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 rough financial waters put their hands up for help earlier.
It seems so simple but, as a turnaround professional, I find it 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 get help.
Why don’t businesses get help sooner?
Having dealt with hundreds of troubled companies, my observation is that the main roadblocks to early intervention include the stubborn pride of many company directors combined with a regulatory environment that makes some directors too afraid to ask for assistance.
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 I reached that conclusion:
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 effects.
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 affected.
In my next article, I’ll explain how to detect the early warning signs of insolvency and how turnaround services can prevent a business from becoming just another statistic.
Michael Fingland is a director at Vantage Performance and has twelve years experience in the business performance management and corporate restructuring industries.
Image by mark sebastian