In February this year Dun & Bradstreet reported that business failures in Australia dramatically increased in 2010 by 23% while during the peak of the GFC in 2009 there was only a marginal increase of 4%. The report was based on external administration and liquidation information from the Dun & Bradstreet database.
Small businesses, with between 1 and 20 employees represented the largest contributor to the 10,000 business failures in 2010 with a 46% increase in failed businesses with 1-5 employees, and a 20% increase in failed businesses with 6-19 employees.
Dun & Bradstreet attribute this apparent anomaly to businesses paying closer attending to their cash flow management in 2009, in response to concern about the GFC, and a relaxation of cash flow management in 2010 as the Australian economy returned to robust growth and the threat of crisis appeared to reduce.
However it is tempting to speculate on other possible contributors to the 2010 jump in business failures, such as:-
There is no doubt that when the banks turned off the tap in 2009 businesses had no alternative but to concentrate on cash flow management to stay afloat – focusing on collecting their debts and turning over stock. We speculated at the time that this would be good discipline for businesses to get back to basic principles after the plethora of available cash in the previous few years.
It is therefore somewhat surprising that Dun & Bradstreet believes that business operators relaxed their cash flow management in 2010, so soon after the apparent demise of the GFC in Australia.
They comment that the increase in business failures in 2010 coincided with a similar increase in business to business payment terms, reaching a peak of an average of 53 days in 2010 after actually improving during the GFC. Many smaller businesses had to wait more than 60 days for payment.
A more recent media release by Dun & Bradstreet reports that, during the March 2011 quarter, average payment terms were even higher at 55.6 days, the second worst figure (after 2008) in 10 years. The number of businesses taking more than 90 days to pay their suppliers rose by 20% in the March 2011 quarter. Large businesses (with 500 plus employees) are the slowest payers taking 58.5 days to pay, up from 55.6 days in the December 2011 quarter. Governments are not much better, taking almost 58 days to pay business suppliers, despite having policies to improve payments especially to small businesses.
This data comes as no surprise to those of us working in the SME sector, as many SMEs are reportedly struggling to deal with extended payment terms taken (not necessarily given) by large business and government customers.
Even the best credit control and debtor management practices are unlikely to be of great practical value to SMEs when their large business and government debtors will not pay. In many cases these large customers represent a significant proportion of an SME’s business. As a result, SMEs are often in no bargaining position to insist on tighter trade terms.
I personally find it hard to believe that SMEs in particular have been so quickly distracted from the fundamentals of cash flow management because of the apparently more buoyant macro-economic conditions. Most of the SME owners I speak to are only too aware of the two-speed economy and the fact that they are not operating in the fast lane. While banks somewhat loosened the credit squeeze in 2010, SMEs are still generally restricted on sources of funding and more reliant on their cash flow to sustain themselves. When they are at the bottom of the cash flow food chain, it is natural that they become the casualties from a slowdown in payments by big business and governments.
If business failures rose by 23% in 2010 on the back of increased average payment terms of 53 days, we must be concerned about the likely fallout from the increase to 55.6 days in the March 2011 quarter.
Of course SMEs must focus heavily on credit control and debtor management, but this will not necessarily save them when their large customers cannot or will not pay them within a reasonable period. If we are to be spared a continuing increase in SME business failures, governments need to take the lead in reducing the time they take to pay their SME suppliers.