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Avoid risk: Consider underlying trends challenging small business

The second Small Business Risk Review for 2018 highlights relatively stable conditions in comparison to the previous financial year. However, there is still an underlying trend where businesses are facing challenges.

It is no surprise that we continue to see big jumps in dollar amounts and court actions in Queensland due to the end of the mining boom and natural disasters.

While court actions in New South Wales and Victoria have declined, dollar amounts have climbed in comparison to last quarter. This suggests that larger court actions have taken place.

As for Western Australia, court actions and judgments continue to drop and this past quarter has seen the largest drop. South Australia remains flat.

Quarter 2 2017 and Quarter 2 2018 are complete opposites of each other. Other factors besides mining could be contributing to the numbers we are seeing. Technology is also something to consider as it is not only an opportunity but also a threat to industries that are seeing more automation or for business owners who don’t know how to stay on top of it. Technology is moving at a rapid pace and the cost of hiring labour is also high.

Unincorporated entities are showing a big jump in a year on year comparison. This past quarter shows that a large number of unincorporated entities have gone under. The ATO is as aggressive as ever in terms cracking down on those who owe money, which could be one of the contributing factors.

“It’s important to consider a debtor’s journey to administration. You’ll see defaults by smaller organisations which leads to court actions and eventually, administrations and insolvencies. I think that’s a lot of what we are seeing here,” commented Patrick Coghlan, Managing Director of CreditorWatch, during the Small Business Risk Review webinar.

As for bankruptcies, Queensland is the leader with the largest increase and the total nationwide data shows an overall increase of 7%. This indicates the financial pressure that people are feeling and therefore, not spending, which in turn, affects cash flow. Business owners and individuals could be paying business debt on their own personal credit cards. Interest rates could also be adding to the pressure. Insolvencies have remained fairly steady throughout the financial year.

“There is an environment out there that is still a bit challenging,“ commented Lance Rubin, CFO of Sequel CFO and guest contributor on the Small Business Risk Review webinar. “’It’s not going to happen to me’ is a dangerous position to take because you simply do not know. Quite often when people think of credit, they think of customers, but it’s more than that: it’s suppliers, distribution partners. They all have an effect.”

It’s vital to understand working capital and how debtors, creditors and inventory/stock all fit together and the impact that throwing one of them off balance will have. “Understanding that cash is king is a must. Profit is not cash,” comments Lance Rubin.

Performing due diligence, recognising warning signs of court actions and insolvencies, financial modelling and having action plans in place are all ways that small business owners can stay ahead of risk. Avoid taking a relaxed approach and consider current trends and impacts that they could have on your entire business and the relationships around it.

For a detailed view of the latest Small Business Risk Review statistics, view our infographic

For more detailed conversation around it, watch the latest webinar

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