The gathering storm of insolvencies

Insolvency firms were expected to have a stellar year. However, the Federal temporary debt and rent relief programs have put the kibosh on anticipated business failures. Ironically, the majority of insolvency firms are struggling to survive. Whilst grim satisfaction may be an initial reaction, such relief programs may actually worsen the health of the economy.

The adage: “Capitalism without bankruptcy is like Christianity without hell” remain a truism irrespective of economic climates.

These programs will eventually expire (possibly by the end of next month). Subsequently, industry experts expect a tsunami of winding up applications and a spike in demand for debt collections. Evidence from Australian courts have shown a 64% YOY reduction in wind up applications for the April-June quarter. This has been accompanied by debt collection agencies reporting a substantial slowdown in activity over the same period.

Further signs of a deteriorating economy have been increased loan loss provisions by the major banks and the rise in provisions for doubtful debts by corporations. Consumer facing businesses as diverse as AGL and Breville have recently ratcheted up their provision for bad and doubtful debts.

As such, now is a timely moment to check in on your cash preservation initiatives.

Managing customer credit risk is one important control during these times. Assigning credit ratings to your customers, avoiding trade credit issuance, assessing the trade-off between credit risk and a marginal sale, reducing concentration risk and KPIs which are aligned to sales all need reviewing. Even for e-commerce platforms, it is worth keeping an eye on chargebacks and returns.

Working capital management is an equally important process.

Nearly 40% of small businesses report significant cash flow pressures due to late payments. This was prior to the COVID-19 pandemic which has only exacerbated tightening of cash flows. Also highlighted by the Australian Small Business and Family Ombudsman, 53% of invoices are paid late by large to small businesses. This equates to $115bn in delayed earnings and $7bn of working capital not being available.

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