Jirsch Sutherland partner Andrew Spring noted that in the December quarter of last year, ASIC recorded an 11.2 per cent jump in the number of businesses going into external administration.
And particularly for SMEs, the administration process is likely to bring about the death of the business.
“We know there is a very low success rate in restructuring Australian businesses under external administration,” Kate Carnell, the Australian Small Business and Family Enterprise Ombudsman (ASBFEO), said in October this year in announcing the still-ongoing Insolvency Practices Inquiry.
Mr Spring attributed much of the rise in business failures in late 2018 to the stresses of the Christmas season.
“Christmas should be a time for celebration, but for many, it can be very stressful and overwhelming, especially for business owners,” Mr Spring said.
“Many find themselves under increased financial pressure and therefore struggle with the decision whether they should close over Christmas or if it should be business as usual.”
That led him to issue a stark warning for business owners ahead of the festive season.
“Unless there is a very specific reason why your business can’t shut down, it could do more harm than good to keep your doors open,” he said.
“While we understand that no business owner can ever really completely switch off, scheduling a bit of downtime will reduce stress and can also improve productivity for both you and your staff.
“Your clients will often take a break over the holidays as well, so it’s the perfect time for operations to come to a halt, or for you to at least maintain skeleton staff. There’s no point paying to keep everything running if you’re experiencing a quiet lull over the holiday period.”
Do insolvency numbers spike around Christmas?
According to Mr Spring, insolvency “isn’t really seasonal” and every business is impacted by its own set of stresses. However, he said that the Christmas period can be more problematic than most times of the year.
“All businesses face individual problems and pressure points, [but] with most people focused on family and holidays at this time, it generally means there’s less focus on the business,” he told My Business.
“The end of the calendar year is often a high-pressure time for many businesses and the Christmas period/summer holidays do pose an increased insolvency environment for certain industries. In Australia, unlike the northern hemisphere, we have the combination of Christmas and the summer holidays, which for many businesses can mean a reduced revenue environment.”
The busiest times of year for company failures, broadly speaking, are actually around tax season, Mr Spring said.
“[It’s] around the time of statutory reporting — e.g. when business activity statements are due,” he said.
“People generally accrue liability over a quarter and then when it falls due, it can be a catalyst for financial issues.
“Generally, the back end of the first quarter and then the end of the financial year and early into the new financial year can also mean greater challenges for businesses.”
Benefits of a Christmas shutdown
Nevertheless, Mr Spring suggested that a Christmas shutdown can deliver a number of benefits to businesses and their owners, including:
- improved productivity from happier, rested employees
- cost savings from reduced overheads, particularly if a lull in customer trade is likely
- technology enables clients to reach out in emergencies, making a break possible for many business owners
- much-needed rest and recharging for the business owners and management
- time to plan for the new year ahead and do a “business pulse check” on the current state of play
He said that particularly for SMEs, the personal wellbeing of the business owners is “very significant” for the viability of the business, and as such, it shouldn’t be taken lightly.
“If you look at the origins of an SME, it’s the owner’s blood, sweat and tears and financial investment that led to the starting of a business. The owner is the one who drives a business’s culture and performance levels,” explained Mr Spring.
“And if they lose motivation, it affects their own personal output and that of their staff. The owner is the heart and soul of a business and thus their wellbeing is a vital factor for success.
“When I work with an SME owner, I’ll often ask how they are feeling — whether they’re confident, or whether they think they’ve tried everything, or if they just feel they need a second chance. If a business owner feels their stress levels are out of control, then that’s a sign they should seek help.”
He added: “It is very important to take that step back, and the Christmas/summer holidays are a good time to do that and to take a ‘pulse check’ to see how the business is faring and also how the owner is faring. A business owner’s health and wellbeing is paramount.”
Use the time off wisely
While most business owners would do well to enjoy a well-earned break and some time away from work over the holidays, the freedom can also be a good opportunity to take a step back and look at the bigger picture.
“As we approach the end of the year, it’s also a good idea to take a close look at your cash flow, debt and expenses,” Mr Spring suggested.
“Due to the seasonal impact on trading for most businesses, it’s important to get on the front foot now to understand how you can manage your money more wisely.
“And before you close the door and head off on your break, have a contingency plan in place in case of client emergencies, power outages or IT failures. Planning ahead will ensure a restful, well deserved break.”