Statistics over the past 5 years from ASIC show external administrations peak in March. This might perhaps validate your own instinctive views on how Corporate Cash flow is traditionally weak between December and February – with the holiday season meaning additional payroll costs, two week “sales months” in December/January and no-one paying anybody until mid February. Behind this year’s potential peak, however, is a tsunami of uncomfortable catalysts, which could have very serious implications:
1) World wide recession – already in the US and most of Europe – especially the UK, where two major retailers called in administrators before Xmas.
2) Underlying weakness being seen in the Aussie december global holidays economy – GDP grew by only 0.1% in the September quarter. Current predictions are for further weakness developing.
3) The Credit Crunch – reducing the ability to borrow (personal and corporate) dramatically. 4) Major suppliers tightening their credit policies.
5) Credit insurers reducing limits and increasing premiums – making credit harder to secure from major distributors.
6) The falling $ – from 97c to 65c leading to increased import costs by c 50%. The lead-time of forward orders for the Christmas season will have missed most of the rises – but what of new orders for the current quarter? Margins will be squeezed as retailers try to make product attractive for a potentially difficult retail environment.
7) China’s exports have fallen by 2.8% (year to December 2008), and imports by 18%. Their GDP growth rate, whilst still impressive, is falling. These effects are leading to reductions in various infrastructure programmes.
8) Resources boom to bust. With China weakening and commodity prices falling – does this mark the end of the resources boom that supported the Aussie economy for so long over? Rio announcing 14,000 job losses is an initial reflection of the market. Other mine closures re-inforce this market weakness.
9) Job losses – financial services have shed many jobs – but ANZ’s recent 800 jobs cut just before Christmas is indicative of their view of difficult conditions ahead. Expect more to come.
10) Job Losses are now spreading – New South Wales Government, RIO, Adobe, Sony – all announcing job cuts. Collectively these have a “reduced consumer confidence” knock-on effect.
11) The Australian Stock Market is down 50% over past 12 months. Most bad news factored into the stock prices. This gives an almost perfect excuse for CEO’s to dump bad news in one hit to make the second half of the year (and the CEO’s themselves) look better.
12) The Reporting Season – ASX companies report their 6 monthly interim figures at the end of February 2009. Expect heavy write-downs/write-offs and unfavourable bank reactions.
13) Directors’ Personal liabilities – with the personal implications of trading insolvently, directors cannot put up a heavy fight for listed corporate survival – that their SME counterparts might put up. We saw this with the recent Allco administration.
14) Falling house prices are being seen in many suburbs, affecting bankers’ view of their security for business loans.
15) The Banks have a collective consciousness and have are absorbing global and local economic problems never experienced before. Their current weak appetite for new loans will be further exacerbated by all the above effects over the current quarter and they will seek to exit weaker companies. Expect to see some major names going into receivership/administration when the banks say enough is enough.
16) We are hearing of more insolvency practitioners being recruited internationally for the Australian marketplace.
Whilst the recent injections of cash into the global finance system, the recent one-off stimulus package and the reduction in interest rates will have some counterbalancing effect – these always have a lag associated with them (usually 6-8 months). Either way, if the current quarter is only half as bad as we expect we would strongly recommend look closely at your own risk management:
– Are your customers showing signs of weakness – e.g. delayed payments. If so, consider stronger credit tactics for getting your money.
– Whilst there is the sometimes difficult balance between sales and credit, if your customers are in the retail sector chase money hard – remember “he who shouts loudest gets paid first”.
– Consider credit insurance to protect you against bad debts – it’s cheaper if you have a low history of bad debt.
– Review your own personal risk. Is the family home on the line for borrowings? There are various different structures of freeing up the family home and still having growth finance in your business, for example factoring finance or inventory finance.
– If you think you might need additional finance for your business – it is easier (and cheaper) to raise money when you are not desperate for it.