Real Costs of Business Collapses

Michael Fingland

Executive Director and CEO

With insolvencies at 30% above pre-Covid levels, and economic conditions set to worsen, it’s confronting to look at the real cost of business collapses.

In a typical year around 10,000 Australian companies collapse which, according to ASIC data and our own analysis, creates a $10b-$15b hit to the economy.

Beyond this lies incalculable collateral impacts – knock-on effects to other businesses, bankruptcies, marriage breakups and suicides.

A World Economic Forum study shows 1 in 5 suicides are due to unemployment. During economic downturns, suicide rates increase by 12%.  A US Global Financial Crisis study found a 1% increase in unemployment equates to 4,000 more suicides; in Australia, it means an extra 1,000 deaths.

I started my career in insolvency and was frustrated by the social impacts and needless destruction of wealth, which is why I founded specialist turnaround firm Vantage Performance and we’ve spent two decades helping hundreds of companies successfully turn around.

A turnaround specialist helps stabilise the business, secure funding and develop a comprehensive strategic plan to turn things around, working with key stakeholders. These days, this often involves a Safe Harbour plan ensuring that directors are protected from insolvent trading should the turnaround plan not succeed.

Safe Harbour legislation was introduced in 2017 to encourage directors to seek help earlier from a qualified turnaround or restructuring advisor – but unfortunately, most directors are still unaware of it.

Safe Harbour provides peace of mind and control to directors as they navigate their way back to a stable financial position and there’s a direct correlation of reducing the business failure rate. It also provides peace of mind to financiers, as being in Safe Harbour means that you have a robust plan supported by a qualified expert.

Early intervention is key, providing the best chance of helping preserve a company’s financial position, reputation and relationships.

With 2024 shaping up for further insolvency pain, there are steps the government, financiers and the ATO should take that would result in a material reduction in the rate of business collapse:

  1. ASIC could send a reminder to directors about the availability of Safe Harbour and encourage them to seek expert advice if they find their business in financial distress.
  2. When assessing a payment plan request, the ATO could check that the business has engaged a Safe Harbour advisor.
  3. When a business has requested additional support to assist their turnaround, financiers could request the company engage a Safe Harbour advisor as a condition of ongoing financial support.

 

The presented text was a collaboration between Michael Fingland and The Courier Mail’s Queensland Business Weekly, published on April 12, 2024.

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