Economy

Poor management the leading cause of insolvencies

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A lack of proper strategic management is the most common reason for business failure in Australia, new Australian Securities and Investments Commission insolvency data reveals.

A lack of proper strategic management is the most common reason for business failure in Australia, new Australian Securities and Investments Commission insolvency data reveals.

Poor management was the key cause of failure for almost 3000 businesses in 2006-07 (43% of all the failures in that year) insolvency practitioners reported to ASIC.

The next most common reason for insolvency was inadequate cashflow, accounting for almost 40% of failures, followed by 34% of businesses that went under due to trading losses.

Businesses in the transport and storage sector were most likely to fail because of poor management, with 48% going under for that reason. Cashflow and trading losses are a big problem for businesses in the low margin hospitality sector, accounting for 48.1% and 47.7% of closures respectively.

Other key reasons for insolvency last financial year included inadequate financial controls, poor management of accounts receivable and difficult economic conditions.

Businesses with fewer than five employees were by far the most likely to go to the wall, making up 64.8% of all insolvencies. Firms with between five and 19 employees accounted for 17.5% of failures, those with between 20 and 200 staff accounted for 5% and very large companies just 0.1%.

Over 20% of insolvencies in 2006-07 were in the construction industry, making it by far the toughest sector for businesses owners. Firms that provide “services to businesses” were the next most likely to go under, on 13.1%, followed by retailers (12.5%), property services firms (9.5%) and hospitality businesses (7.3%).

The number of insolvencies in Australia has increased steadily in recent years, from 6218 in 2002-03 to 7562 in 2006-07.

 

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