More than 20,000 businesses in Australia were wiped out during the recent building downturn, the latest figures show.
Published recently by the Australian Bureau of Statistics, the Count of Australian Businesses data reveals that the number of active registered businesses throughout the country within the construction industry dropped by 21,771 during 2012/13 from 350,257 businesses operating at the start of the financial year to 328,486 as at June 30 2013.
While most of the fall was due to a lower than usual number of new businesses starting up during the year (36,029), the 57,800 that left the industry was higher than at any other time over at least the past five years.
The data shows that of the 344,419 construction entities in operation as at the start of July 2009, only 201,387 remained as at June 2013, giving a survival rate of 58.5 per cent, slightly lower than the 62.9 per cent average across all industries.
Of 57,498 construction businesses which started in 2009/10, by contrast, only 43.9 per cent, or 25,239, survived through to June 2013. This implies a slightly lower survival rate amongst construction businesses compared with the broader economy averages.
Business ‘exits’ in the above figures do not necessarily relate to business failures, as some of these businesses may have been sold, merged with other businesses or been closed down due to events such as owners retiring, relocating or re-entering the paid workforce.
The figures come as the latest data from the Australian Securities Investments Commission shows that almost 1,000 (992) incorporated entities in the building sector entered external administration within the first half of 2013/14.
Contractors Debt Recovery managing director Anthony Igra said the industry’s exit rate of 16.5 per cent in 2012/13 (slightly above the economy-wide average of 14.1 per cent and slightly higher than in previous years) does not give cause for alarm given that similar rates were observed in a number of other sectors, but added that the numbers underscore the need for effective business management including sound financial controls, adequate capital management and avoiding taking on work beyond firms’ financial capacity.
“The actual rate of exits in the construction industry is not that different to a number of other sectors which have an exit rate of between 14 and 18 per cent,” Igra said. “There are probably seven or eight sectors caught up in that and they are probably the more capital intensive ones. So I don’t think construction particularly stands out that it suffered for some other internal structural or cultural reason.”
“But the fact that 21,000 companies (net) have gone under highlights the basic findings against the most recent report that poor business management was at the source of a lot of insolvencies in the construction industry. It reinforces the need for proper financial control and for companies managing their capital properly."
He noted that a prime reason for insolvencies in mid-sized and large construction companies is the fact that they often take on too many projects with too little working capital.
“That’s why you get these companies falling over. You wonder how the hell they owe $40 million bucks. The reason is, they are doing 27 projects all at the same time without enough capital,” he said.
In terms of the broader Australian economy, the ABS figures show the country lost 61,614 businesses in 2012/13 as 239,229 started up but 300,843 merged, were sold or closed down.