Business activity is back to normal but there are challenges ahead

The results from the March CreditorWatch Business Risk Index (BRI) are in, and the surprise news is business activity has returned to pre-COVID levels. Yet despite this positive indicator, more businesses are going into administration than ever and trade payment defaults are up by 20 per cent year-on-year.

The findings suggest many businesses are at risk of defaulting in the coming months, with CreditorWatch reporting those in hospitality (food and beverages) at highest risk.

Another indicator of the rising level of business activity is an increase in credit enquiries, which rose 28 per cent from February to March and is up a massive 149 per cent year-on-year.

While heightened business activity, despite inflationary pressures, is a good sign, the BRI figures suggest that businesses must brace for some trying times ahead.

CreditorWatch CEO, Patrick Coghlan, says the increase in business activity in March is testament to the resilience of the Australian business community.

“From a pandemic to labour shortages, supply chain disruptions, high inflation and rising interest rates, Australian businesses have had it all thrown at them,” said Coghlan.

“To now be registering these increases in turnover is a very encouraging sign. However, 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.”

Business administrations on the rise

Although trade activity bounced back in March, CreditorWatch still predicts B2B payment defaults to rise sharply in the latter half of 2023.

CreditorWatch also warns that external administrations have risen by 35 per cent year-on-year, with court actions also up by 22 per cent. The findings show that Sydney businesses are feeling the most pressure, with six of the ten highest ranking regions likely to see businesses default located in Western Sydney.

Coghlan suggests the small business sector has now entered what will be some of the toughest trading conditions many have experienced for some time.

“Demand will reduce, particularly in sectors reliant on discretionary spending, while costs and interest rates are high. In this environment, the marginal businesses, the ones that were barely profitable in low-cost times, will find it increasingly difficult to remain solvent.”

Probability of default graph - Creditorwatch Business Risk Index March 2023 — Source: CreditorWatch risk score credit rating average probability of default by industry. Default defined as external administration, strike-off or deregistration in the next 12 months.

Probability of default by industry

The industries with the highest probability of default over the next 12 months are:

Food and Beverage Services: 7.34%
Transport, Postal and Warehousing: 4.78%
Arts and Recreation Services: 4.67%

The industries with the lowest probability of default over the next 12 months are:

Health Care and Social Assistance: 3.28%
Agriculture, Forestry and Fishing: 3.59%
Wholesale Trade: 3.67%

Industry insolvency rates

CreditorWatch Chief Economist, Anneke Thompson, says the increase in trade receivables and monthly business activity can partly be explained by high workloads experienced across many sectors, but the cost of doing business is ravaging profits.

“The construction industry, in particular, is still working through very high volumes of work and is invoicing at a very high rate,” Thompson said.

“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.”