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External administrations reached a record high in March amid ongoing cost pressures, skilled labour shortages, and falling consumer demand, according to CreditorWatch.
New figures released by the credit reporting agency this morning (17 April) revealed that external administrations reached a record high in March.
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The March 2024 CreditorWatch Business Risk Index (BRI) calibrated proprietary data with data from approximately 1.1 million ASIC-registered, credit-active businesses to determine insolvency risk and track key indicators of business conditions such as payment defaults, court actions, and external administrations.
It found that more than 1,200 businesses went into administration in March, setting a new record.
The record reflected a 22.6 per cent increase compared to March 2023, when the number of businesses entering administration was just below 1,000 and is up on the previous record high, set in August 2023.
The credit reporting agency attributed the increase in administrations to labour shortages, a reduction in consumer demand, and continuing cost pressures.
CreditorWatch chief executive Patrick Coghlan commented: “Most businesses, particularly those that are consumer-facing, and therefore exposed to the vagaries of discretionary spending, are currently being hit by a range of heavy impacts.”
He added that he did not believe business conditions would improve markedly until consumer spending increases, which he said was “dependent on interest rate relief, which is not even on the horizon at this point given the high rates of inflation in the US”.
Construction industry suffering with ATO debt
The BRI also revealed that the construction industry is still struggling and dominates the Australian Tax Office’s (ATO) tax debt default records.
Of the construction companies with ATO debt, 70.4 per cent of businesses were from the construction services sector, which is predominantly made up of smaller subcontractor businesses, according to the agency.
Moreover, the construction industry made up 23.8 per cent of businesses with an outstanding ATO debt of more than $100,000, according to CreditorWatch.
The report said: “It is also interesting to note that within building construction, residential builders are around 1.5 times more likely to default on a tax debt than non-residential construction companies.”
The March index also found that business-to-business (B2B) payment defaults had decreased slightly, when compared to February 2024, when a record high of 120 bps was set. However, compared to March 2023, the B2B invoice defaults were up 22.6 per cent.
The average value of invoices also increased in March after reaching a record low in February of $150,000.
CreditorWatch said that the increase in invoice values in March was a “seasonal uptick” but is “still trending strongly downwards”.
Government to improve invoice payment times for SMEs
The improvement in B2B payment defaults came as the government works to improve payment times.
On Monday (15 April), the Albanese government released draft legislation to amend the Payment Times Reporting Act 2020 and introduce reforms to “increase pressure on big businesses to pay small businesses on time”.
It followed recommendations from Craig Emerson in December 2023, who conducted an independent review of the 2020 Act, and suggested that the regulatory body be given the power to “name and shame poor payers and praise fast payers publicly”.
The government said that the proposed legislation would level the playing field for small businesses when chasing invoice payments from larger corporations.
According to the Labor government, the proposed bill would:
- Broaden the regulator’s functions to include researching the causes and impacts of slow payment to small businesses and allow them to highlight “good and poor payment conduct by large businesses”.
- Consolidate reporting under Australian accounting standards so that the data reported to the regulator provides a comprehensive view of payment times and enables meaningful comparisons of large businesses.
- Introduce mechanisms to improve transparency and identify slow-paying businesses, including potential enhanced disclosure from continuously slow-paying large businesses.
The government is allowing submissions from interested stakeholders on the draft legislation until 29 April 2024.
The Labor government expected the draft legislation to be introduced to Parliament this year.
[Related: SME invoice payment defaults at record high: CreditorWatch]
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