Inadequate cash flow or high cash use continue to be the root cause for a company’s failure, ASIC’s latest corporate insolvency report shows.
Of the 7,498 initial external administrators’ reports lodged in the 12 months to 30 June 2019, 51 per cent nominated inadequate cash flow or high cash use as the top cause of business failure.
External administrators are allowed to nominate more than one reason for a company’s failure, with poor strategic management of business coming in second at 42.9 per cent, and trading losses at 38.9 per cent rounding up the top three causes of failure.
Manufacturing, wholesale trade, and accommodation and food services were the three industries that were most susceptible to cash flow pressure.
Agriculture, forestry and fishing; rental, hiring and real estate services; and transport, postal and warehousing industries exceeded the average percentage for poor strategic management of business.
Industries that were most at risk for trading losses were manufacturing, accommodation and food services, and retail trade.
ASIC’s latest annual overview of corporate insolvencies also revealed that small- to medium-sized corporate insolvencies continue to dominate external administrators’ reports, with 85 per cent having assets of $100,000 or less, 76 per cent having fewer than 20 employees and 38 per cent having liabilities of $250,000 or less.
Further, 96 per cent of creditors in this group received between 0–11 cents in the dollar, reflecting the asset/liability profile of small- to medium-sized corporate insolvencies.
The three industries with the highest number of reports were other (business and personal) services, construction, and accommodation and food services.
The top six industries have not changed position from the previous year, with retail trade; transport, postal and warehousing; and manufacturing rounding up the top six.
Of the 7,498 reports lodged, external administrators reported alleged misconduct for 88.5 per cent of them.
External administrators identified more than one indicator of insolvency on which they based their belief that the director had reasonable grounds to suspect that the company was insolvent or would become insolvent by incurring the debt.
The top three indicators included the non-payment of statutory debts such as PAYGW, SGC, GST; financial statements that disclose a history of serious shortage of working capital and unprofitable trading; and difficulties paying debts when they fell due, evidenced by letters of demand.
Registered liquidators continue to improve the timeliness in lodging their reports with ASIC, with 60.5 per cent now lodged within the period of between two months and less than six months after appointment, up from 54.7 per cent in 2017–18.
For more advice on dealing with cash flow problems, go back and view November’s My Business webcast.