Published on Australian Financial Review, September 28 2010

Accountants warn that more small to medium-size enterprises (SMEs) will fail unless they adopt more disciplined financial management techniques or find funding sources other than the banks.

Turnaround and insolvency director Peter Marsden of national accounting firm RSM Bird Cameron has forecast a rise in insolvencies, part of a looming trend for SMEs.

Despite reports of the Australian economy’s stability, many SMEs are already experiencing renewed hardship in terms of managing their credit performance and debts.

“You speak with most of the banks and they will say that there is still a lot happening from an insolvency perspective,” Mr Marsden said.

Even without considering international influences, he warned SME directors that the market was not getting any better – nor was it getting worse – and said this was not a time to become complacent.

Interestingly, the number of incorporated businesses which failed for the half year ended June 30 fell slightly from 4859 to 4703. About 35 per cent of small businesses are incorporated.

Mr Marsden said these levels were still relatively high and would “stay high for a while because the market is still under stress – there is still a lot of hurt and pain out there”.

He said that recent changes to the Directors Penalty Notice and the massive increase in tax debt put SMEs under increased pressure to manage their liabilities. Add the banks’ lower loan-to-value ratios for those who used their homes to finance their businesses, plus the increased scrutiny on bank lending, and the picture was likely to worsen.

The outlook is similar at Brisbane accountancy firm elliotts. Partner Michael Ward said cash flow was one of the most serious issues placing businesses in all sectors under stress, despite a slowly recovering economy.

“Because of the drying up of credit from the banks, businesses have to focus more on their own cash flow,” Mr Ward said. He did not expect this situation to change until business confidence returned and banks lent more, although there were some signs this was occurring.

SMEs facing a cash crisis can struggle to pay creditors, employees and business owners.

“The problem is, for most business owners, keeping track of their expense and revenue items, each operating according to its own highly uncertain timetable, can be a difficult and stressful exercise, and this is why cashflow management is failing to be done properly,” elliotts Managing Partner Matthew Schlyder said.

For a business to achieve a stable cash flow, he recommended monthly cash flow projections. The cash low improvement formula for a healthy business should be to drive debtors down, drive stock holdings down and maintain creditors at terms.

By doing so, he said, surplus cash existed to make asset purchases, meet debts and pay dividends and drawings to owners.

Access to lending, however, continues to trouble many SMEs. Small Business Victoria held a breakfast seminar last week for 50 small businesses where the difficulty of access to credit was raised. SBV has developed online tools for finding business loans and grants.

Meanwhile, SMEs are searching out alternative funding arrangements. The Institute of Factors and Discounters said factoring and discounting turnover rose by $716 million to $14.1 billion for the June quarter from the March quarter.

Business at debtor finance firm Oxford Funding, a Bendigo and Adelaide Bank subsidiary, increased by 45 per cent over the past two years.

Chief Executive Rob Lamers said many SMEs had used up the equity in their homes for bank funding during the global financial crisis and were now looking at other asset classes to fund growth.

Mr Lamers said that despite a recovering economy, businesses were still taking more than 50 days on average to pay their debts, which was indicative of the cash-flow constraints under which many businesses continued to operate.

In his view, factoring and discounting appealed to SMEs because security was held over business assets rather than real estate.

Also, the presence of 16 providers had created a competitive lending environment.

Wholesale traders were the biggest users of debtor finance (33 per cent of total receivables) with many feeling the pain of a drop in retail spending and consumer confidence. Manufacturers (21 per cent) were the second highest users of debtor finance, followed by property and business services (10 per cent), labour hire (nine per cent ) and transport and storage (eight per cent).

Western Australian firm Topgold Enterprises , which also has an office in Hobart, hires out blue collar workers to fabrication workshops. Managing director and founder, Darrel Herbert described the mood among SMEs as “subdued, subdued, subdued. Everyone is waiting for something to happen.”

He has used debtor finance to manage cash flow for the past 7-8 years, with most of his funding from this source.

While not a heavy user of bank funding, he noted that “the banks have really clamped down in the last 12 months.”

His business was introduced to Bibby Financial Services in June trough a finance broker.“I am very aware that a lot of small businesses are struggling to get financing from the big banks at present and some SMEs are going bankrupt as a result,” he said.

Bibby’s head of national sales Gary Green pointed out that half of his company’s client are new to debtor finance “as they seek other forms of lending to deal with the external pressures such as rising interest rates and withdrawal of the Government’s stimulus support.

“I think businesses are frustrated because they don’t have the support of traditional lenders that they have been used to in the past. Banks have certainly become more conservative over the last 12 – 18 months,” Mr Green said.