Government-funded sectors hit hardest as private business failures blow out in 2023

Private businesses operating in largely government-backed sectors, including the NDIS, have the unenviable record of being the biggest losers in 2023 and helping to drive a 26 per cent increase in external administrations across all industries in Australia over the past year.

According to the CreditorWatch Business Risk Index, businesses working in Public Administration and Safety saw the biggest increase in the rate of external administrations in the 12 months to the end of November, up 101 per cent, followed by those in Healthcare and Social Assistance – a field that includes NDIS providers – which saw a 71 per cent increase.

The troubled construction sector, which this year has garnered its fair share of media attention with a slew of builders going under, came in third with an increase of 59 per cent.

CreditorWatch CEO Patrick Coghlan says the data revealed in the Business Risk Index illustrates the ‘extreme stress that almost all sectors of the economy have been under this year’.

“The fact that almost every sector has seen double-digit increases in the rates of business failures across 2023 is truly shocking,” Coghlan says.

“When this is viewed in the context of our other key business risk indicators, such as the steep decline in the average value of invoices and the rise in B2B payment defaults, it is shaping up to be a very challenging 2024 for Australian businesses.”

Amid the setbacks faced across most business sectors, the Arts and Recreation Services sector was the only shining light by recording a 23 per cent fall in external administrations.

CreditorWatch says this was due to the normalising of activity across the entertainment industry following COVID.

“It is yet to be seen if this positivity continues as cost-of-living pressures force consumers, particularly young renters, to reduce discretionary spending,” the credit-reporting agency says.

Meanwhile, the Food and Beverage Services sector recorded a relatively modest 8 per cent increase in the rate of external administrations in the 12 months to the end of November.

This is despite this sector remaining the most at risk of payment defaults by a ‘considerable margin’.

In a geographical breakdown of the data, CreditorWatch says Ballarat in regional Victoria has emerged with the lowest risk of business failure followed by Unley and Norwood-Payneham-St Peters in South Australia.

The worst performing region is Gosford in NSW, followed by Leichhardt in inner-west Sydney, while the 10 worst performing regions are all in Western Sydney and southeast Queensland – with four of these located on the Gold Coast.

The most improved region is Townsville, followed by Brunswick-Coburg in inner-city Melbourne.

CreditorWatch is forecasting a tough year ahead for business owners following several years of relative stability.

“We expect a large increase in the business failure rate over the course of 2024, as many businesses trading at a loss will not be able to sustain another six to nine months of high interest rates and low consumer confidence,” the agency says.

“Business failure rates have been unusually low for some time now, however, there has now been a significant increase in the number of tax defaults lodged against businesses by the ATO.

“This is generally a good forward indicator that business failure rates will start to rise significantly, especially given that the avenues to source cash to pay these tax debts are diminished.”

The industries most at risk are Food and Beverage Services, followed by Transport, Postal and Warehousing, and Financial and Insurance Services.

After recording the biggest increase in failures over the past year, Health Care and Social Assistance is forecast to have the lowest default rates over the next year followed by Wholesale Trade, and then Agriculture, Forestry and Fishing.

“While late 2023 has proved a challenging time for businesses in Australia, overall business confidence has remained relatively good, except for the retail sector,” says CreditorWatch.

“This is likely to change in the new year, especially once Christmas trade data comes in and we get to see just how tightly Australian consumers have been closing their wallets.”