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‘Tis the season’ for business failure

30 November 2018

New Zealand’s business failure season is almost upon us – December through February is when most SMEs are likely to pull the plug – and that, for many business owners, may be a good thing, notes Auckland chartered accounting firm NexGen Group.

“Knowing when to quit, before things get too out of hand, is actually a good thing,” said chartered accountant and firm director, Peter Prema. “It means you may be able to minimise damage enough to come back another day and try again, older and wiser.

“Unfortunately, in our experience, too many small businesses will be looking to take out an overdraft or borrow against their mortgage to try and keep a sinking ship afloat when really they should be closing up shop.”

In a country where almost half of SME start-ups will fail within their first two years, too many small business owners leave it too late, but those that do eventually go belly up are most likely to do so over the Christmas and New Year period. Cash flow stress and more time to think – because they have no customers – help many SME owners come to the right decision.

Prema, who is also the former deputy head of finance for the Ministry of Justice in the UK, said borrowing (usually against the mortgage) to pay bills – like salaries, rent, even groceries – is a strong signal that things aren’t right with the business.

“It’s important not to quit until you take expert advice, but you should ask yourself some questions to help be honest with yourself. For example, how is your health? What are your stress levels? Has the thrill gone? Are your relationships in trouble due to the business? Was your turnover this year the same as last year?

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“Take a look at your bank account, because your bank account is the heart of your business. If it isn’t healthy, your business is not healthy and it may be time to re-evaluate.”

Prema said that in his experience, other signs of a labouring business include the owners becoming bored with the same old same old – the business is now just a job. Customer service levels suffer as a result, complaints increase, staff turnover is high and there’s a failure, or inability, to keep up with new technology.

“New competitors, still eager and hungry, enter the market. They bring new technology and fresh energy, which is very hard for a demoralised and struggling business owner to counter.”

Prema said additional pressures like due dates on provisional tax, GST and ACC levies all fall due in December and January, which is really bad timing on the part of Government because they know that business activity – with the exception of retail – comes to a virtual halt during this period.

“Christmas presents for the family, summer holidays and taxes are part of the story, but another killer is that customers delay payment on invoices, often to try and save their own cash flow, but there’s a massive knock-on effect.

“The second year in business is also when the tax free run ends and suddenly you have to pay the previous year’s tax and the provisional tax for the new financial year. Anecdotally, relationship break-ups can also sink a business.”

He offers the following advice for companies which may be showing some symptoms of failure:

1. Don't make big decisions without expert advice and good data

“Surround yourself with business advisers who know how businesses work and know the numbers. Do monthly management reports, because without them it’s simply impossible to know what’s going on. If you wait until you get your annual financial statements, it may be too late.”

2. Take ownership

“I have experienced so many struggling business owners who blame everything and everyone one else for the predicament. Don't shift the blame. Instead, learn from what’s happened, take ownership, accountability and responsibility – be honest with yourself,” Prema said.

3. Take action.

It may be possible to turn the business around, but doing so requires that the business owner is sure about his or her purpose, vision and mission.

“No business succeeds without marketing and sales, and having just one source of leads – like referrals – is risky. Diversify your lead channels.”

4. Quit when it’s time to quit

Take expert advice and exit before things get too bad so you can avoid liquidation or receivership.

“It may be possible, if you do some work on your systems and processes, to sell the business. If you have debt, talk your creditors or look at a debt consolidation loan so you can exit gracefully, instead of borrowing to keep a sinking ship afloat,” Prema said.

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