The recent recession has been much milder than the previous big downturns of the early 1980’s and 1990’s with actual figures far outperforming official budget forecasts of zero economic growth in 2008-09 and a 0.5% contraction in 2009-10 . As we come out the other side and business confidence begins to grow, many are viewing recessions with a less fearful approach. This is a good thing considering that as the reserve bank governor Glenn Stevens points out Australia has been through recessionary bouts of weakening demand, falling output and rising unemployment in the early 1950s, the early 1960s, the mid 1970s, the early 1980s, the early 1990s and now. Adding the brief recession of 1957 and 1977 makes eight since World War II, or one every eight years.  

Yet the most recent GDP rise is misleading as the economy is clearly contracting. GDP is likely to be negative in one or both of the next two quarters, which could yet jolt consumer confidence. Business investment is contracting sharply from very high resource boom levels. Company profits are being crunched. Aggregate working hours are down and unemployment will rise toward 8 per cent in 2010.

Despite this, Australia's banking system remains solid in the face of the global crisis (and in contrast to the early 90s recession). The resources boom did not produce a wage cost blow out (unlike in the early 80s recession). Housing construction is set to recover by the end of 2009. The fiscal stimulus and the Reserve Bank's rate cuts have held up consumer spending. That's helped produce a rise in overall employment since the crisis hit in September last year, thanks to a more flexible job market. 

The nation's improving economic conditions present a new challenge for Australian firms, with data showing that businesses remain vulnerable to financial stress and failure in the early years of economic recovery following a downturn. These findings come from new research by credit reporting agency Dun & Bradstreet (D&B).

The research examined business failures in the recovery period following the Dot Com bust of 2000.  Rather than improving, business failures actually jumped 20.5 percent as the economy returned to positive growth in the 2001 financial year following the 7.1 percent contraction in the March 2000 quarter. This was followed by business bankruptcies increasing a further 5.1 percent in the 2002 financial year, when Australia recorded GDP growth of 3.8 percent. Failures did not begin to decline until the third year of recovery.

The data demonstrates that an economic recovery following a downturn can catch many businesses by surprise. Firms that are under-stocked and under-resourced as demand rises are left scrambling to fulfil new orders which can place significant pressure on cash flow. Firms are forced to outlay funds for items such as raw materials and labour to provide their products but the payment gap results in negative cash flow.

Adding further pressure to financial stability, Australian firms are currently averaging 51.8 days to settle accounts, meaning that firms will be forced to wait an additional three weeks on top of the standard 30 day term to receive payments for their goods. Particularly now, when credit conditions remain tight, cash flow troubles are a significant concern. Already 45 percent of firms are indicating that credit market conditions are negatively impacting their operations and it's unlikely that many firms could borrow their way out of trouble as credit providers continue their focus on risk aversion.

The challenge for Australian firms as the economic environment improves is further highlighted by Dun & Bradstreet risk ratings, which show that 38,000 firms are a high risk of experiencing financial distress in the 12 months to the end of June 2010.  This follows a continued rise in the number of firms at risk from around 34,000 in the June quarter 2008. This increase leaves one in ten (10.2 percent) firms at risk of financial distress. These findings come on the back of a 22.4 percent jump in business failures (year-on-year) in the 2009 financial year.

Dun & Bradstreet's CEO, Christine Christian believes the research is an important reminder that a failure to plan properly for improving economic conditions can bring new stresses and challenges for business executives.

"As economic conditions improve, there can be a tendency for firms to let out an audible sigh of relief and simply expect their own business conditions to improve," said Ms Christian.

"However D&B's research provides an important reminder to business executives that they need to plan adequately for an economic recovery and maintain a tight focus on the fundamentals of cash flow and risk assessment.  Failing to do so could result in financial disaster."

If anything here reads true for your business, or you feel that you may be experiencing some of the problems mentioned above please feel free to give us a call here at Walker Lawrence Watson