Insights

How To Help Your Business In The Changing Economic Downturn


Preparing For The Next Wave…

With the waves of the economic downturn changing, and analysts providing conflicting forecasts, we use this newsletter to consider Australia’s current position in the economic cycle and discuss what managers can do to ensure their businesses continue to weather the storm…

 

Do the increases in GDP and the consumer price index suggest a strengthening of the Australian economy, or do the downward trends in production job advertisements and capital expenditure signal tougher times ahead?  With many conflicting indicators it is difficult for business owners and managers to find a basis on which to plan for the future.

During these turbulent times using historical information can provide valuable assistance in predicting the future.  One of the more interesting trends relates to “Impaired Debt”.  Impaired Debt can result when a company’s ability to service its debt is brought into question, and often occurs during times of financial distress.

Financial institutions are the major creditor of many businesses, and are often the instigator of insolvency proceedings.  As such there is a relationship between Impaired Debt and corporate insolvency:

During the period to 2008 there were, on average, 0.3 insolvency administrations for every million dollars of Impaired Debt.  From 2008 the level of Impaired Debt increased significantly, however the number of insolvency administrations for every million dollars of Impaired Debt reduced to 0.1.

Why?  Are financial institutions adopting a win-win philosophy and supporting their customers through times of financial distress, or are they simply reluctant to act due to depressed asset realisation conditions or PR implications?  Is government influencing financial institution policy, or is the government’s injection of cash into the economy combined with the ATO’s policy of payment plan concessions changing Australia’s economic landscape?

Most importantly: How long will the disconnect between Impaired Debt and insolvency administrations last and if they do spike, how severe will it be?

One very important issue to remember is whilst the banks have had to make significant provisions, the majority of this debt is still sitting on their customers books.  Therefore any changes in the above attitudes or increases in interest rates will place upward pressure on the number of insolvency cases.

In these uncertain times owners and managers must continue to strengthen their businesses in preparation for a prolonged and unpredictable period.  This can be achieved through initiatives such as:

  • Ensuring forecasts are up to date and revised regularly
  • Strong working capital management
  • Sale of non-core assets to reduce debt
  • Applying the 80/20 rule to drive revenue and margin strategy
  • Improving the integrity of your financial control environment
  • Continuing to innovate in terms of products and services
  • Optimizing your workforce

Some managers will have sufficient resources and time to execute these initiatives.  However, a significant number will require the expertise of corporate turnaround and performance improvement advisors to ensure rapid and timely implementation.

For more information or assistance please contact one of the team at Vantage Performance.

Regards

Michael Fingland

Executive Director

 

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