– Closures within the hospitality, administrative and support services, and transport sectors could exceed one in five, according to Ruthven Institute founder –
SYDNEY, 16 June 2020: As many as one in six (15%) Australian small to medium-sized enterprises (SMEs) could close as a result of the economic fallout from the COVID-19 pandemic, according to Ruthven Institute founder and respected economic futurist, Phil Ruthven, who believes that some industries will be better off than others. In a recently released report, Mr. Ruthven provides an in-depth analysis of the history of Australian enterprises, and how past trends may lead the way for recovery post-COVID-19.
Prior to the COVID-19 pandemic in 2019, Australia created 356,000 new businesses which brought the country’s total operating businesses to 2.4 million. According to Mr. Ruthven, this growth accounted for a 15% increase in the number of new businesses in 2018, mostly comprised of small enterprises employing 20 staff or fewer.
Australia saw 293,000 business closures in 2019 or one in eight existing businesses. Fortunately, only a little over 1% of these closures involved a bankruptcy or receivership. In average years, Australia records around 15,000 bankruptcies, or 1.3% of the 912,000 unincorporated businesses (sole traders and partnerships), employing around 1.2 million people.
Similar percentages apply to insolvency appointments of incorporated entities; slightly less at around 1% on average, but higher following economic and financial crises. Overall, the nation loses around 1.2% to 2.3% of its enterprises through insolvency in one form or another, said Mr. Ruthven.
But this rate can almost double after a recession or a global financial crisis. The COVID-19 pandemic and associated economic fallout a GFC Mark II as Mr. Ruthven calls it“ is likely to see record insolvencies created.
In 2020 and 2021, due to the GFC Mark II, we forecast one in six businesses closing their doors, instead of the usual one in eight. The number of new business start-ups could also fall below 200,000 until the economy regains its composure, said Mr. Ruthven.
Before looking at the prospects for SMEs through this crisis, and offering general advice on survival and success, Mr. Ruthven believes it is important to first understand the survival history and make-up of Australian enterprises and the industries in which they operate before.
The overwhelming majority of the 2.4 million businesses in Australia last year 62.8% employed no one (sole traders, trusts, and shell companies), while 37% were small and medium-sized enterprises employing fewer than 200 staff. Only 0.2% were large enterprises.
SMEs contribute 32.5% of Australia’s $5.6 trillion revenue in F2019, while the largest enterprises with revenues of over $100 million and up to $64 billion accounted for a whopping 47% of the nation’s total revenue, said Mr. Ruthven.
The survival of enterprises by industry
According to Mr. Ruthven, given that some industries grow faster than others, they can be more susceptible to the external business environment over time, and/or can suffer shocks. For example, 15% of the Australian economy was shut down either directly or as collateral damage during the current pandemic, which in turn created massive unemployment.
The industries with the largest number of enterprises are those with the highest proportion of SMEs, and these industries also have the lowest average revenue per enterprise, said Mr. Ruthven.
Interestingly, some of the industries with the most difficult business environments survive better. Historically, agriculture is the second-best surviving industry, despite having the lowest profitability of the for-profit sector, being subject to variable export terms, and being at the mercy of nature. Manufacturing is another example, having remained steadfast despite strong competition from imports; as is the rental, hiring, and real estate services industry, given the volatility of the housing market and the sheer number of competing enterprises, said Mr. Ruthven.
However, other industries that are strongly populated by SMEs are below the average survival rate, even though over half of them do survive four years. They include the professional, scientific, and technical services industry (63%); the construction industry (61%); the transport, postal, and warehousing industry (60%); the administrative & support services industry (58%); and“ the most difficult to survive“ the accommodation and food services industry (54%), where barely half of all enterprises survive over a four-year period, he continued.
An average enterprise in Australia has a revenue of $2.4 million and employs five people. Statistics show that enterprises with the best survival rate are in the $5 million to $10 million revenue bracket, Mr. Ruthven concluded.
The future of SMEs in Australia moving forward
The government-mandated shutdowns in response to the pandemic will have a dramatic impact on business survival rates over the four years to 2022 or 2023. The damage is already apparent across a number of sectors, including:
- tourism-dependent industries (hospitality, transport, retail);
- entertainment (including sports) and arts;
- education and training (especially tertiary);
- administrative and support services;
- rental, hiring, and real estate services; and
- professional, scientific, and technical services.
The shutdown stopped around 15% of the nation’s GDP from generating output. In these and other badly-impacted industries, government support provides some help; but not for the two to three years it will take to recover to 2019 conditions, said Mr. Ruthven. For some industries, the effect of the shutdown has been uncomfortable, but not disastrous to the point of disrupting cash-flow. But one in eight of the nation’s enterprises were also bound to close anyway, even in a non-recessionary economy, he added.
Mr. Ruthven believes that over the next two years, the closure rate is likely to rise to an average of 17%, equating to one in six enterprises. For some industry divisions including hospitality, administrative and support services, and transport sectors, closure rates could exceed 20% or one in five businesses.
Players in these sectors cannot safely rely on a quick return to the market size of 2019. We really don’t know yet whether we will have a V-shaped recession or a W-shaped depression. Within this context, financial adequacy or the selling of one’s business (if saleable) becomes more critical, said, Mr. Ruthven.
Some 70% of the economy is now derived from service industries that are generally less exposed to cash-flow problems, given they don’t own hard assets, stocks, and debtors to the same extent as goods-producing industries. However, this isn’t much of an advantage when a government shuts your industry down for three months, added Mr. Ruthven.
Even with government support, Mr. Ruthven believes access to finance is vital, be it in the form of reserves, savings, liquidatable assets, banks, and another institutional lending, or any other source. For some industries and some localities, the 2020 “21 GFC will not be as short as the last one in F2009, or the last recession in F1992.
Starting a business has become increasingly popular in the post-industrial age of service industries and advanced digital technology, and especially in the 21st century. This is partly because the entry cost is lower than was the case for businesses in the Industrial Age; partly because, until now, Australia enjoyed nearly three decades of recession-free economic growth; and partly because business ownership is perceived to grant an individual more freedom than being an employee, said Mr. Ruthven.
But 2020 is reminding us that life, work, and business ownership cant be taken lightly. We all must endure challenges in all of these areas, and such obstacles can be truly scary when we least expect them, he continued.
One of the challenges that businesses clearly face during this time is remaining solvent. For those who want to prevent becoming the one in six, I would advise exploring avenues such as increasing bank accommodation; reducing costs such as rent; seeking new equity (shareholders or partners); exploring mergers; or selling the business and living to fight another day, he concluded.