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Small business bankruptcies on the rise

A new report from analyst firm Dun & Bradstreet has found that small business failures in the fourth quarter of 2011 rose 42% compared to the same period in 2011.

The number of businesses calling it quits was down 10% compared to the third quarter of 2011, but up more than 40% for the year.

“There is an increasing risk that the global economic slowdown will intensify the upward trend in insolvencies,” said Christine Christian, CEO of Dun & Bradstreet, in a statement.

“Despite recent rate cuts, there is a palpable lack of confidence in the current operating environment. This is obviously one of the side effects of long standing global uncertainty and can often be enough to deter businesses from entering the market, irrespective of actual conditions,” she added.

The amount of new businesses starting up in the last quarter of 2011 fell 11% compared to the previous year as well. According to the report, business failures were most common in the finance, service and construction industries.

“Outside the mining sector, sentiment is generally still poor and the strong Australian dollar is straining profits. This could lead to an increase in business failures in 2012,” said Christian.

Dun & Bradstreet’s findings also pointed to Australia being at the same level of risk as countries directly linked to the euro-zone debt problems, such as Italy, Portugal, Spain and the UK.

“In Australia, rising insolvencies are largely being driven by poor sentiment outside the mining sector and a tightening of credit. This will have a knock-on effect on businesses as cash flow becomes more strained,” continued Christian. “Cash flow is the mitigating factor here, particularly for small businesses who feel the effects a lot faster than larger companies with cash reserves to match.”

Small businesses with less than 20 employees recorded a large spike in failure rates, with Dun & Bradstreet noting a 48% year-on-year rise in insolvencies.

“Businesses should take precautionary measures to reduce their level of financial and operating risk. Changing market conditions will no doubt have an impact on all businesses, but it is above all good cash flow management that is the key to running a successful enterprise,” said Christian.

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