Small firms hit hardest by insolvencies: ASIC

Small businesses are failing in greater numbers than their larger counterparts as the lingering impact of the pandemic continues to hit sales and trading outlook.

Small businesses are failing in greater numbers than their larger counterparts as the lingering impact of the Covid-19 pandemic continues to hit home.

The latest data from the Australian Securities and Investments Commission (ASIC) shows small to medium-size companies remain most prone to insolvency as cash flow and trading performance continue to be affected in a post-pandemic market.

ASIC said that of the corporate insolvencies reported in the latest financial year, 83 per cent had assets of $100,000 or less; 82 per cent had fewer than 20 employees; and 68 per cent had liabilities of less than $1m. Creditors of these small companies also bore the brunt of their failure with 96 per cent only receiving between 0 and 11 cents in the dollar.

The highest number of failures were in the construction industry, which made up 28 per cent of insolvencies, with the accommodation and food services industry representing 15 per cent.

ASIC said the most commonly reported causes of failure were inadequate cash flow or high cash use followed by trading losses. In 19 per cent of insolvencies, Covid-19 was nominated as a contributing cause. Most of the failed companies were based in NSW (41 per cent), followed by Victoria (27 per cent) and Queensland (18 per cent).

WCT Advisory managing partner Andrew Weatherley said accommodation and food services were now the top two industries impacted by insolvency.

“We are seeing far more food services businesses seeking help or alternatively just moving to appoint a liquidator and closing down and we expect that to continue,” Mr Weatherley said. “Cafe and bar owners are looking to trade through the next few weeks and then close or liquidate around/just after Christmas, when the whole industry slows down.”

He said the retail, food services and construction sectors would remain in a difficult trading environment for another year.

“I suspect those pressures will lessen towards the back end of 2024 with a pause or even reduction in interest rates and other cost inputs,” he said. “Nevertheless, we think 2024 will be a busy period for insolvency firms.”

There have been signs of further deterioration since the start of the new financial year in July.

The number of company collapses for the first five months of the 2024 financial year has hit 5623, up almost 40 per cent from the 4020 notched up in the same period last year, according to the latest ASIC figures.

Construction-related insolvencies accounted for almost 28 per cent of all collapses at 1574, up 36 per cent from 1155 a year earlier.

Revive Financial head of business restructuring and ­insolvency Jarvis Archer said the latest ASIC statistics reflected the increasingly difficult trading environment.

“Retail, hospitality and construction businesses are all ­presenting with challenging ­circumstances,” he said.

Mr Archer said that the ­statistics included in the ASIC report didn’t show the full picture for small business. “Small business restructures are specifically for small business, but don’t require the same report to be lodged with ASIC,” he said. “This adds about 100 ­further companies to the list each month.

“The growth in the number of small business restructures has grown rapidly in 2023 and is ­expected to continue its popularity to deal with ATO and other accrued debts in 2024,” Mr Archer said.

Originally published as Small firms hit hardest by insolvencies: ASIC