Opinion: there should be publicly-funded financial health checks for every Australian small business

By Harry Guinness

September 20, 2020

Calls for the federal government to ‘reactivate’ temporary insolvency protections. (Adobe/Syda Productions)

Unlike an ordinary recession, a pandemic won’t only give you ‘creative destruction’ — instead, it destroys many businesses that should and would survive in the absence of this once-in-a-century economic shock. With the events of the last six months smashing consumer spending in a number of areas, sending business revenues into freefall, it should come as no surprise that Australia’s small businesses are struggling.

Many of these small businesses, suffering though they are right now, have the potential to serve as the engine room of our recovery. Without them, this recession will be far deeper and longer than it needs to be. Meanwhile, many of the supports governments have provided have prolonged the survival of so-called “zombie businesses” that in an ordinary recession would have been allowed to fail.

With that in mind, governments should do all they can to give the thousands of Australian small business owners, and the millions of workers they employ, every chance to succeed on their own. To that end, a new report from the Blueprint Institute makes the case for publicly-funded financial health checks for every Australian small business.

These checks, at a cost of $3000 a pop, would be conducted by a trusted financial advisor — such as an accountant, tax agent or bookkeeper. Small business owners would receive advice on how they can restructure their business, or, when this isn’t possible, to wind up their operations in a dignified and efficient way.

During these unprecedented times, it is essential that small businesses in particular have access to high-quality financial advice to understand their options. The taxpayer is currently providing more than $10 billion per month in wage support to Australian businesses. And even with the upcoming reduction in JobKeeper, spending will still remain above $2 billion a month all the way through to March.

If financial health checks increase the likelihood of otherwise-viable small businesses surviving the crisis, this would in fact complement this existing public spending and increase its effectiveness. The stated goal of these wage support programs has been to save these jobs and businesses. Providing small businesses with access to advice from accredited financial advisors will do just that.

And providing these vouchers won’t only benefit small business owners, but the economy as a whole. By improving the viability of small businesses and helping them avoid insolvency or holding on for too long, we will be protecting jobs and livelihoods, while laying strong foundations that will pay dividends in the years to come.

On a broader level, the government’s role in the market should be to create the foundations so that innovation and entrepreneurship can flourish. Without support, many small businesses may struggle to find or fund the advice they need to succeed. Many may become insolvent unnecessarily when another course of action could have saved the business and the jobs it supports. This could lead to unnecessary financial hardship, resulting in stress for many small businesses owners, and slowing the recovery.

While critical to protect our economy from the worst effects of the pandemic, many government actions froze our economy in time, keeping a raft of zombie businesses on life support. Wage subsidies have been tied only to existing, struggling businesses. And businesses have been allowed to operate while insolvent, which has opened up a big gap in bankruptcies. For some small businesses, this has simply delayed the inevitable.

While JobKeeper has been extended at a lower rate so as to phase out support more gradually, a still-significant level of funding will come to an end in March. The fiscal cliff has simply been postponed. Today, we have no idea how many businesses will fail once that support runs out. These financial health checks would provide everyone — including the government — with a much clearer picture of where we stand.

Some avid free marketeers argue that we should let all struggling businesses fail. But a ‘laissez-faire’ attitude to small business would likely result in a devastating loss of otherwise-viable businesses and firm-specific capital that would set back the Australian economy for years to come. The links between businesses and their workers, suppliers and customers are valuable, and mean the loss of a business would reverberate through the local economy.

Many small businesses are suffering not due to poor business practice, but rather as a result of legally-mandated lockdowns and the economic uncertainty wrought by COVID-19. Small businesses that were viable and profitable prior to COVID-19 are suddenly fighting for survival. A publicly-funded financial health check would give more small businesses a fighting chance, and more quickly reallocate tied-up capital to the businesses that will propel our recovery.

The key is to distinguish between the two, and these financial health checks would do just that.

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