Slowing economy triggers further spike in business distress
Insolvencies are likely to worsen over the remainder over the year with the demand for turnaround services seeing a significant increase, according to one specialist.
Flattening growth in the economy and reduced consumer spending is leading to increased numbers of businesses getting into difficulty more recently and seeking out turnaround services, according to Vantage Performance chief executive Michael Fingland.
Fingland said the economy is teetering on the edge of an official recession, with the economy having already experienced a negative GDP per capita.
“A recession is two consecutive quarters of negative GDP and GDP per capita has actually been in a recession for the last three quarters and that for me is the most important measure,” said Fingland.
“GDP as a whole is just above at 0.2 per cent for the past couple of quarters which means its basically flatlining and its only just above zero because of the 600,000 immigrants that came into Australia last year which artificially boosts GDP.”
Fingland expects the Australian economy will likely get worse before it gets better with the global economy also softening.
His firm is now seeing much greater demand for turnaround services at the moment compared with the fast track services it offers to help businesses scale up.
“The turnaround services usually account for around 70 per cent of our work while fast track services account for 30 per cent. Given where we’re at the moment we’re projecting that turnaround is probably going to be around 90 per cent and sale up only 10 per cent,” he said.
“On the turnaround side, we tend to see changes in the economy around six months before the insolvency industry does because we help companies that get into some difficulty and we get in there and restructure them and get them back on track before they become and insolvency statistic. We are seeing a significant increase in distress.”
In the current environment, Fingland said it is critical that businesses are undertaking stress testing to prepare for any future disruption.
“The essence of a stress test is you pick the top three things that are likely to happen if the economy gets tougher or your industry gets tougher?” he explained.
“Typically, that means that revenue is going to drop by 15 to 20 per cent. So that's one of the assumptions that you model. Your customers might also take five to 10 days longer to pay you. So you model that at least those two but there might be another one or two that you might also model.”
By modelling two or three key changes in the business, this tells businesses what the resulting profit and loss and cashflow will be, he said.
“You can then come up with 10 to 30 initiatives, effectively a rapid fire turnaround plan, that you would implement if that should happen,” said Fingland.
“That acts as a huge peace of mind when you model all those initiatives.
“It might say that cash flow is going to go negative by $3 million but with all these initiatives we’re back to breakeven and better. It might be that we have to sell off some non-core assets and we might have to do a sale and leaseback of a property, downsize the business or whatever it might be but you basically have that plan ready to go.”
