Are SMEs too Reliant on Voluntary Administration as a Survival Strategy?
According to recent Australian Securities and Investments Commission statistics, the typical return to creditors from a Voluntary Administration is less than 11%.
This makes me think that Australian businesses, SMEs in particular, need to be made more aware that there are other business survival strategies apart from Voluntary Administration.
The Australian Securities and Investments Commission (ASIC) recently released its inaugural report on the regulation of liquidators (you can read the full version here).
As well as providing regulatory and compliance information, the report provided these interesting statistics on Voluntary Administration:
- The typical return to creditors is less than 11%
- 78% of VAs have fewer than 20 employees
- 84% of VAs have assets under $100K
- 44% of VAs have less than $250K in unsecured creditors.
To me these statistics suggest that Voluntary Administration is clearly favoured among SMEs.
Not a startling point in itself, but when you consider that SMEs comprise around 95% of Australian businesses¹ and that the return to creditors in a Voluntary Administration is typically less than 11%, the flow-on impact of the Voluntary Administration process can’t be ignored.
This year the Australian business community will have to deal with an estimated 15,700 corporate insolvencies.
This equates to a $14.9billion financial impact on our economy – and since every insolvency has a flow-on effect, this impact will be felt by another 700,000 businesses.
I believe Voluntary Administration has a place in the turnaround environment, but it should be a last resort.
To be successful, creditors must vote in favour of a Deed of Company Arrangement proposal put forward by the business’ owners, and although creditors often vote in favour of a proposal promising a greater return than would likely be available through a Liquidation, a 90% debt write down generally isn’t the best way of shoring up relationships for future dealings.
So what steps can business owners and managers take to give them the best chance at identifying, catching and mitigating a business downturn before it’s too late (because once it’s too late a Voluntary Administration is your only option)?
Here are some suggestions provided in the blog Key Signs To Warn You That Your Business Is In Trouble:
- Sales – Watch for sales and/or the sales pipeline reducing or becoming static, and also for excess inventory/stock and customer concentration issues (if a major one goes “belly up” is that the end for your business?).
- Gross margin – It could spell trouble if gross margins are reducing or static, or you have negative earnings trends.
- Cash flow – Warning bells should ring if working capital growth outstrips sales growth, creditor payments are being stretched, cash flow predictions show a looming cash crisis, formal payment plans for creditors are being made, you have problems obtaining finance or there’s an inability to pay dividends, ATO and superannuation arrears.
- Collection concerns – Keep an eye out for signs such as slow debtor collections or litigation in relation to product/service quality.
The unfortunate reality is that so many corporate collapses can be prevented. The key factors are awareness that specialist turnaround skills are available, and timing.
Don’t be shy about putting your hand up for help at the early signs of trouble.
Elizabeth Mawby was a former Client Director at Vantage Performance, Australia’s leading business transformation and turnaround firm – solving complex problems for businesses experiencing major change.
¹ “Key Statistics Australian Small Business” Australian Government Department of Innovation, Industry, Science and Research, Commonwealth of Australia 2011.