Navigating the rising tide of business-related Personal Insolvencies: A Call to Action

The business landscape, particularly in Australia, is experiencing a significant rise in personal insolvencies, affecting many entrepreneurs whose personal finances are intertwined with their business ventures. The latest snapshot by the Australian Financial Security Authority (AFSA) revealed 901 new personal insolvencies recorded in June, with a quarter being business-related.

 In some earlier statistics for March 2023 quarter, 34.4% were attributed to business-related causes, up from 29.9% in the same quarter in 2022.

The data paints a clear picture: the personal finances of entrepreneurs and business owners are suffering, and the impact is far-reaching, extending beyond traditional company insolvency statistics. It underscores the fragile relationship between personal and business finances.

Added to those statistics, Insolvency Australia has revealed a 57 per cent increase in companies appointing administrators in the last quarter (compared to the same time in 2021/22.) NSW led the way with 1170 corporate insolvencies, and Tasmania recorded the highest year-on-year increase at 133 per cent. 

It’s clear between the ASFA and Insolvency Australia figures that businesses are feeling the squeeze. 

The sectors that seem to be most impacted are construction, retail trade, accommodation and food services. Despite the current relatively low personal insolvency rates, AFSA CEO Tim Beresford predicted a significant increase in the coming year due to various policy and macroeconomic factors, including the end of pandemic-era payment extensions and repayment holidays. 

Though not the majority, business-related insolvencies carry a significantly larger debt burden. As of January, ASFA confirmed they accounted for roughly two-thirds of debt in the system, with an average debt of $830,502, more than 5.8 times larger than non-business-related insolvencies.

With the tax office now stepping up in its collection activity beyond pre-pandemic levels and an increase in company wind-ups by the big four banks, it stands to reason there’s an increase in business-related personal insolvencies. Understanding these figures and the potential growth in future, business owners and directors need to recognise the signs of distress early enough to take action:

Review Financial Statements Regularly: Regular analysis of your financial statements can provide early warning signs of trouble. Look out for decreasing profits, increasing debt levels, and shrinking cash flow.

Monitor Your Payment Delays: Frequent delays in paying bills or meeting other financial obligations indicate pending financial distress. It’s essential to keep an eye on your payment schedules; a big part is ensuring your suppliers are paying you on time. Their delayed payments can have a knock-on effect when businesses are already feeling the squeeze.

Increasing reliance on debt to fund operations: If your business is increasingly reliant on debt to fund daily operations, it’s a clear sign that you might be heading for financial trouble. A healthy business should be able to fund its operations through its revenues. Try to avoid increasing lines of credit or extending credit card debt.

The rise in personal insolvency figures is a stark reminder of the financial challenges many are facing. It’s a call to action for all of us to stay vigilant, monitor our financial health closely, and seek help early when needed. If you’re struggling with business-related debts, there are several avenues you can take.

If your debt is tax-related, it’s critical to contact the ATO asap to negotiate a payment plan or reach out to an independent business advisor or restructuring specialist to understand your options. 

Early identification and intervention can be the key to navigating through financial hardship. Let’s help each other stay afloat in these challenging times.

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