Leading economic indicators point to a difficult financial year for businesses in 2023–34, with consumer sentiment deteriorating and costs expected to rise further.

CreditorWatch chief executive Patrick Coghlan said the latest Australian Securities and Investments Commission (ASIC) data is now indicating that insolvencies are at a 10-year high.

“This is not entirely surprising, given the decline during the height of the pandemic thanks to government support and a ‘hands-off’ approach to collections from the ATO; however, some industries, such as construction, have now surpassed the rate of pre-COVID insolvencies,” said Mr Coghlan.

CreditorWatch chief economist Anneke Thompson said retail volumes are already falling even if nominal retail turnover is rising due to inflation.

“We are spending more on less, further eroding the savings of Australian households. Consumer confidence is at record lows, and there seems little likelihood of consumers feeling more confident until they feel sure that we are at the peak of the monetary policy tightening cycle,” said Ms Thompson.

The Reserve Bank of Australia (RBA) is unlikely to consider a cut to the cash rate until both goods and service inflation is on a sustained downward trend and the unemployment rate is at roughly 4.5 per cent.

The food and beverage industry is the sector most at risk over the next 12 months, according to Ms Thompson. “Restaurants and cafes will continue to have to deal with rising, and sometimes unpredictable, supply costs, but also contend with softer demand,” she said.

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“One positive factor is that labour supply may be easier to come by, but energy costs, particularly gas, are due to rise dramatically in September, and this will have broad implications for energy-intensive sectors.”

Businesses should be prepared for trading conditions to become much more difficult going forward, she said.

“While the worst of inflation is behind us, energy prices are still set to rise, and consumers will only continue to spend less as they grapple with high interest rates and rents,” she said.

Cash flow management critical for 2023–24 financial year

Managing cash flow effectively will be crucial for businesses as conditions worsen over the next 12 months, according to business consultant Glenda Lewis.

Ms Lewis said there are practical steps and strategies that businesses can take to optimise cash flow and ensure a healthy financial position going into the new financial year.

One of these is to file tax returns as soon as possible to ensure that any funds owed are returned to the business quickly.

Invoices should also be issued in a timely manner.

“Aim to send out invoices within two business days of the month’s end to improve cash inflows and minimise delays in receiving payment,” said Ms Lewis in the End of Financial Year Survival Guide 2023.

Encouraging early payment from customers by offering incentives such as discounts or rewards such as complimentary services.

“These incentives can encourage prompt settlements and improve cash inflows,” said Ms Lewis.

Expanding payment options to accommodate customers’ preferences, including credit cards, online transfers, or mobile payment apps, is another way to streamline the payment process.

“Automating collections can also simplify the process and boost collection rates,” she said.

“For example, using automated payment reminders and online invoicing systems can streamline follow-ups and improve overall cash flow.”

Businesses should also review the time it takes to pay their suppliers and explore opportunities to negotiate more favourable payment terms, such as longer payment terms, early payment discounts, and volume or tenure discounts.

Glimmers of hope

Despite the challenging environment being faced by businesses, Mr Coghlan said there are some potential positives.

“The businesses that managed to weather the pandemic storm have emerged as leaner, more efficient entities, with many embracing the power of digital transformation,” he said.

“CreditorWatch’s Business Risk Index also shows that trading activity is back to pre-COVID levels.”

Mr Coghlan said that businesses that take proactive measures and prepare for the challenging conditions ahead would gain a significant advantage over their competitors when conditions eventually improve.