"She'll be right." It's a phrase synonymous with life in New Zealand. It makes us easy-going and fun to be around, and is one of the many reasons people flock to our shores in pursuit of a better lifestyle. But when it comes to business, the "she'll be right" attitude can be devastating.
Why do businesses fail in New Zealand?
"When problems arise, Kiwi business owners can find it all too easy to simply sweep them under the carpet, instead of really addressing the root cause," explains Jessica Kellow, Business Recovery and Insolvency Partner at BDO New Zealand.
This is particularly the case for financial issues. In New Zealand, 97 per cent of organisations are classed as SMEs, according to the Ministry of Business, Innovation and Employment. Many of these business owners are extremely good at their trade, but may not be as knowledgeable about their finances, despite this being key to avoiding insolvency.
Craig Hudson, Xero's New Zealand Manain Director, tweeted "The biggest impact we could have on the success of small biz in NZ is to improve our payment practices to increase cash flow." @Xero
For SMEs, cash flow will make or break a business, yet only half of NZ small businesses were cash flow positive in any given month of the 2017-18 financial year, Xero reports.
Small business owners can also be opposed to paying for advisers - especially accountants - and here again we see the "she'll be right" attitude that can devastate SMEs.
Another reason businesses fail is that they over-expand into areas the owner isn't familiar with. "We're seeing this a lot in the construction industry," explains Jessica. "Although the sector is actually experiencing a boom, this has meant some SMEs in the space are taking on larger contracts than they're used to and in areas they haven't worked in before. This is leading to a higher rate of failure as some of these businesses are unable to handle the ventures they take on."
MARGIN CALL - James Macqueen shares key findings from BDO's recent Construction Survey with the team at New Zealand Construction News. To see what the article reveals about an industry that's under pressure, click here.
How to fix a failing business
It's not all doom and gloom, however. There are a number of things businesses can do to counter the risk of failure. These include:
- Upskilling in financial literacy: Simply being aware of what's owed by whom will have a huge impact on cash flow, especially if you can then agree on better payment terms. BDO New Zealand has recently launched a colour accounting programme to bring financial literacy to as many Kiwis as possible.
- Pick up on red flags early: These include a mismatch between profit and cash, slow moving stock, an absence of timely information for decision-making, and factory inefficiencies.
- Identify the underlying cause: Due to New Zealand's rising house prices, many business owners are simply taking money out and using their home as equity, instead of identifying what the real cause of the problem is.
- Work harder to retain top talent: This is especially important in the construction industry, where there's a significant shortage of skilled labour in New Zealand.
- Trim costs: This shouldn't be a business' go-to, but it does help to take a look at where you can trim costs and therefore improve cash flow.
- Engage an independent adviser.
"The more confident managers feel around #financialstatements the more they use them, and the more insights they gain about their business. The result is better decisions." #Accounting guru Peter Frampton on Calculated Confidence." - Colour Accounting
How can an independent adviser help a failing business?
Sometimes, SME owners are simply too involved in their organisation to see the bigger picture. This is hardly surprising - after all, they live and breathe their business. But an independent adviser can identify areas for improvement that may never have occurred to the owner.
Jessica, for example, worked with a struggling retail store last year. Although the company had good brand awareness, its sales were suffering. Jessica helped to identify where the business was paying unnecessary costs and what elements of its operations could be improved. She recommended they move premises to a single storey lease (as the two-level store they were operating in required more staff and higher rents). Jessica also helped to improve their online shopping tool, which had previously been cumbersome and wasn't generating sales.
"Independent advisers are essentially a fresh pair of eyes. We're there to help identify the root cause of issues, as well as give some hard truths that business owners may not have picked up on themselves," explains Jessica.
BDO wants your business to succeed. That's why we have recovery and insolvency services across New Zealand. No matter where you're located or what size your business is, we're here to help. Contact us today for more information.