Young companies at risk

Almost one in five businesses under five years old are at “high risk” of experiencing financial stress before June next year, a new report has found.

The report by Dun & Bradstreet found 20,000 young businesses, or 17%, faced a high risk of insolvency and payment defaults, compared to just 3% of more established companies.

“There could be many reasons for this, but really, [the first five years] are a time when you’re going to test the longevity of your business,” says D&B chief executive officer Christine Christian.

But young SMEs are also at risk of being taken advantage of by larger companies, she says.

“Small businesses need to act like big businesses when it comes to accounts. They need to grow some teeth and make sure they’re getting paid.”

“Small businesses are generally at the end of the food chain when it comes to being paid by larger companies, and the reason is because they’re allowed to get away with it.”

“In the excitement that comes with the resurgence in activity firms often forget that a sale which doesn’t get paid or is paid well past due has significant detrimental impacts on cashflow.”

And young businesses especially need to make sure their business model is flexible enough to adjust up or down, depending on the circumstances, Christian says.

The report found a total of 38,000 Australian businesses, or more than one in 10, are at high risk of financial stress in the current financial year, up from 34,000 in the second quarter of June last year.

About 13,000 firms from NSW are classified as high risk, followed by 8,000 in Queensland and 6,000 in Victoria.

In the communications sector, 13% of all companies are in the highest risk category, followed by 11% in the transport sector. Construction, manufacturing and retail industries are the next riskiest.

But Christian warned young SMEs established for the wrong reasons will have the hardest time staying out of financial trouble.

“Often these companies are developed for the wrong reasons in the first place, for example because the owner doesn’t want to report to anyone, or wants a flexible lifestyle, that type of thing.”