Bond, Skase and Connell are names of just three of the list of high profile entrepreneurial Australians who have failed at some point in their business careers. In Australia, the latest high-profile entrepreneur to run into financial trouble is Inverell born Nathan Tinkler who, through the good fortune of a ‘tailwind’ of inflated commodity prices and friendly lenders, in April 2012 had an estimated wealth of $1.1 billion.
Photo: Louie Douvis (Sydney Morning Herald, Business Spectator)
However, with the Australian Taxation Office being the latest creditor to seek payment of the comparatively small amount of $2.7 million in back taxes, Mr Tinkler’s wealth might have fallen to the point of him being in net debt. With his holding in Whitehaven Coal now valued at around $625 million but with estimated debts of $700 million, things are certainly tight for him.
Over the last month he has embarked on selling down much of his thoroughbred horse racing interests and has had his private jet and helicopter repossessed by financiers. From the outset, the Achilles Heel of Tinkler’s operations was the very high levels of gearing (borrowings) and he is now in substantial financial difficulty. There are lessons in this for every business owner; for every individual.
Firstly, much of his wealth was based on borrowed money and while, in and of itself, borrowing is not a bad thing, like many things in life too much of it is far from good. Nathan Tinkler’s ability to borrow very large amounts has to this point been underpinned by two key planks. Firstly, borrowings were secured by a lien (a mortgage) over his shares in Whitehaven Coal (and predecessor companies) and secondly, lenders lent against the shares on an expectation that the resources boom would continue unabated for a much longer period into the future.
With the decline in global commodity prices over the last calendar year or so, in part a response to slowing demand from China, shares in resource companies like Whitehaven Coal have been bearing considerable downward price pressure. For all resources companies this has brought on a need to cut costs wherever possible in the face of reduced revenue from sales of commodities – witness redundancies afflicting thousands of mining workers across the nation over the last six months.
From the outside at least, the Tinkler situation appears to be a case of too much (debt) too soon. Cash flow is ultimately the lifeblood of every business (substitute ‘salary’ for cash flow, for employees) and if it’s impeded (e.g. reduced commodity prices) then things can get grim very quickly. With an inability to meet debt obligations because of falling revenue, it’s only a matter of time before smiling lenders start to deliver other facial expressions.
The same risks are at play for individuals. Too much debt is never a good thing and myriad risks abound to curtail loan repayment ability. Consider sickness, accident and unemployment as just three of the things that could jeopardise an individual’s capacity to meet loan repayments. Then there are issues like rising interest rate cycles which eventually send some borrowers into default on loans.
Whether or not Nathan Tinkler will be able to resurrect his business’ ascendency remains to be seen. The headwinds that confront him now seem unlikely to dissipate any time soon.
While the very essence of a successful economy is that at points along the way, people have been brave enough to be entrepreneurial and start a business, there can be failures at any time in every business cycle – in good times and bad. Yet, thanks to sound business management, plenty do succeed. As in nature, business evolution initially sees the strong (balance sheets) survive along with those that can adapt to a changing environment.
As you read this it’s worth remembering that the very reason you can read this online, right now, is in very large part due to the entrepreneurship of people with names like Gates and Jobs!