Cash flow pressures continue to impact Aussie businesses

The April Business Risk Index results from CreditorWatch shows Australian businesses are being hit by a three-way squeeze: inflation and energy costs are lifting operating expenses, higher interest rates are tightening credit as well as debt-servicing capacity, and weak consumer demand is limiting the ability to pass costs on.

Inflation and energy costs lifting operating expenses

The Reserve Bank of Australia’s May Statement on Monetary Policy indicates inflation remains above target, with higher fuel prices adding to inflation. There are signs that these costs are likely to have second-round effects on broader goods and services prices.

The near-term outlook remains heavily influenced by Middle East developments, oil prices and inflation pressure, with input costs rising sharply due to fuel and broader energy impacts.

CreditorWatch chief economist Ivan Colhoun noted that Australian economic data to date shows only a slight deterioration in business conditions, but much bigger impacts on confidence and input costs.

“The surge in input costs and retail prices add to prior cost-of-living and cost-of-doing-business pressures and can be expected to lead to weaker business conditions in coming months unless the Strait of Hormuz reopens relatively soon,” Colhoun said.

The longer the Strait of Hormuz remains closed, the greater the risk of a renewed very sharp spike in energy prices and interruptions to energy supplies, as emergency global stocks cannot be rundown indefinitely.

Higher interest rates are tightening credit and debt-servicing capacity

The RBA increased the cash rate target by 25 basis points to 4.35 per cent, assessing that inflation is likely to remain above target for some time. It noted that higher fuel prices and this year’s interest rate increases are expected to lower spending by Australian households and businesses.

That combination matters for business risk, as higher rates lift debt-servicing costs across the economy.

CreditorWatch’s Australian Taxation Office (ATO) default data for April depicts that a rising number of businesses are falling behind on their tax payments. Three of the four highest new inflows since the increase in enforcement post-COVID-19 have been recorded in the past four months. There is a considerably higher risk of insolvency over the coming 12 months for companies carrying large ATO debts.

Weak consumer demand is limiting the ability to pass costs on

Softer demand makes it harder to pass on costs. The result is a more fragile cash flow environment, especially for smaller operators and sectors with tight margins.

Data indicates that the pressure is uneven, with the rolling annual insolvency rates varying quite notably across different industries, with the sectors exposed to discretionary spending, labour costs, fuel, materials, subcontractor risk and supply-chain disruption.

1. Food and beverage services (2.24 per cent)
2. Administrative and support services (1.25 per cent)
3. Transport, postal and warehousing (1.24 per cent)
4. Construction (1.18 per cent)
5. Manufacturing (1.13 per cent)

In terms of the late-payment picture, the sector split is reinforced even further regarding the rates of invoices being overdue.

1. Food and beverage services (60 days overdue at 11.37 per cent)
2. Electricity, gas, water and waste services (8.16 per cent)
3. Rental, hiring and real estate services (7.51 per cent)
4. Construction (7.51 per cent)
5. Transport, postal and warehousing (7.09 per cent)
6. Retail trade (6.59 per cent)

It is apparent that Australian businesses are facing substantial pressure financially as rising operating costs, higher interest rates and weaker consumer demand combine to squeeze cash flow across the economy.

With late payments, tax debt, and invoice defaults continuing to rise, it seems as though the outlook remains challenging for many sectors going ahead.

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