The Post: Unprepared business owners putting mental health on the line

This article was originally published on The Post on 24 Sep, 2024.

The insolvency figures released this month are a worry.

The number of Kiwi businesses failing is the highest in eight years.

They’re a concern but they’re also a wake-up call for business owners to deeply understand their financials and get accustomed to early planning to avoid any action from the IRD, who are responsible for most involuntary liquidations.

After nearly 25 years working alongside business owners, we know that the stress that comes from worrying about finances can cause headaches and much worse.

With Mental Health Awareness Week kicking off on September 23 we all need to be adopting the Mental Health Foundation’s theme of community and look at how we can support one another through this rough patch. It isn’t just about individual resilience, but building a network of support.

Being open and not being afraid to ask for help is a good start for stressed out business owners.

Whether it’s reaching out to peers, advisors, or even other business owners to share best practices, there’s power in community.

It’s also key to review any blind spots and know where your finances are at.

The IRD are responsible for about 60 percent of involuntary liquidations and after a few years of Covid and cyclone leniency they appear to be losing patience - we hear they’re moving a lot faster right now. The trouble most often starts brewing with unpaid GST and PAYE.

If a business is signalling to the IRD early that there are issues, then this can go a long way to staying out of trouble. But early warnings need to combine sharp operational KPIs and reporting so solid decisions can be made. There’s an easy way to identify what’s going well and what’s not. Basically, have a forecast and a plan to show them there is a way out.

Once the IRD has put a business in the distressed business unit, steps which follow can be quick. There’s a legal right to challenge, and the process may slow down by paying, but there is not a lot of time to negotiate when things get to the brink. Doing what you say you’ll do can go a long way to getting some level of leniency if trouble strikes again.

Auckland-based accountancy firm, Frank Accounting, tell us there have been three times more voluntary liquidations this year than last. Voluntary liquidations get a bad rap but it doesn’t have to be like that. Often the later a business is left struggling, then the longer the trail of destruction. An early call may be an opportunity to salvage some parts of the business and pay bills rather than having everything fall over.

Sadly, we see a lot of established businesses who don’t understand their financial position. They don’t have KPIs, they don’t understand pricing and a lot of businesses are banking future deposits and taking revenue but not reflecting the costs still to come on the balance sheet.

Business owners need to understand where the working capital is at. It’s not good enough to say “my bookkeeper will know the answer” or “my CFO sorts that stuff out”. Look closely at what needs to shut down or change. It could be customers, team members or segments of the business that need to change. If the gross profit is not where it needs to be, then linking to other KPIs, and asking questions – are we productive enough to get turnover back to where it was?

Let’s face it - If you don’t have this information then you’re shooting from the hip and putting your business at risk and undoubtedly your mental health.

Actively forecasting different scenarios and different sensitivities in the forecast should all link to the overall business plan.

Cash flow forecasting ahead of time can mean that there is time for banks to approve overdrafts – some banks are taking a lot longer to make those decisions and require a forecast for any change in funding.

There are few levers the current cash-stretched government can pull to help businesses right now but it would help if larger businesses are ensuring their payment terms to smaller businesses are timely. One of the key consequences of late payments is the stress it puts on businesses with GST payments.

In February, Minister Bayly announced the Government would be working with BusinessNZ to create an industry-led voluntary code to ensure small businesses are paid on a more timely basis. The Minister acknowledged there is a problem with large market players imposing long payment terms and routinely paying invoices late.

It was promising to see the Minister’s messaging last week to central government agencies to prioritise their payments to small businesses.

It would be useful to this initiative implemented for our wider business community sooner rather than later.