Small businesses rise as bankruptcies fall

Historically low business bankruptcies have created the strongest ever corporate Canada in the most difficult economic times.

A recent study by CIBC recorded business bankruptcies in Canada to be at an all-time low with just 3.4 bankruptcies per 1,000 businesses in 2010.

“In some ways, corporate Canada has never been stronger than it is right now,” said Benjamin Tal, deputy chief economist at CIBC. “Better-than-expected profitability and a reluctance to spend in recent years has left Canadian businesses sitting on a record amount of cash and confident about the future.”

The report noted the ability of Canadian firms to stay in business during the recession was, in part, a result of some well-timed defensive steps taken by its business leaders.

“Corporate Canada’s decision to quickly downsize during the recent recession not only allowed it to withstand the downturn but has also allowed it to ramp up its hiring at a much faster clip than we’ve seen stateside,” said Tal.

One of the secrets of their survival has been the capacity to adapt and to stay ahead of the curve in changing economic times, said Mike Michell, national director for small business, RBC. “It speaks to the ability of small businesses to adapt quickly and take preventative measures to set themselves up for it,” said Michell. “I saw the report and I had a smile on my face. It speaks to the tenacity and resilience of the small businesses in Canada.”

Not only is the number of business bankruptcies low but they continue to fall at an unprecedented rate, the report noted. “The 2008-2009 recession was the only downturn on record that saw the number of business bankruptcies in Canada drop and even now they are falling at a year-over-year rate of 30% – much faster than the pace seen in any other recovery,” said Tal.

“Early on when the economy started to go south we saw small businesses shed a certain amount of jobs, but they did it early on and it didn’t go as deep as we saw in big companies, and it rebounded faster,” said Michell.

Small businesses were quick to see what was coming and took preventive actions – controlling cash flows and scaling back operations – to make sure they could weather the storm. Therefore, they were also quick to bounce back when signs of recovery returned.

Michell attributed the success of corporate Canada to good planning on behalf of businesses, the fact that they weren’t overextended to start with and were paying attention to early signs of slowing economy. “Keep an eye on your expenses, your cash always has to remain with you to make sure if something unexpected happens you can react quickly,” said Michell.

Not overstocking, keeping the cost of production low and diversification of capital are some of the other measures key to a business’ survival, he said.

“It’s very important for entrepreneurs to diversify their funds [through RRSPs, TFSAs], as some of those options will allow you to accumulate liquidity in a tax-free way,” said Michell.

Leveraging these strategies can help them make tax efficient investment into their company when the times are tough, he added.

The study further found that “despite the fact that today there are 30% more businesses in the Canadian economy than in the late 1980s, there are also 50% fewer bankruptcies.”

While all provinces saw the number of business bankruptcies fall in 2010, British Columbia lead the way with 43% fewer bankruptcies than the previous year. Ontario, Manitoba and Saskatchewan also saw business bankruptcies decline more than the national average.

CIBC: Business bankruptcies at record low