The number of small businesses going bankrupt jumped by 48 per cent over the last 12 months, while small business start-ups fell by 95 per cent over the same period.
Analysis by Dun & Bradstreet of business start-ups and failures for the December quarter 2011 found that across the economy, business failures were down 10 per cent on the September quarter 2011, but up more than 40 per cent for the year.
According to Dun & Bradstreet CEO, Christine Christian, Australian business failures have trended steadily upwards since 2008, growing over 30 per cent in the last three years.
"There is an increasing risk that the global economic slowdown will intensify the upward trend in insolvencies," she said.
"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."
The report also found that nationwide, insolvencies rose 42 per cent year-on-year while the number of new businesses fell 11 per cent over the same period. Additionally, failures were more likely within the service sector (up 58 per cent) followed by finance (up 58 per cent) and construction (up 66 per cent).
More specifically, most sectors saw some improvement during the fourth quarter, failures in the retail sector rose 11 per cent for the quarter and were up 115 per cent for the year. This corresponds with similar jumps in the traditional manufacturing states of New South Wales and Victoria where insolvencies increased 59 per cent and 35 per cent respectively for the period.
Since the Global Financial Crisis in 2008, failures in the services sector have risen by 77 per cent, while failures in the manufacturing industry have increased by 57 percent.
"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," Christian said.
"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."
"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."