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Average invoice values have plummeted and the business failure rate is predicted to rise by almost a quarter.
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Key business metrics take decisive turn for worse: CreditorWatch
23 August 2023
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Key indicators of business health have taken a decisive turn for the worse with average invoice values down by almost one third over the past year and the business failure rate forecast to rise 23 per cent, according to the latest CreditorWatch data.
The bureau’s July Business Risk Index also found credit enquiries, external administrations and court actions on the rise with the most vulnerable areas for business failure in western Sydney and south-east Queensland.
Industries dependent on consumer discretionary spending were also heavily exposed, with the food and beverage sector way out in front and facing a 6.9 per cent chance of payment defaults.
CreditorWatch CEO Patrick Coghlan said the plummeting value of invoices was a major concern, with a 28 per cent drop over the past 12 months.
“Over the past year, the decline in the value of invoices has been consistent and severe,” he said. “This deterioration is reflected in our other key business indicators: payment defaults, external administrations, credit enquiries and court actions.”
“It will be the industries most exposed to consumer discretionary spending such as hospitality and retail that will experience the toughest conditions across the second half of this year.”
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The report said the “massive drop” in invoice values meant businesses were ordering less each month and this was flowing through to revenue declines across supply chains.
CreditorWatch chief economist Anneke Thompson predicted invoice values to drop further “as consumer demand and business confidence fall away while costs rise” and increasing expectations of a recession that would “further erode business and consumer confidence.”
Other key findings:
- Business-to-business trade payment defaults continue to trend upward, with an 86 per cent year-on-year increase.
“Trade payment defaults continue to paint a worrying picture of cash flow constraints among Australian small businesses,” the report said. “The volume of trade payment defaults we have recorded over the past three months have been some of the highest on record, and there has been a noticeable increase in the trend since June 2022.”
- The national default rate is expected to rise 23 per cent over the next 12 months, from 4.67 per cent to 5.79 per cent.
“By July 2024, we expect 5.79 per cent of Australian businesses to have failed over the past year, up from 4.67 per cent today,” the report said. “Unfortunately, the slowdown in economic activity is going to cause casualties.”
Ms Thompson said household consumption had already slowed considerably and was expected to decline further as more mortgage holders came off fixed-rate home loans.
Areas with the highest risk of insolvency tended to have younger populations and business profiles more strongly weighted to construction, tourism and retail trade.
“The regions with the highest insolvency risk continue to cluster around western Sydney and south-east Queensland, with Merrylands-Guildford (NSW) recording a forecast default rate of 7.80 per cent for this time next year.”
- Credit enquiries are up 66 per cent year-on-year, despite a slight fall from June, reflecting tighter due diligence.
- External administrations have increased 10 per cent year-on-year, with most industries experiencing an increase in this measure.
- Court actions are up 17 per cent year-on-year.
Industries with the highest probability of default over the next 12 months were food and beverage services at 6.95 per cent, transport, postal and warehousing at 4.43 per cent, and arts and recreation services at 4.42 per cent.
ABS retail trade volume data showed Australia bought less at cafes and restaurants over the June quarter compared to the preceding quarter, in the first volume decrease recorded since September 2021 when pandemic restrictions were in place.
“The operating environment for Australian businesses will continue to have an elevated level of risk as we settle into a period of higher interest rates, probably for the next year,” the report said.
“Australian consumers’ cash reserves are falling away dramatically, and this slowdown in spending eventually works its way through the wider economy.”
The CreditorWatch Business Risk Index is calibrated by data from approximately 1.1 million ASIC-registered businesses. It combines these insights with CreditorWatch’s proprietary data.
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