Insolvencies to exceed pre-pandemic levels in FY24, CreditorWatch predicts
Company insolvencies are expected to see a steep increase this financial year beyond levels seen in early 2020, a credit agency warns.
Leading indicators are pointing towards a tough financial year for businesses with default rates predicted to reach 5.8 per cent, according to CreditorWatch.
CreditorWatch chief executive Patrick Coghlan said there is going to be a tremendous amount of pressure on consumer and business wallets throughout this financial year.
“By September 2023, the full impact of the RBA’s 12 cash rate rises will be fully passed on, and it’s going to affect about 40 per cent of Australian households. In the second half of this calendar year, we have more people coming off fixed rates than in the first half,” said Mr Coghlan.
External administrations have also increased following a period of decline during the pandemic, he noted, particularly in industries such as construction and retail trade.
Minimising risk exposure as conditions deteriorate
The Australian Institute of Credit Management (AICM) said businesses investing in their accounts receivables, collections and risk areas will be able to better mitigate the risk of slow or non-payment by customers.
Investing in systems and data is another important step with organisations that have invested in this area outperforming over the last two years, according to AICM chief executive Nick Pilavidis.
“Those systems free up the credit professionals’ time to have conversations with customers and target efforts on those that can’t pay, rather than those that are a bit late,” said Mr Pilavidis.
“It can allow your people to be a lot more efficient at what they’re doing.”
Businesses should also be having regular conversations with customers in order to manager credit risk.
“Target your efforts into talking to those customers that are displaying risks and engage with them to really understand what’s happening in the business,” said Mr Pilavidis.
“Find out how you can do business with them and establish which businesses present greater risks and see if these can be mitigated.”
It is also important to document personal property security and personal guarantees, particularly those that display a bit more risk.
“Registering the appropriate securities can help you manage that risk and give you the best chance of recovery if insolvency does occur,” said Mr Pilavidis.
“If you got a PPS registration, you’re at the table and you’re able to engage with insolvency professionals to get the best possible outcome.”
Warning signs of insolvency
Cathro & Partners principal Andrew Blundell said there is a range of early indicators for insolvency that businesses should be aware of in order to ensure they make informed decisions surrounding the provision of credit to a business.
Where the management team of a business does not reflect the stage at which the business is at, for example, this can create potential issues, according to Mr Blundell.
“If you’re a growth-focused business, you might have a management team in place for the first 18 months to two years that’s reflective of the challenges in that growth phase of the business,” he said.
“Once a business reaches a point where it’s starting to mature, that management team may not be the best fit for that stage of the business. Over time, people tend to take their eyes off the ball and get comfortable in the way that a business operates and, in their ability to deliver the required oversight of the business.”
Balance sheet items that don’t reflect what the value of the underlying assets are another warning sign.
“It could be a goodwill component that keeps increasing, or plant or equipment being held at cost value rather than market value, that may have diminished in value,” said Mr Blundell.
About the author
