A review of the national company insolvency statistics for 2005 has highlighted some alarming trends in the business community. The number of companies being placed in receivership, administration and liquidation was up by 9% in 2005. This is a significant increase considering that the number of insolvencies in 2004 actually declined by 2%.

The most alarming trend however is the rapid pace of this increase. As the following table illustrates the national rate of increase in the six months to December 2005 was actually up by an amazing 24%. This is quite an alarming indicator and, together with the recent ABS statistics on GDP growth, indicates that many sectors of the economy ground to a halt in the latter part of 2005.

NSW bore the brunt of this negative sentiment with company insolvencies actually up by 34% in the six months to December 2005. The following graph really highlights this rapid change in the six months.

Also of concern is the fact that the number of casualties in the second half of the calendar year are usually lower than the first half.  Not so in 2005 as this trend was reversed.

The industries under most pressure are the manufacturing, retail and transport & logistics industries.

The main issues affecting these industries are as follows:

  • The high oil price which has almost doubled in recent years.  This can equate to a reduction in net profit of 8 percentage points for many small to medium transport companies which puts them well into the red considering the industry average for net profit prior to the oil spike was 4%.
  • Rising wage costs, particularly for manufacturing businesses.
  • A tightening of consumer spending due to the slowdown in the property boom (ie. less equity to spend) and the high oil price.
  • The strength of the Aussie dollar.
  • A more aggressive stance by the ATO on collecting outstanding GST.

In our experience insolvency cycles don’t peter out after six months and usually build for 18 months to two years before levelling out. These statistics indicate that we could be in for a challenging couple of years.

What this means for businesses in these sectors is the importance of having a rigorous performance management program and culture in their organisation. A review of their strategic business plan or the creation of one is paramount to ensure that the business and its cost base can move in step with the slowing economy to safeguard the business and the interests of its many stakeholders.

For many businesses urgent and in some cases radical restructuring will be required to stave off the threat of insolvency and given that it can take up to 3 to 6 months for restructuring initiatives to have an impact, management teams need to be seeking the advice of a performance improvement or turnaround specialist now.


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