New research predicts insolvency looming for many businesses

Insolvency looming for some small businesses
Insolvency looming for some small businesses

New research suggests that many businesses and individuals are at serious risk of bankruptcy, with 2021 looking particularly precarious when government COVID-related stimulus measures are set to end.

The study was conducted by cashflow forecaster Float based on the data released in November by the Australian Securities and Investment Commission (ASIC) and Australian Financial Security Authority (AFSA).

ASIC reported that insolvency figures in July to September 2020 among businesses were at a “record-breaking” low of 946 insolvencies compared to a quarterly average of 2367 in previous years.

However, Float estimates that there are 2325 Australian “zombie” firms being kept artificially above water by government money. This figure is predicted to rise as high as 3452 by EoY based on the number of unviable businesses in a typical year but may be much higher in reality due to COVID-19. Meanwhile, 2988 personal insolvencies were recorded in September 2020, a steep decline compared to 6100 from the previous year.

The research suggests that many Australian businesses are on a “knife’s edge”.

While new government schemes come into force on 1 January 2021, they are less robust then the first round of stimulus measures.

Float has urged the Government to extend current financial interventions in order to avoid a wave of “zombie” firms declaring bankruptcy at the same time. It also called on businesses to remain cautious with their spending even as the country heads into summer and records fewer COVID-19 cases.

“The mood among Australian businesses is broadly positive. We’re heading into summer, while COVID numbers and restrictions are down nationwide,” Dylan Burgess, partner relationship manager at Float, said.

“Government intervention has been vital to Australia recording its lowest ever insolvency figures, and we have fared better than most other countries around the world, but we still need to temper this optimism.

“The stark reality is that we’re in the middle of a national and global financial recession,” Burgess added. “Thousands of Australian businesses are limping through to 2021 and many won’t last another six months. We have to do more to avoid a tsunami of insolvencies in 2021.

Burgess warned that businesses must remain cautious, get a handle on their cashflow and prepare for as many possible future scenarios as possible.

“Making decisions based on the facts, using real world financial data, is essential for business owners right now, regardless of how optimistic they may feel at the moment,” Burgess concluded.

This article first appeared on Inside Small Business, a sibling website to Inside Franchise Business Executive.