Why Are Small Business Failures Up 48%?

February 21, 2012, 12:12 pm Kochie's Business Builders Yahoo7

The number of small businesses going bankrupt jumped by 48 per cent over the last 12 months, while small business start-ups fell by 95 per cent over the same period.

Why Are Small Business Failures Up 48%?

The number of small businesses going bankrupt jumped by 48 per cent over the last 12 months, while small business start-ups fell by 95 per cent over the same period.

Analysis by Dun & Bradstreet of business start-ups and failures for the December quarter 2011 found that across the economy, business failures were down 10 per cent on the September quarter 2011, but up more than 40 per cent for the year.

This coincides with Dun & Bradstreet’s downgrades during the December quarter of more than 128,000 firms that are likely to experience financial distress over the coming twelve months.

According to Dun & Bradstreet CEO, Christine Christian, Australian business failures have trended steadily upwards since 2008, growing over 30 per cent in the last three years.

“There is an increasing risk that the global economic slowdown will intensify the upward trend in insolvencies,” Ms Christian said.

“Despite recent rate cuts, there is a palpable lack of confidence in the current operating environment. This is obviously one of the side effects of long standing global uncertainty and can often be enough to deter businesses from entering the market, irrespective of actual conditions.”

Key findings of the D&B Business Failures and Start-ups Analysis for the December quarter 2011:

- Nationwide, insolvencies rose 42 per cent year-on-year while the number of new businesses fell 11 per cent over the same period;

- Small business failures grew 57 per cent over the year among firms with less than five employees and 40 per cent over the year among firms with six to 19 employees;

- Small business start-ups among firms with less than five employees fell 95 per cent in the year;

- Failures were most pronounced within the service (up 58%), finance (up 58%) and construction (up 66%) sectors; and
 Start-ups during the December quarter in the manufacturing, service and finance sectors fell by nearly 100 per cent.
“Outside the mining sector, sentiment is generally still poor and the strong Australian dollar is straining profits. This could lead to an increase in business failures in 2012.”

Business failures by firm size Q4 2010 - Q4 2011

While most sectors saw some improvement during the fourth quarter, failures in the retail sector rose 11 per cent for the quarter and were up 115 per cent for the year. This corresponds with similar jumps in the traditional manufacturing states of New South Wales and Victoria where insolvencies increased 59 per cent and 35 per cent respectively for the period.

Since the Global Financial Crisis in 2008, failures in the services sector have risen by 77 per cent, while failures in the manufacturing industry have increased by 57 percent.

In contrast, not surprisingly, the mining industry recorded almost no insolvency activity during the December quarter. Over the last three years failures in the mining industry have fallen by 20 per cent.

Business failures by industry 2008-2011

These findings correlate with a recent D&B Global Business Failures Report, which revealed that Australian businesses continue to present a high insolvency risk when compared with the rest of the world.

The report indicated that with its steady increase in bankruptcies, Australia is now being classified in the same risk category as a number of countries being impacted by the euro-zone debt crisis, such as Italy, Portugal, Spain and the United Kingdom.

"In Australia, rising insolvencies are largely being driven by poor sentiment outside the mining sector and a tightening of credit. This will have a knock-on effect on businesses as cash flow becomes more strained," Ms Christian said.

“Cash flow is the mitigating factor here, particularly for small businesses who feel the effects a lot faster than larger companies with cash reserves to match.”

"Businesses should take precautionary measures to reduce their level of financial and operating risk. Changing market conditions will no doubt have an impact on all businesses, but it is above all good cash flow management that is the key to running a successful enterprise."

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