There is no denying 2024 was a tough year for business.

According to the figures from Alares Credit Risk Insights, insolvencies numbers reached an all-time high last year.

Inadequate cash flow, poor strategic management and trading losses are some of the top reasons companies go under.

ASIC’s latest insolvency data for the fourth quarter from October to December 2024 revealed a staggering increase in the number of Australian companies failing.

During that period 3,852 companies entered external administration, a 48.5 per cent increase on the corresponding 2023 quarter which saw 2,593 enter insolvency.

Experts lend their advice

Insolvency expert Andrew Spring, partner at Jirsch Sutherland, has seen a notable increase in businesses going into insolvency or using a business rescue solution such as voluntary administration or the Small Business Restructuring (SBR) regime.

Introduced in January 2021, SBRs now account for around a quarter of new appointments.

As for the information media and telecommunications category, Spring said the main causes nominated were trading losses, inadequate cash flow, poor strategic mismanagement of business, under capitalisation and poor economic conditions.

“In the last financial year there were 260 businesses in the information media and telecommunications sector that went into external administration, compared to 203 in 2022-2023 and 124 in 2021-2022,” he adds.

Tips to keep a tech business afloat in difficult times

Spring offers the following advice:

1. Maintain your profit margin and prioritise cash flow. Like all businesses, technology companies should focus on maintaining their profit margin. If your input costs go up, you must find ways to increase the unit revenue.

2. Develop new software features for existing products, or enhance or add new services.

Andrew Spring advises business owners to speak up if they are in distress. Photo: Supplied

3. Cut operating costs: where possible, cut back on any unnecessary expenses.

4. Keep an eye on your market, industry trends, and competitors. “We’ve seen from past insolvency and business recovery matters involving tech companies that products or services can become obsolete because of technological advances or changing trends, so it’s important to keep on top of market demand, new developments and competition from established or new players,” Spring says.

5. Transparent communication is crucial with customers, suppliers, staff, lenders, the and Australian Taxation Office. If your tech business is struggling, don’t be afraid of having tough conversations.

6. Speak up if you are in financial distress! It’s important not to put your head in the sand and hope the crisis goes away. Talk to your accountant or get an obligation-free consultation from an insolvency professional. Early intervention could provide many more options available.

Planning the key to success

“What successful businesses do that others don’t is they know the numbers and have done their planning at the outset and on a regular basis,” he adds.

When planning, you need to be aware of all the operating costs and your obligations such as tax, superannuation and salaries.

“Buying a widget for $1 and selling it for $2 sounds like a good deal, but there are so many costs in running a business.

“Time, utilities, insurance and compliance, rent and not to mention taxes – and that means the $1 product could end up being a real cost of $3.”

Record high appointments

Hayden Asper, principal of Worrells, a state-wide insolvency and turn-around service has also seen notable increases in insolvencies.

“We’ve had record-high appointment levels both internally at Worrells and across the broader industry.”

Insolvencies have risen sharply. Source: Alares

Several factors contribute to this trend, largely these were industries that rely on discretionary spending and thin profit margins.

“During tough economic times, consumers cut back on dining out, travel, and holidays.

“Starting a business in these sectors often requires minimal upfront investment.

“For example, a second-hand commercial coffee machine can be acquired cheaply, to run a coffee shop.”

Tech start-ups doing it tough

Those in the startup sector faced significant challenges adds Asper.

“In the recent cases of tech startups, I’ve been involved in, the directors often highlighted the limited availability of venture capital within Australia.”

These startups typically rely on initial funding from friends and family, followed by early-stage investors contributing share capital.

“While these businesses often develop a revenue-generating product, building a profitable company with a new product from the ground up requires both time and resources.

“Without adequate funding, many startups struggle to sustain operations long enough to achieve profitability.”

Common mistakes

Poor cash flow management: cash flow is the lifeblood, yet many companies fail to manage it effectively. A lack of visibility into cash flow, combined with over-reliance on debt or delayed receivables, often results in an inability to cover operational costs during downturns.

Not enough research or planning before starting: Many business owners rush into the market without thoroughly researching their industry, targeted demographics, or competition.

“The result, around 20 per cent of businesses fail in their first year and around 50 per cent of businesses by their fifth year,” said Asper.

Failing to prioritise organic growth: Some businesses rely too heavily on external funding or quick fixes to grow. Organic growth, driven by reinvested earnings, sustainable scaling, and solid customer relationships, provides a more stable path to long-term success.

Over-reliance on debt: Borrowing can provide much-needed capital, but relying too heavily on debt is risky. Debt increases fixed costs through repayments and interest, leaving businesses vulnerable if revenues fall short. A balanced approach, combining equity funding and retained earnings, is often safer.

Restructuring your business is one option. Source: Alares

Not seeking or ignoring the right advice: Many business owners either fail to seek expert advice or disregard it. Advisors such as accountants, lawyers and coaches can provide critical insights and strategies. Do not risk making business decisions in pub talks!

Avoiding issues when they arise: Approach problems when they surface, address difficult decisions and challenges proactively. Whether it’s a cash flow issue, declining sales, or operational inefficiencies, delaying action only exacerbates the problem.

Warning signs

HLB Mann restructuring and risk advisory expert Todd Gammel said some IT businesses can make it with a pure growth focus and the right funding, but others require more patience to become a success.

“One warning sign is when there is no medium or long-term strategy other than to survive and it’s becoming increasingly difficult and uncertain, alternatives should be explored.”

The alternatives might include a potential sale, or a managed close-down, or a transition to an outsource model to reduce costs and refine the business.

Another warning sign is carrying debt for extended period without any payment solution or the inability to restructure the cost to meet the relevant revenue.

“In all scenarios seek expert advice or options in business restructuring, voluntary administration and liquidation.

“It will provide managers with peace of mind and decision-making information that can avert personal liability,” Gammel said.