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Pressure on discretionary spending and rising costs are accelerating the risk of insolvency for the food and beverage and construction industries, a credit agency warns.
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Hospitality, construction face highest insolvency risk
21 April 2023
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The food and beverage sector currently has the highest risk in terms of industry insolvency, with 0.97 per cent of businesses going into insolvency on a rolling annual basis in March 2023, according to recent CreditorWatch data.
It is also the industry with the highest probability of default over the next 12 months, based on the CreditorWatch Business Risk Index for March.
The food and beverage industry continues to struggle with labour shortages and is also heavily reliant on discretionary spending which is currently in decline.
The construction sector was second most at risk for insolvency with 0.7 per cent of businesses going into insolvency, based on the CreditorWatch Business Risk Index for March.
CreditorWatch chief economist Anneke Thompson said the construction industry is still working through very high volumes of work and is invoicing at a very high rate but is being hit by rising costs.
“It is the cost side that is really damaging to this sector at the moment, with many projects being completed at a substantial financial loss to the builder due to the price the owner pays being fixed at the time of contract signing.”
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The rate of external administrations for contribution businesses is still below the baseline rate of what it was pre-covid but is expected to continue rising, according to the Business risk Index.
The very low levels of insolvencies in the construction sector during the covid lockdowns suggest that a number of businesses kept going that normally would have failed.
"The huge amount of government stimulus showered upon the wider economy, and in particular the construction sector, allowed many businesses that were not viable to stagger through," said CreditorWatch in a recent statement.
These businesses, nicknamed ‘zombie businesses’ during COVID-19, are now being exposed as supply costs, labour costs and interest rates continue to rise and demand and government incentives reduce.
The Business Risk Index for March also revealed Western Sydney is the region expected to be hit hardest by insolvencies over the next 12 months.
Relative levels of debt are high in this region and there are many small businesses that are very sensitive to even slight movements in demand.
The Business Risk Index revealed that half of the ten highest ranking regions for probability of default are located in Western Sydney. These regions include Fairfield, Bankstown, Auburn, Canterbury and Merrylands - Guilford.
Low medium income, high population density and low positions on the ABS’s Index of Relative Social Advantage and Index of Economic Opportunity are some of the indicators driving higher risks for businesses in these areas.
Overall, the results of the March Business Risk Index were encouraging with business activity increasing. Trade receivables were up 45 per cent year on year while nine out 13 industries saw an increase in turnover, according to the index.
CreditorWatch chief executive Patrick Coghlan said although these results were encouraging and demonstrated the resilience of the Australian business community, the next 12 months is likely to be challenging.
“We can’t ignore the forecasts for more tough times ahead as demand drops and cost pressures remain.”
“However, these current increases in turnover mean that businesses will thankfully be in a stronger position as conditions tighten.”
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