Every day, 10 businesses in New Zealand go into liquidation.
By Bob Weir, February 4, 2016
New Zealand is a nation of small businesses. Unfortunately large numbers of these businesses do not achieve what they were set up to achieve and far too many disappear and fail prematurely.
Here are a few statistics to elaborate on this (from Statistics NZ and Insolvency Watch).
- In 2013 over 46,000 enterprises ceased operation (defined as “deaths”). While it is not possible to analyse why these businesses died, these numbers do exclude temporary inactivity, mergers and takeovers.
- In the year to March 2015 over 2,400 businesses went into liquidation – that’s almost 10 every business day.
- Under 5 small businesses are ten times more likely to fail than bigger businesses and this is a trend that has been consistent for at least a decade.
- The family and personal lives of small business owners are very closely intertwined so business failures invariably impact the family.
So considering the importance of small business, we need to understand why failure rates are so high and more importantly, what we can do to improve the situation.
Here are a few things to keep in mind so you don’t become a statistic …
YOU, the business owner, are the factor most contributing to success or failure of the business
While there are a number of reasons a business fails ALL will ultimately come back to those running the business. Sorry, we’d like to blame other factors but ultimately it will be up to the owner to determine if a business succeeds or fails. Be honest with yourself. Accept what you are good at and not good at. Ask for help!!
Spend time ON the business
This is such an overused cliché in business that I often avoid using it. However, it is absolutely critical. If you are too busy to look at how your business is going, where it is heading and how to improve it, you will fail. Sorry, it’s that simple. Set aside the time or suffer the consequences.
No point seeking insurance when the house is on fire!!
Far too few business owners seek out help. Small business is complicated and owners need to know a huge amount to do it well. Get help!!
Unfortunately if you are burnt out or tired, had enough, or the bank, IRD or creditors are knocking on your door its probably too late.
Do some sums before you commit to big investments
I am amazed how often I see small business owners invest heavily in new ventures, equipment, property, vehicles, or increase their fixed costs based solely on “gut feel”. It’s all well and good to chase a great idea but if you can’t afford it things can turn ugly very quickly. You can’t predict the future and business requires risk taking but at least try to understand what the costs are likely to be, what repayments you have, and how you are going to increase your sales to at least break even.
It is your business not the bank’s business
The banks are there to lend you money and ensure they get it back. The banks do not want to screw you, as many may think. However, if you borrow money ensure you are comfortable with the amount and the repayment requirements. The banks will do their own assessment of you before lending. However, don’t blame the bank if you over-commit and can’t meet the loan repayments. It’s your business and ultimately it’s your decision.
Know what you are signing
All the banks and most large suppliers are only going to lend you money or offer you credit if they have some assurance they will get their money if you get into trouble. Typically this is in the form of a personal guarantee. When you sign documents make sure you understand what security the other party has over you. You are unlikely to have a choice, but if you struggle to pay them don’t be surprised if they step in chasing their money. Many suppliers will do this without much sympathy for you, as they also want to survive.
Pay the taxman
It shouldn’t be a surprise that one of the most common organisations that pursue the liquidation of businesses is the IRD. The taxman is often considered to be the bad guy in the eyes of business owners. The thing is, if you are paying taxes you are making money. With a good tax advisor or accountant there will be legitimate ways to reduce this tax burden.
Too often businesses absorb GST into the business’ cash supply and leave insufficient money aside to cover provisional and terminal taxes, all of which can be accounted for ahead of time.
If owners do get into trouble with their taxes I believe the IRD are particularly forgiving in the flexibility they offer businesses in repayments options. So if business owners do find the IRD comes knocking I would not be blaming the IRD.
Cash really is King
Sorry but another overused cliché is the phrase “Cash is King”. However, a business’ cash flow (i.e. the money coming into and going out of the business on a monthly basis) is the business’ lifeblood. If it stops, even for a short period, the business will die.
Too often I see businesses that have great prospects for the future, and are quite profitable (remember profit does not equal cash). They could also attract a good value if sold. However, they get into trouble because of short-term cash difficulties.
There are many simple reasons for this.
Owners don’t chase outstanding invoices. Overdrafts are allowed to rise. Inventory sits on the shelf for too long. Invoices are not sent out. Staff don’t log all their hours. Wasteful practices creep into the business. And there are others.
These are all within the owners control if good disciplines are followed.
This blog has a rather forthright tone to it. Sorry but no apologies for that. There is no reason for the number of failures that occur to be happening in this country. The impact on families, individuals, creditors, that are left out of pocket, and customers, who have to go elsewhere, is significant.
It shouldn’t be happening.
Look after your business. Look after yourself. Ask for help. Follow the basics. Put in the effort and enjoy the ride and the success you seek will follow.