condition
- Trading losses
- Under capitalisation
If you consider the flow-on effect, it is not surprising that the small, unsecured contractors actually make up the largest insolvency industry. A big volume builder goes belly up and the hundreds of subcontractors are dramatically affected, especially if one volume builder would make up the majority of their work as is typical.
In the transport industry, there is a major power imbalance where the large transport firms can price and negotiate such that it is difficult for the smaller businesses to viably compete. The accommodation industry seems to include a large number of club insolvencies. A 2015 Clubs census showed over 40% of over 6,400 clubs in Australia were in financial distress or serious financial distress, and these were mainly sporting clubs that had a heavy reliance on gaming machines, unsophisticated (and sometimes uninterested) volunteer boards, high overheads and low membership revenue.
When you drill down on the causes of business failure, there are some common areas where a good advisor could have helped. Areas such as business coaching, strategic business planning, cash flow management, costing and profit forecasting, debt management, customer value analysis, and strategic partnerships to name a few. What I find very frustrating, however, is that many of these businesses could have avoided insolvency if they had sought out the right help early enough.
Business failure affects many more than just the business owner: families, friends, creditors, other businesses in the community, and even competitors are also affected, like a pebble in a pond. Fortunately, there is a tendency for businesses to engage advisors at the onset of troubles, as well as a change in sentiment, from thinking it is easier to go into liquidation to having a go at fixing the problems.
But running a business is a skill in itself. I haven’t heard of many electricians that go out of business because they are bad electricians – it’s usually because they are working in their business (as an electrician) and not working on their business as the business owner. These skills can be learned, and I actually describe the ‘reasons’ for business failure as a subset of either a lack of business skill, or environmental reasons.
Even environmental reasons for business failure are a subset of lack of business skills – a ship doesn’t sink because of the water around it, but because of the water that gets in. It is a skill to manage the environment in which you operate. So, if your business is in trouble, either seek help or learn to run your business better.