Insolvency looms for businesses failing to focus on profits

insolvency failing profits
Latest report shows insolvencies still rising. (Source: Bigstock)

The latest Alares Credit Risk Insights reveals Australia’s insolvency numbers last year exceeded the pre-Covid highs of 2018 and 2019, sparking concerns for SMEs in the months ahead. And in December 2023, Court recoveries and winding-up applications continued to spiral upwards.

Patrick Schweizer, director of Alares, said it is too early to judge whether the trajectory will continue as January is historically a low month for insolvencies.

“It won’t be until February or March before we get a clearer idea whether the trend from the end of 2023 continues into 2024,” he said.

Business owners face possible insolvency if they fail to manage costs and profit margins, warns insolvency and business turnaround specialist Jirsch Sutherland.

Andrew Spring, a partner with Jirsch Sutherland, said “This isn’t an uncommon pitfall for businesses, but the current market is forcing even experienced operators into making this mistake. We often say that ‘chasing sales is vanity, chasing profit is sanity’.

“However, in the current environment we know some business owners are feeling the pressure to maintain price points or even discount to maintain top line performance, while the costs of doing business continues to grow, strangling and suppressing their profit margin.” 

Insolvency a threat

Spring said “Margin squeeze is tricky to come back from; it can ultimately turn what was a profitable business into an unprofitable one. This can seriously impact cash flow because you then have to fund that loss from working capital.

“That’s why it’s so important to understand your business’s costs and cash needs vs what its true performance looks like. That knowledge enables owners to make good decisions and avoid catastrophic consequences such as poor cash flow management, which can lead to business failure.

“Since the pandemic, empathy and compassion have been front and centre for a lot of creditors when assessing financially distressed debtors; however, because the spike in insolvencies impacts creditors’ businesses, we anticipate seeing a more robust and active credit collection environment,” he said.