11 minute read
Avoid being caught in the flow on effects of economic uncertainty
By Patrick Coghlan*
If the headlines in the media are enough to go by, the state of the economy has entered uncertain times. Every day it seems as though there is a new collapse and a company is entering administration.
According to the Sydney Morning Herald, the economy may be set to record its worst annual result in two decades and JP Morgan stated that there is the real possibility of another negative quarter. Two negative quarters in a row would push Australia into a recession.
CreditorWatch’s recent Small Business Risk Review, showed that court actions increased in financial year 2019 across all states and there has been a steady increase since December 2018. Despite this, insolvencies and bankruptcies have fallen but that doesn’t mean that the next wave of insolvencies won’t start presenting themselves soon off the back of the court actions. It will be interesting to watch these trends over the next few quarters.
An Industry Insights report also conducted by CreditorWatch for the 2019 financial year, showed the top three worst performing industries according to court actions were (in order): 1. Construction 2. Professional, Scientific and
Tech Services 3. Retail Trade
New South Wales saw the highest construction risk and Victoria came in second place. To many, this may be of no surprise.
One of AICM’s longest standing members of 20+ years, Treacy Sheehan, was caught out by the construction industry. As a resident of the Mascot Towers and a small business owner herself, she is now facing the flow on effects of the poor performing construction industry. While it is still unclear what happened with the Mascot Towers, Treacy is now staying in temporary living arrangements and has had to contribute thousands for repairs.
Treacy and 132 other owners of units in the Mascot Towers are caught up in the flow on effects of poor due diligence in the construction industry. “I run a small recruitment business, Trace Personnel, and being caught in this mess affects revenue, its an absolute flow on effect. The IGA that operated at the bottom of the Mascot Towers has lost hundreds of thousands in stock. Yet, our mortgages still need to be paid, interest still needs to be paid, and if the building is unacceptable, what happens to the owners’, our investments and our credit, where do we go from here?”
“The situation with the construction industry is endemic with at least 3 other buildings in Sydney facing a similar situation,” said Treacy. There is constant news of construction company collapses as of late. According to the Australian Bureau of Statistics, as of June
2019, the trend estimates for total construction work done fell 2.7% this quarter and has fallen for four quarters. Building work also fell 2.2% this quarter and has fallen for three quarters. Residential and nonresidential also fell. Construction work in New South Wales and Victoria has fallen for the last three quarters. The value of total work completed has also fallen by 2.7%.
The CreditorWatch Industry Insights report also found that the most amount of insolvency notices were given to Professional, Scientific and Tech services, with Construction in second and Retail in third. The headlines match these statistics with some notable collapses: l Professional, Scientific and Tech
Services – RCR Tomlinson, an engineering firm, collapsed owing $630 million. ECM, an electrical engineering contracting business, collapsed, leaving 400 employees with two weeks’ pay and out of jobs. l Construction – Ralan Group collapsed owing $500 million.
J.M. Kelly Group saw a $33 million collapse. Strongbuild collapsed owing $7 million and JBP Holding collapsed owing $6.4 million l Retail Trade – It’s no surprise that retail has been struggling for a while. Recently, Australia saw the collapse of big names such as
TopShop, ToysRUs, Roger David and recently, Karen Millen. Big W is closing 30 stores around the country and department stores are voicing their struggle.
On top of all this, you need to be aware of illegal phoenix operators. The Phoenix Taskforce, which comprises 37 federal, state and territory government agencies, found that “it can occur in any industry or location. However, illegal phoenix activity is particularly prevalent in major centres in building and construction, labour hire, payroll services, security services, cleaning, computer consulting, cafés and restaurants, and childcare services. We also see it in regional Australia in mining, agriculture, horticulture and transport. There is an emerging trend in intermediaries who promote or facilitate illegal phoenix behaviour.”
The ATO, ASIC and the Fair Work Ombudsman commissioned PwC to measure the current impacts of illegal phoenix activity.
Annual costs of Phoenix Activity from the 2018 report found: l Annual direct impact of illegal phoenix activity to be between $2.85 billion and $5.13 billion l The cost to business from unpaid trade creditors is between $1,162 million to $3,171 million l The cost to employees, lost through unpaid entitlements is between $31 million to $298 million l The cost to government from unpaid taxes and compliance costs is around $1,660 million.
Xero released an explosive Small Business Insights report which highlighted that there was $115 billion in late payments throughout financial year 2018 and that $7 billion was owed from larger businesses. There could be many reasons for this but often we see larger businesses paying their larger customers first and it’s the smaller businesses that get paid late, or not at all.
While the state of the economy may seem worrisome, it is not all doom and gloom. Small businesses and larger businesses alike can see this point in time as an opportunity to reset their knowledge and processes around due diligence and who they do business with. By keeping the following tips in mind, businesses can mitigate risk, improve management of cash flow and reduce the impact of becoming part of a flow on effect.
Invest in onboarding your customers correctly
One of the most important things a business can do to protect their cash flow is to invest in onboarding their customers correctly. Allocating spend and taking the time to improve the onboarding process will actually save a business money in the long term. While we’d like to trust everyone, it’s just not possible to do that. If a customer goes into liquidation, it can affect your business’ cash flow and there is a flow on effect from there.
We live in a digital age where technology is more accessible than people think. One way to significantly improve the onboarding process is to switch to technology that can streamline and automate your processes, saving you both time and money. ➤
Small Business Risk Review
Annual Review FY2018 vs FY2019
Court Actions by Volume FY2018-FY2019
Court actions increased in FY2019 in comparison to FY2018 across all states with the exception of WA, which decreased by 18%. We saw an overall increase of 18%.
Western Australia had the least amount, with a consistent decrease.
28%
South Australia significantly peaked in court action s in July 2017 and again in February 2019
14%
YOY% TOTAL 18%
26%
Victoria took the lead each year with the highest amount of court actions Victoria saw its highest court actions in August 2018
1%
New South Wales had the second highest amount of court actions each year New South Wales peaked in August 2017 and peaked again in May 2019 with the highest amounts.
Court Actions by Dollar Amount FY2018-FY2019
Dollar Amounts increased in FY2019 in comparison to FY2018 across all states with the exception of WA, which decreased by 5%. There was an overall increase of 13% across Australia.
Western Australia had the highest dollar amounts in July 2017 and again in January 2019
-5%
South Australia peaked in dollar amounts in July 2017 and again in April 2019
55% 10%
QLD had the highest dollar amounts in August 2017 and peaked again in May 2019
YOY% TOTAL 13%
23%
Victoria peaked in dollar amounts in July 2017 and again in May 2019 New South Wales had the highest dollar amounts in August 2017 and peaked again in May 2019 38%
New South Wales had the second highest amount of court actions each year New South Wales peaked in August 2017 and peaked again in May 2019 with the highest amounts.
5 Riskiest Industries by Average Days Overdue July 2018 - June 2019
Administrative and Support Services
Arts and Recreation Services
Electricity, Gas, Water and Waste Services
Construction
Professional, Scientific and Technical Services
87 DAYS
88 DAYS 90+ DAYS
90+ DAYS
90+ DAYS Court Actions Nationwide July 2018 - June 2019 Top 5 Industries of Highest Risk
23%
11% 11%
8% 7%
Construction
Professional, Scientific and Technical Services Retail Trade Manufacturing Transport, Postal and Warehousing
1% Court Actions Nationwide (July 2018- June 2019) Lowest Risk: Electricity, Gas, Water and Waste Services
Construction Risk Across Australia
Construction is the riskiest industry across NSW, QLD, SA, VIC, WA and TAS. NSW is the worst performing state by 33%
19% 9% 9%
27%
3% 33%
ASIC Notices Generated by Industry July 2018 - June 2019
20%
16%
10%
7% 6%
Professional, Scientific and Technical Services Construction Retail Manufacturing Accommodation and Food Services
Professional, Scientific and Tech Services RCR Tomlinson $630 million collapse; ECM 400 employees jobless Construction Ralan Group $500 million collapse; J.M. Kelley Group $33 million collapse Retail Trade TopShop, ToysRUs, Roger David , Karen Millen
Payment Defaults by Industry July 2018 - June 2019
29%
12% 12% 10% 8%
Construction Manufacturing Retail Professional Accommodation
Scientific & & Food Technical Services Services
Software like CreditorWatch and its integration with its online credit application, ApplyEasy, can greatly improve the onboarding process. Customers information will be checked for accuracy and will be run through a credit check with a recommended decision provided in seconds. If you think that the customer’s information doesn’t matter, think again. A great example is PPSR. Without the correct ABN, ACN, name or address, registrations can become void. ApplyEasy also integrates with PPSR Logic, for streamlined registrations.
It is important to agree upon the correct payment terms as well. If a customer has a history of payment defaults, slow payment times or court actions, consider placing them on cash on delivery (COD) for a while. You might also want to shorten the payment terms than you usually would to allow for the average 7 days late period. Consider switching your accounts receivables to an online platform. Xero found that businesses who used online invoicing increased their payment times by 55%.
Know exactly who you are dealing with
Another crucial step to keep in mind is really getting to know your customer, especially if they operate in a highrisk industry or have adverse data on their credit report. Identify who is the underlying guarantor and ask for a trust deed if dealing with a trust.
Directors are essential to pay attention to. A director cannot be operating a business if they are bankrupt, but some fall through the cracks. It is important to look at cross directorships as well. For examples, if the director of construction Company A has adverse action registered against their Company B, you’ll want to be across it as past and present director behaviour is a great indicator as to how they will run a business: l A director with a payment default is 5 times more likely to experience another one l A director with a court action is 2 times as likely to have another one l A director with a failed business is 2 times more likely to fail again
If a director has experienced insolvency and sets up another company afterwards with a slight name change, this could indicate illegal phoenix activity.
“It’s important to perform due diligence when dealing with the construction industry,” explained Treacy. “You need to check if the builder, developers, strata management companies and engineers are still in business, and get to know who you are dealing with from the ground roots. It’s the same for a business. Make sure you do your homework on who you’re dealing with.”
The process of KYC (Know Your Customer) is handy for those not just in legislated industries like finance, if a customer operates in risky industries like construction or retail utilising KYC tools are very handy. These tools help identify higher risk entities and enable you to perform better due diligence, identifying those people who ultimately control a company regardless of whether they are a director or not.
Pay attention to the canaries in the coal mines
Subscribing to monitoring and alerts can help you to stay across adverse data in real time with 24/7 alerts highlighting insolvencies, mercantile inquiries, court actions, payment defaults, ABN/ACN changes, and more.
Companies that go into administration, generally show signs of stress before that happens. If a company can’t make payments to their smaller suppliers, they can only realistically maintain that for about six months. Then, when they stop supplying their largest suppliers, that’s when they typically collapse or are wound up.
Have an action plan in place
Review your current debt collection plan and if you don’t have one, now is the time to make one. Establish a process for each stage of a late payment and your follow up response to it. Collection software has come a long way in recent years allowing you to automate a number of these follow ups. And of course, don’t forget about the power of a payment default!
Review your customer database
It is vital to review your customer database regularly. Performing a Datawash can assist and help to identify any changes to your customer circumstances such as ABNs, ACNs, address changes and more. Consider placing the customers who have poor credit scores, court actions and payment defaults into a quarterly or 6-month review.
The above tips will help you to stay on top of your customer base, mitigate risk to your business and stay proactive in times of uncertainty.
*Patrick Coghlan MICM Managing Director CreditorWatch Ph: 1300 50 13 12 www.creditorwatch.com.au
