Insights

The Easiest Way To Make $2 Billion For Australia


Five fingers and a raised hand could be all that’s required to add an extra $2 billion to the Australian economy each year.

That’s the money that would be saved if even only half of Australian businesses that find themselves in financial strife put their hands up for help earlier.

It seems so simple but, as a turnaround professional, it is so frustrating that more company directors and business owners don’t realise the benefits of seeking professional help before it’s too late and they end up as an insolvency statistic.

There are almost 14,000 company insolvencies in Australia each year. Too many companies waited too long to call in expert help.

From dealing with hundreds of troubled companies, my observation is that the main roadblocks to early intervention included the stubborn pride of many company directors combined with a regulatory environment that makes some directors too afraid to put their hands up for help.

Another major issue is that most business owners and company directors are not aware that turnaround advisors exist. They are aware of insolvency practitioners but are too afraid to use them as they perceive this to be a precursor to receivership or voluntary administration. A turnaround practitioner’s mandate is very simple: to restructure the company, help return the business to positive earnings and cash flow and quite simply help prevent the company from going into voluntary administration.

A couple of telling observations:

  • The estimated financial impact of the average 13,590 insolvency appointments each year over the past 3 years in Australia is more than $13 billion annually.
  • I figure that if only 50% of businesses fighting cash flow problems had called for help earlier, it could have a $2 billion annual positive flow-on to the Australian economy.

Here’s how we worked this out:

Annual insolvency analysis – sobering statistics

The following is a combination of ASIC data and Vantage Performance analysis:

Average $ figure of creditors per company – $950,000

Average insolvency appointments per annum – 13,590

Average dividend retrieved – .05%

Number of creditors impacted per annum – 680,000 (39% of all registered companies)

On top of these “cold hard cash” statistics, there is the enormous flow-on effect of insolvency – the director bankruptcies, loss of government taxes/income, impact on GDP and economic growth, not to mention marriage breakdowns, suicides and other social impact.

Statistics from the US, where turnaround management is a more mature industry, point to a 31% success rate for turnarounds, which provides a better outcome for employees and creditors than if these companies had entered insolvency (this statistic is from Crafting Solutions for Troubled Businesses: A Disciplined Approach to Diagnosing and Confronting Management Challenges, by Stephen J. Hopkins and S. Douglas Hopkins)

Given this estimated 31% success rate for turnarounds, if even half of Australia’s troubled companies sought early intervention, the annual financial impact on the nation could be reduced by $2 billion and 177,000 fewer companies would be impacted.

I can’t stress enough – early intervention is the key to a successful turnaround and to stopping a business from becoming an insolvency statistic.

For this reason, I welcome the current review and mooted reforms by the Federal Government and ASIC, to encourage directors to seek help earlier.

The main reforms are based around the notion of creating a “safe harbour” whereby a director who engages a turnaround professional (or other advisor) to help restructure/turn around their business would be protected for a period of up to 3 months from insolvent trading issues whilst the turnaround plan is being developed and executed. That way the director can make an informed decision on the merits of continuing on without the threat of potential insolvent trading issues affecting their decision making.

The other main option is to provide a director with a defence against insolvent trading if they had sought professional advice, felt confident in the turnaround plan that had been developed, and followed the plan. Given that most turnarounds take 12-18 months to complete, we feel that the second option would provide a more practical outcome and encourage more directors to seek help from a turnaround professional.

Vantage Performance specialise in improving business performance and executing corporate turnarounds. We work with companies going through major growth or change, helping them to improve profit and performance. We also advise underperforming companies or those in financial distress, helping improve cash flow, profitability and value of the business. Vantage Performance was awarded Turnaround of the Year in 2008 and 2009 by the Turnaround Management Association of Australia for its work with troubled companies.

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Michael Fingland
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Michael Fingland

My philosophy is that there is always a way to solve a crisis, as long as you’re engaged early enough.

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Cooperative leadership teams that develop prioritised actions to progress towards clear strategic objectives can achieve long-term business viability.