Road to recovery presents challenges for SMEs

Risk of financial stress prevalent in the early years of economic recovery

23 October 2009

Australia's improving economic conditions present a new challenge for small businesses, with data showing that SME's remain vulnerable to financial stress and failure in the early years of economic recovery following a downturn. These findings come from new research by Australia's leading credit reporting agency Dun & Bradstreet (D&B).

The research examined business failures in the recovery period following the Dot Com bust of 2000. Rather than improving, business failures actually jumped 20.5 percent as the economy returned to positive growth in the 2001 financial year following the 7.1 percent contraction in the March 2000 quarter*. This was followed by business bankruptcies increasing a further 5.1 percent in the 2002 financial year, when Australia recorded GDP growth of 3.8 percent. Failures did not begin to decline until the third year of recovery.

                   dot com bust.jpg

% change in failure rate over previous financial year

The data demonstrates that an economic recovery following a downturn can catch many businesses - particularly SME's - by surprise. SMEs that are under-stocked and under-resourced as demand rises are left scrambling to fulfil new orders which can place significant pressure on cash flow. Firms are forced to outlay funds for items such as raw materials and labour to provide their products but the payment gap results in negative cash flow.

Adding further pressure to financial stability, Australian firms are currently averaging 54.8 days to settle accounts, meaning that SMEs will be forced to wait an additional 3-4 weeks on top of the standard 30 day term to receive payments for their goods. Particularly now, when credit conditions remain tight, cash flow troubles are a significant concern. Already 45 percent of firms are indicating that credit market conditions are negatively impacting their operations and it's unlikely that SMEs could  borrow their way out of trouble as credit providers continue their focus on risk aversion.

The challenge for small businesses as the economic environment improves is further highlighted by Dun & Bradstreet risk ratings, which show that small businesses in Australia are currently a higher risk of experiencing financial distress in the next 12 months than the average firm. Younger businesses - most of which are SMEs - also have a high risk profile, with 16 percent of firms less than five years old rated a high risk of experiencing financial distress. These findings come on the back of a 22.4 percent jump in business failures (year-on-year) in the 2009 financial year. 

Dun & Bradstreet's CEO Christine Christian believes the research is an important reminder that a failure to plan properly for improving economic conditions can bring new stresses and challenges for small business owners.

"As economic conditions improve, there can be a tendency for firms to let out an audible sigh of relief and simply expect their own business conditions to improve," said Ms Christian.

"However D&B's research provides an important reminder to small business owners that they need to plan adequately for an economic recovery and maintain a tight focus on the fundamentals of cash flow and risk assessment. Failing to do so could result in financial disaster."

"The other critical message for SMEs is that credit providers continue to be wary of any sign of risk, so it's unlikely they will be able to borrow their way out of cash flow trouble."

The Dun & Bradstreet research follows the release of its new book for small businesses, which focuses on managing cash flow and credit risk. Dun & Bradstreet's Guide to Cash Flow and Credit Risk is available online @ or in bookstores.

*ABS gross domestic product, chain volume measures, percentage changes (original) data reveals that GDP contracted by 7.1% in the March 2000 quarter (when the Dot Com bust occurred).


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