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The credit reporting agency has raised concerns over a significant rise in insolvencies, particularly in the construction and retail trade industries.
CreditorWatch’s latest report: ‘Safeguard your business from insolvency report’, has warned that insolvencies continue to rise, particularly for the construction and retail trade industries, highlighting the need for credit professionals to be aware of early warning signs.
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CreditorWatch’s Business Risk Index has indicated a sharp increase in external administrations, reversing the decline observed during the pandemic and returning to pre-COVID-19 levels.
The agency predicts a steep surge in default rates, surpassing even the levels seen in early 2020, with figures projected to reach 5.8 per cent.
CreditorWatch’s chief executive Patrick Coghlan attributed the impending surge in insolvencies to the full impact of the Reserve Bank of Australia’s (RBA) 12 cash rate increases.
The effects of these rate hikes are expected to impact approximately 40 per cent of Australian households transitioning from fixed term to variable interest rates by September 2023.
“This, accompanied by low levels of consumer confidence, leads to an expected increase in external administrations,” Mr Coghlan said.
“FY24 will be difficult for Australian businesses and consumers. We are all paying a lot more for goods and services, consumer confidence is at record lows and business confidence isn’t doing that great either.”
He stressed the importance of insolvency risk management becoming a core element of business operations to navigate the upcoming challenges successfully.
While acknowledging the resilience of Australian businesses during tough times, CreditorWatch’s report highlighted the value of investing in technology, automation, and data to mitigate potential risks.
Businesses that have streamlined operations and adopted modern systems are likely to fare better in the face of economic uncertainty, the report noted.
Credit professionals are advised to focus on identifying early warning signs when working with businesses, principal at Cathro & Partners, Andrew Blundell, said.
“Having an understanding of these will give you, as a credit professional, insight into the business you’re dealing with and its performance so you can make informed decisions surrounding the provision of credit to that business,” Mr Blundell said.
He emphasised the significance of understanding a company’s performance and financial status to make informed credit decisions.
For example, dividends exceeding performance, especially in small- to medium-sized enterprises, where wages might not be taken, can serve as a warning sign of cash flow stress.
In addition, cash flow-related issues, such as reduced cash balances, maxed-out credit limits, and strained relations with suppliers, should also be carefully monitored.
Calculating and analysing liquidity ratios (current assets divided by current liabilities) can provide valuable insights into the company’s financial health over time.
“A deteriorating liquidity ratio, particularly viewed over time, shows the business’s ability to continue as a going concern and its ongoing deterioration is a bright red warning sign that you would be considering hard whether to extend terms to that business as a credit manager,” he said.
[Related: Mortgage arrears highest in outer regions of capitals S&P]
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