According to ASIC’s annual insolvency data, corporate business failures have risen by 39% compared to the previous year, with construction, accommodation, and food services being the most affected sectors.
Restructuring appointments surged by over 200% in 2023-24. Small business restructuring, which applies to companies with liabilities under $1 million and other criteria, allows businesses to maintain control while working with a restructuring practitioner to develop a plan and negotiate with creditors.
Of the 573 companies that began restructuring after January 1, 2021, and completed their plans by June 30, 2024, 89.4% are still registered, 5.4% have gone into liquidation, and 5.2% were deregistered. Michelle Bullock of the Reserve Bank of Australia has noted that the business sector is facing increased pressure and a less favorable outlook, with productivity also falling short.
Strategically, managers must keep a close eye on their financial metrics to spot and address issues before they become serious. If you’re unaware of the key factors that influence your business’s success or failure, it’s crucial to identify them.
A business becomes insolvent when it is unable to meet its debt obligations as they come due. The three primary causes of company failure are:
- Ineffective strategic management
- Insufficient cash flow or excessive cash expenditure
- Operating losses
It’s common to overlook warning signs and hope for improvement if you can just get through a tough period. The typical problem areas include:
- Significant underperformance compared to the budget.
- Major increases in fixed costs without a rise in revenue—Fixed costs, such as additional space, more staff, or new equipment, affect profitability directly. If these costs increase without a corresponding boost in turnover and gross profit, it can be detrimental.
- Declining gross profit margins—The gross profit margin is the difference between sales and the cost of goods sold. A decrease in this margin reduces overall profit.
- Relying on debt financing rather than equity.
- Decreasing sales—Falling sales can negatively impact profit and hinder growth.
- Delayed payments to creditors—Even if sales are strong, insufficient cash flow can lead to late payments.
- Spending beyond cash flow—Using future income to cover current expenses.
- Inadequate financial reporting systems—Operating without clear financial insights.
- Rapid growth—Expanding faster than the business can manage.
- Significant bad debts or unsellable stock—Unpaid accounts and inventory that cannot be sold.
Don’t let your business become another statistic. With corporate failures rising by 39% and restructuring appointments up over 200%, it’s crucial to stay proactive. Evaluate your financial metrics, identify key drivers of success, and address potential issues before they escalate. Ensure you’re not falling into common pitfalls like poor strategic management, rising fixed costs, or inadequate cash flow. Take charge now—review your financial practices, implement robust reporting systems, and seek professional advice if needed.
