Insolvency outlook bleak as late payments spike to 8.5-year highs

The September Business Index from the credit reporting agency revealed that one in 10 invoices is now more than 60 days overdue, which is the highest since April 2018 and double the rate of a year ago.

Fewer than half of invoices (48 per cent) are paid on time, down from 58 per cent a year ago, while the proportion of invoices outstanding for more than 60 days has doubled from 5.0 per cent to 10.1 per cent.

According to CreditorWatch, this deterioration in business payment behaviour indicates growing cash flow pressure across the economy and compounds risk for small-to-medium enterprises already grappling with rising costs and weaker consumer demand.

CreditorWatch CEO Patrick Coghlan said the agency is seeing a growing proportion of invoices drift into serious delinquency, showing that businesses are not just paying a few days later.

“They’re all certainly leading indicators of future pain, insolvency, and delinquency,” he told Accounting Times.

“We’re not at peak insolvencies but we’re very close to it. We’re plateauing at around peak insolvency numbers, which is indicative of a challenging environment. The concerning trend is that the data doesn’t show that it’s getting better. If anything, it could get worse or remain at this heightened insolvency risk level for quite some time.”

The number of trade payment defaults rose by 26.1 per cent year on year, pointing to a trend where more overdue debts are progressing beyond late payment. CreditorWatch’s seasonally adjusted trade payment default index stood at 196 in September, up from 100 in February 2020 and only marginally lower than the record set in recent months.

The number of defaults registered over the past three months was 6.8 per cent higher than the number registered in the three months to June.

Coghlan said trade payment defaults are a powerful collection tool for the supplier and a critical data point that signals that a company could be headed towards administration.

“From there, typically, what we see is additional payment defaults being lodged, continued deterioration in payment times, and ultimately that company ends up going into administration within 12 months,” he said.

“The slower the payments, the more defaults being lodged, the higher the probability of failure of that particular business.”

Every industry under the pump

No industry was marked safe from the deterioration, with the construction industry witnessing the steepest drop in payment times, where the proportion of invoices paid more than 60 days late has more than doubled from 6 per cent a year ago to 13 per cent.

Similar surges were recorded in transport, postal and warehousing (4 per cent to 12 per cent), manufacturing (4 per cent to 11 per cent), utilities (electricity, gas, water and waste services, from 7 per cent to 13 per cent), retail trade (5 per cent to 11 per cent), and mining (6 per cent to 12 per cent).

However, food and beverage services remained the weakest-performing sector, with almost 20 per cent now more than 60 days overdue, up from 10 per cent a year ago and 16 per cent three months ago.

CreditorWatch highlighted that many of these industries have posted a considerable jump in just the past three months, indicating payment performance has deteriorated rapidly through the September quarter.

“I think what it’s showing is that no industry or business type is immune from the challenges out there. We’re certainly not seeing it only affect hospitality or construction, for example. It’s really impacting all businesses,” Coghlan said.

CreditorWatch chief economist Ivan Colhoun said conditions could worsen for interest-sensitive sectors, such as residential construction and real estate, businesses reliant on discretionary spending, and businesses with large debts.

Businesses fall behind on tax obligations

More businesses are also falling behind in their obligations to the Tax Office, with the number of Australian Taxation Office (ATO) tax debt defaults climbing by 20.7 per cent from a year earlier to 37,577 in September. New defaults outpaced removals, with 2,024 new tax defaults lodged in September, a significant increase on recent months.

“Record ATO tax defaults show many businesses are falling behind on what they owe the Tax Office, not just their suppliers,” Coghlan said.

“Tax debt is often one of the first obligations to slip when cash flow tightens, and if it isn’t addressed, it can escalate quickly. With interest rates at their highest level in 15 years and fuel costs remaining elevated, creditors should be keeping a close eye on their exposures.”

Coghlan said that worsening consumer confidence and decreased spending due to higher interest rates have contributed to the deteriorating conditions, alongside rising cost-of-living pressures due to sticky inflation.

“Small businesses don’t have the ability to raise capital or access debt, so they’re very reliant on cash flow. That’s certainly having a significant impact,” he said.

High oil, diesel, rent, labour, and input costs have added to the pressures, according to Coghlan.

He suggested that accountants could help ensure their small-business clients work with high-quality customers and debtors. They could also tackle cash flow constraints by using automated collection tools to collect their receivables as quickly as possible.