Ask An Expert: Top 3 Reasons SME’s Go Into Administration

A couple of weeks ago The Australian Securities and Investments Commission Insolvency figures were released.

Apparently 9829 companies entered external administration in the 2010-11 financial year – the highest figure since the peak of 10,005 during the global financial crisis. I spoke to Domenic Calabretta, Parnter at Hall Chadwick, and asked him what he thought the Top 3 reasons SME’s go into Administration are. Here’s what he had to say:

1.      Current Economic Climate

The state of the economy is fundamental to SMEs.  The global financial crisis which we had in late 2008 was called by leading economists as the worst financial crisis since the great depression of the 1930s. The burden of the global economic meltdown of 2008 is now being carried by governments with sovereign debt, resulting in reduced demand for goods and services provided by SMEs. This, coupled with lack of credit due to stricter lending practices by major banks, is causing critical cash flow problems for SMEs.

It comes to no surprise that business failures rose 25 percent during the June 2011 quarter to reach their highest level in 12 months. Smaller businesses and those in the retail, finance and service sectors recorded the highest failure rates, indicating firms in troubled sectors of the economy are struggling to stay alive during periods of reduced cash flow available.

2.      Poor financial control/cash flow management by SMEs

A lot of SMEs do not prepare regular cash flow forecasts, nor do they review whether their forecasts have been achieved and what needs to be done to fix problems.

The majority of external administrations of SMEs are triggered by SMEs encountering cash flow problems. Upon a company’s cash availability drying up, it is no longer able to pay all of its creditors as and when debts fall due, leaving the company no choice but to appoint an external administrator to deal with the creditors.

3.      SMEs are too late in fixing problems

Not all businesses can survive in a free market, in particular during tough times which we are currently facing. Unfortunately, it is even harder for SMEs to survive if they are too late in fixing critical components of their business during an economic downturn.

SMEs should make sure that they act upon warning signs as soon as they arise rather than adopting a wait and see approach until it is too late. Some of the important warning signs to look out for are as follows;

• Continuing losses
• Liquidity ratios below 1
• Outstanding tax obligations
• Creditors outside trading terms
• Letters of demands, summons, judgments, statement of claims and other legal recovery processes issued against the business

SMEs that detect and act upon the warning signs and improve their cash flow early have a better chance of recovery than SMEs that ignore the warning signs and do not take action until it is too late.

For further information contact Hall Chadwick on (02) 9263 2600 or visit their website at http://www.hallchadwick.com.au.

Hall Chadwick is one of the largest and most experienced accounting groups in Australia servicing clients in every major capital city and many regional centres in Australia. Nationally, Hall Chadwick is an association of independent firms that can combine the experience and skills of many partners and staff.