Business failures on the rise

17 February, 2011

Business failures jumped nearly 25 percent in 2010 as cash flow pressures made their presence felt even as the Australian economy continued to be one of the better performers in the developed world.

This is just one finding from new research by Dun & Bradstreet examining new and failed business trends over the last three years, which includes the Global Financial Crisis (GFC) and Australia's return to post-crisis growth.

The research found that while business failures climbed marginally in 2009, during the peak of the GFC, there was a dramatic upturn in 2010.  The rate at which businesses failed in 2009 climbed a marginal 4 percent to just over 8,000 however spiked dramatically in 2010 by more than 23 percent to over 10,000 firms.

The spike in failures in 2010 coincided with a similar increase in business-to-business payment terms, which reached a peak of 53 days on average in 2010 after actually improving during the GFC.  This improvement during the global crisis was a result of firms paying close attention to their receivables and cash flow management in response to concern about the impact of the crisis. 

Conversely, the deterioration in payment terms in 2010 was a result of executives relaxing their cash flow management as the Australian economy returned to robust growth and the threat of crisis appeared to dissipate.  

However, it is cash flow that is the primary cause of business failure and not broader macro-economic events as is widely assumed.  Dun & Bradstreet research shows that more than 80 percent of business failures are related to cash flow rather than sales pressures.  It was this relaxation of cash flow management in 2010 that largely contributed to the spike in business failures.

The trend was also identified in Dun & Bradstreet's risk ratings with more firms being rated a risk of failure at the beginning of 2010 than at the same time in 2009.  This means that Dun & Bradstreet predicted more firms were at risk of failure in 2010, a period of economic growth for Australia, than during the worst financial crisis for seventy years. 

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While some commentators questioned these ratings at the time the business failures data from 2010 reveals the accuracy of the Dun & Bradstreet ratings and the link between cash flow and business risk.

All industry sectors experienced an increase in the number of company collapses with the most significant number coming from the finance, insurance and real estate sector which experienced more than 1,500 failures.  The services sector also accounted for a substantial number with more than 1,300 firms in this industry failing.

Examining the data by size reveals that smaller firms, those with between 1 and 20 employees, accounted for the most significant number of failures in 2010 while large firms, those with more than 500 employees, actually recorded a decline in the number of business failures.

New South Wales had the largest number of failures with nearly 3,500 firms collapsing.  However, while the Northern Territory had the lowest number at less than 50 it recorded the largest year-on-year increase at more than 100 percent.  Western Australia had the greatest overall increase in business failures since 2008 with an increase of more than 70 percent.  This was followed by Queensland and Tasmania with increases of 63 and 58 percent respectively.

However, the news is not all bad.  The number of new businesses increased in 2010 by close to 13 percent with more than 160,000 firms commencing operations last year.  This follows a decline in new business start ups in 2008 and 2009 reflecting the fear many entrepreneurs had about starting a new business during the GFC.  Unsurprisingly, small business led the way with more than 30 percent of new business start ups in 2010 coming from firms with between 1 and 20 employees.

The Dun & Bradstreet data also reveals trends in business relocations with firms on the move favouring Queensland as their new home base.  Around 40 percent of firms that left New South Wales moved to Queensland while 35 percent went to Victoria.  Overall, between 2008 and 2010 the majority of firms relocating were moving away from New South Wales and into Queensland or Victoria.  While Queensland did experience some loss of firms it had a net gain in the years 2008 to 2010. 

Australia is not the only country experiencing a high number of business failures.  Research conducted by Dun & Bradstreet in the United States (US) reveals that more than 80,000 firms failed in the 12 months to June 2010.  The transportation, construction and manufacturing industries were the most impacted with failure rates 40 to 80 percent higher than the US average.  These are also the industries in the US experiencing the greatest payment difficulties, once again confirming the link between cash flow and business risk.

To obtain a copy of the US Business Trends report contact marketingdept@dnb.com.au

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