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The surge in invoice defaults is ringing alarm bells amidst a landscape of mounting cost pressures for businesses.
The latest data from the February 2024 CreditorWatch Business Risk Index (BRI) paints a sobering picture: business-to-business payment defaults have soared to record highs. Notably, the food and beverage services sector stands out as the most vulnerable to business failure, with a risk rate of 7.08 percent, underscoring the urgent need for strategic intervention.
This surge is directly linked to the mounting financial strains faced by Australian businesses, stemming from factors such as surging interest rates, inflation, wage hikes, labor shortages, and dwindling consumer demand amid soaring living costs.
Key Business Risk Index insights for February:
B2B trade payment defaults are now consistently above pre-COVID levels, recording a record high in February and a 47.9 per cent year-on-year increase.
The average value of invoices for Australian businesses had a small uptick in January but is still trending down and sits 16 per cent below the February 2023 level.
External administrations are now sitting consistently above pre-COVID levels (up 24.6 per cent year-on-year).
Credit enquiries had a seasonal jump in February but are still trending down as trade activity declines.
Court actions are returning to pre-COVID levels. For our latest observed month, December 2023, they are up 52.0 per cent against December 2022.
Businesses in the food and beverage services sector remain the most at risk of business failure (7.08 per cent) by a considerable margin. Public Administration and Safety is the next riskiest industry at 5.39%, followed by Accommodation (5.09%).
The regions with the lowest risk of business failure remain concentrated around regional Victoria, inner-Adelaide and North Queensland. Ballarat, in regional Victoria, is the top-ranked region, followed by Norwood-Payneham-St Peters in South Australia and Townsville in Queensland.
The regions with the highest risk of business failure are around Western Sydney and South-East Queensland, with Merrylands-Guildford (NSW) the top-ranked region, followed by Bringelly-Green Valley and Canterbury, all in Western Sydney.
On a quarterly basis, the best performing region is Nundah, in inner-Brisbane, which moved 22.0 points up the index, while Stonnington-East in inner-Melbourne recorded the biggest slide down the index – also 22.0 points.
CreditorWatch’s research underscores a worrisome trend: a strong correlation between payment defaults and business failures. With each default, the risk of insolvency looms larger, with businesses facing a 24% chance of going under within the next 12 months after just one default. This risk doubles and triples with two and three defaults, respectively.
The decline in invoice values compounds these challenges, with last month witnessing record lows. The trend persists, as highlighted by the recent ABS Business Indicators for the December quarter, indicating businesses’ anticipation of further consumer demand declines by depleting inventories.
CreditorWatch CEO, Patrick Coghlan, says the rise in B2B payment defaults and falling invoice values is a very concerning combination. “Trade payment defaults going up while invoice values decline is a real worry,” he says. “This indicates that cash reserves are being depleted and margins are being squeezed. An increasing number of businesses have less cash coming in, which means they are then finding it more difficult to pay their own suppliers and as such we are seeing a steep increase in payment defaults being registered on the CreditorWatch database. They are also cutting the size of their orders and running down inventories.” “This payment defaults data provides our members with critically important intelligence about the trading behaviour of other businesses, some of whom they could have extended credit to.”
Anneke Thompson, Chief Economist at CreditorWatch, emphasizes the Index’s portrayal of a slowing economy, corroborated by sluggish GDP growth and negative per capita GDP over consecutive quarters.
Despite a seasonal uptick in invoice values, the overarching trend reflects a broader economic slowdown, underscoring the pervasive impact of diminished consumer spending.
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