Wednesday, October 12, 2011

Insolvencies spike as companies feel pressure from debt defaulting clients

By Business editor Peter Ryan

The deepening global economic uncertainty and the potential fallout in Australia is pushing some businesses to the brink of financial ruin, according to research out today.

The credit reference agency Veda  has revealed a twenty percent spike in the number of companies going into administration since the global financial crisis hit three years ago.

However, the financial distress is not being caused by factors directly linked to Australia's two speed economy or instabliity fuelled by the sovereign debt crisis in Europe.

Instead, the Veda research shows more companies of becoming insolvent because their clients are defaulting on their bills as they struggle to preserve their own cash flows.

Veda's head of commercial risk Moses Samaha says the number of companies entering external administration has risen by 19.6 percent since the June quarter of 2008 when the global financial crisis took hold.

"Concern over a possible global credit crisis, reduced consumer sentiment and delays in customer payments are no doubt adding strain to business cash flow. Tighter financial and credit management practices will now prove vital for SMEs to avoid the risk of insolvency over the coming 12 months," Mr Samaha said.

Listen to my interview with Moses Samaha broadcast on "The World Today".

Mr Samaha said assessing the credit risk of customers and clients should now be a priority for any business given the current environment.

"This is necessary to help minimise business exposure to bad debtors and to help safeguard against risky business relationships. Organisations should also undertake a thorough background check on company owners and directors and not just the business entity itself."

The construction industry accounts for the largest proportion of external adminstration (18 percent), followed by manufacturing (13.9 pecent), retail (8.8 percent) and professional, scientific and tech services (8.3 percent).

Mining, information and media, and education and training accounted for the least amount of external administrations at 0.7 percent.

The Veda research also reveals that companies with 10 to 99 employees were over-represented in companies going into administration.

Mr Samaha said some customers were holding back on payments to companies in a bid to hold on to cash, as part of a vicious cycle of default.

"Cash flow is the "lifeblood" of any business. Poor credit control will greatly affect cash flow and the ability to pay debts on time, so it pays to develop an understanding of the financial situation of the business to which you are extending credit," he said

"This will give you an indication of how swiftly they may pay you for your products or services and the likely impact on your company finances."

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