November 19, 2015

Is your business thriving or just surviving?


According to the NAB Quarterly SME Business Survey

  1. Business conditions improved strongly during the quarter rising to its highest level since early 2008.  This is consistent with the growing evidence that the non-mining sectors of the economy are staging a more pronounced recovery.
  2. Inadequate working capital capacity continues to be a constraint on profitability.
  3. Labour and purchase costs have continued to outstrip growth in revenue, and consequently profit margins remain very weak despite some improvement in the quarter.
  4. Increase in the adverse impact from the AUD.  Industries affected include: wholesale, retail and transport who have become more reliant on imports as a result of the elevated AUD in recent years.
  5. Business conditions in the construction industry was at its peak in the December quarter dropped to parity in Q1 (March quarter) but has had a steady rise towards meeting confident by the end of Q3 (September quarter).

According to Dunn & Bradstreet’s September Business Expectations Survey, Australian businesses settled their invoices at a new record-setting pace of 45.1 days on average during Q3 (September quarter).  This suggests that businesses have healthy cash flows primarily resulting from a favourable credit environment.

Stephen Koukoulas, Economics Adviser to Dunn & Bradstreet has been quoted as saying: “The spectacular decline in average invoice payment times since the middle of 2014 suggests firms are experiencing favourable cash flows.  A combination of savings from record low interest rates, reasonable income growth and ongoing economic expansion means that firms are well placed to pay their bills more quickly than at any time in many years.”

However, according to the survey 43% of businesses would choose to miss a payment to a trade supplier if they were unable to pay all of their bills.  Further, the survey also found that 35% of businesses have had a customer or supplier become insolvent or otherwise unable to pay them during the past year.


A slight reduction in corporate insolvencies was reported by ASIC during the 2014 financial year as compared to the previous two financial years.  It has been reported that the number of insolvencies during the 2015 financial year were down by up to 25% which has continued throughout the 2016 financial year.

It should be noted that the number of Court Liquidations in the March 2015 quarter were at their lowest in the last 5 years. However, during the June 2015 and September 2015 quarters, the number of Court Liquidations have risen to a record high over the last 5 years. This has been predominantly driven by the activity of the Australian Taxation Office in pursuing outstanding debt.

Historically the construction industry makes up a large proportion of total insolvencies in excess of 20% of all insolvencies in the last five financial years.  This has resulted in a senate inquiry into insolvency in the Australian construction industry.

The three main causes of failure reported to ASIC during the 2015 financial year in respect to insolvencies are as follows:

  1. Inadequate cash flow or high cash use
  2. Poor strategic management on business
  3. Trading losses


For many business owners, running a successful business is often challenging enough, however, when facing difficult times, it can become a real nightmare.

As set out in the overview, businesses are, or should be, currently enjoying good economic conditions, what with low interest rates, favourable cash flows and a slow but steady economic growth.

It is important to understand that more businesses fail during economic recovery i.e., when an economy comes out of a recessionary period, than during the recession itself.

Following 2000, business failures jumped 20.5% as the economy returned to positive growth.  Economic recovery is defined by Investopedia as a period of increasing business activity signalling the end of a recession.  Much like a recession, an economic recovery is not always easy to recognise until at least several months after it has begun.  Economists use a variety of indicators, including GDP, inflation, financial markets and unemployment to analyse the state of the economy and determine whether a recovery is in progress.  An economic recovery is the phase of the business cycle following a recession, during which an economy regained and exceeds peak employment and output levels achieved prior to the downturn.  A recovery period is typically characterised by abnormally high levels of growth in real GDP, employment, corporate profits, and other indicators.

In the face of the 2 year downturn in late 2008, many businesses elected to realise assets, reduce staff and inventoryin order to regulate cash flow and to pay bills.

Today, we see a lack of working capital as a major contributor to insolvencies and we have just seen the first increases in interest rates by the major banks and financial institutions, putting pressure on credit for the first time in a number of months, if not years.

This is in part as a result of regulators forcing banks to maintain higher capital basis.  This will affect the flow of funding to SME.  In recent times, we have seen a number of borrowers simply rolling over their positions, rarely is capital expenditure (CAPEX) or capital growth on offer.  Non-accruing debt will rollover.  As a result of same, non-accruing debt (or rollover) does not rebuild assets value.  This in turn limits the enterprise for want of a restructure albeit organisational, financial management, upstream or downstream problems.


Many recent media articles have concentrated on:

  • Interest rate rises.
  • Asset values increasing.
  • The short supply of debt funding to SME.
  • The attitude of the ATO to GST and PAYG outstanding.
  • The stimulus spending of government.

In essence what is forecast is that as the economy recovers, market forces will begin to normalise.  Those market forces include:

  • Interest rates – projected rise,
  • AUD – projected reduction,
  • Unemployment – projected reduction.

All of these will have an impact on your business.  The key is to determine what impact might occur and minimise any adverse impact.


If your business is enduring tough times, there are three simple measures to improve the probability that your business will succeed:

Collect your cash

Cashflow is the key to managing any business. So, collecting cash from customers is an integral part to maintining positive cashflow.  Consider amending your policies for debtor collection and stock management.

Debtors collection

Manage the credit limits of your customers and, if necessary, place tighter limits on the amount of credit you extend to your customers.  If you have a concentration issue i.e. high dollar exposure to a few large customers, seek assurances and guarantees on how they will pay their account.  If customers are in breach of their credit terms, enter repayment schedules and offer ‘discounts’ for early payment or ‘cash only’ terms until those customers accounts are in order.  If the decision is between being flexible and survival there is really only one choice.

Stock management

Avoid overinvesting in stock. Continually monitor your stock requirements and place strict controls over stock ordering. If customer sales slow down, so should your ordering.

Reduce your costs

If you have experienced a reduction in revenue and/or profit you will need to examine your cost structure to maintain your profitability.  Be prepared to make some hard decisions.  Low fixed and high variable cost is the ideal cost structure for doing business in both tough times and during economic recovery.

Non-trading costs

Try to reduce or eliminate non-trading costs.  For example, examine wage productivity reports and restructure non-productive roles or encourage multi skilling to maximise your employee return per hour.  Staff reduction is not necessarily the answer.  The reallocation of resources may assist in you getting the optimum structure.

Variable costs

Examine all your expenses and investigate ways to transfer your business’s fixed cost to variable cost.  Outsourcing is a variable cost strategy.  It also allows you to scale up the business to meet the demands during economic recovery.

Protect and grow your revenue

Maintain constant contact with your key customers get to know their business and how they are travelling. Identify how you can offer them support and further build upon your relationship.  Understanding their situation means that you will be better informed about how you can assist them and thus protect and potentially grow your business’s revenue.  To grow your own revenue, invest in new innovative (low cost) sales strategies, increase (low cost) sales and marketing programs and show leadership by spending more time with your customers and sales team.

Minimise your risks

It is important to consider minimising your business risks.  The first step is to re-examine and prepare a new business plan to assess your current situation and plan for the future.  The second step is to prepare a three way budget, projecting profit and loss, cash flow and balance sheet to ensure that you are not only profitable but will have sufficient cash flow to continue to trade the business without your requirement for a capital injection.

Seeking advice early will mean the difference between your business thriving or simply surviving.


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