Finance-related issues always keep business owners awake at night. Things such as tax obligations, cashflow management, funding for growth, working capital, credit management and debt collection can be the stuff of nightmares.
To help steer you through, NZBusiness offers this condensed guide to finance.
In the ANZ Business Outlook released just before December 2017, the difficulty in getting credit was a top concern of New Zealand’s business owners. A net 41 percent of businesses surveyed expect it to be tougher in 2018 to get credit – up from 31 percent, and the highest since the question was first asked in mid-2009.
Expectations aside, money matters have always weighed heavily on the minds of business owners. So NZBusiness scouted around the business finance landscape to secure some top finance advice and answer some of the more pressing money questions for business owners.
A banker’s perspective
Perhaps the first logical stop for advice on business finance is a traditional bank. However, Heartland Bank is a little different – representing a new breed of technology-driven banks with flexible options for businesses.
Heartland’s ‘Open for Business’ online lending platform responds to the fact that small business owners are often time poor, have modest capital needs, and are well aware that the ‘big banks’ want to lend them money secured against a residential property. The platform lets them apply for working capital online without having to make an appointment and take time out from the business. Unsecured business loans of up to $75,000 can be applied for – or a partially-secured business loan up to $250,000. Decisions can be received ‘in seconds’ and the loan won’t be tied to a customer’s residential property. And because Heartland is a specialist bank, there’s no need for customers to change their transactional bank in order to work with them.
As well as the business loan not being tethered to the customer’s residential mortgage, there are no early repayment fees and penalties either. Payment schedules are flexible, to suit each customer’s business – for example, payments can be tailored to fit around seasonal peaks.
When it comes to funding growth, business owners must ensure the type of finance and the term of that finance best matches the type of desired growth. For example, avoid short-term debt structures that don’t match the life-cycle of an asset being purchased.
A key recommendation is to be organised; know what you want to achieve; and be realistic about what you can afford.
Avoiding the tax trap
Don’t be afraid to look at alternatives to banks and other mainstream providers. An increasing number of business owners are doing that by using invoice financing and factoring services when they need cash. However, says Chris Cunniffe, CEO of Tax Management New Zealand (TMNZ), the money they would otherwise use for provisional tax can also be a source of working capital.
“We regularly see small businesses use our service to defer income tax payments to a later date so they can buy new equipment, extra stock, or take advantage of another opportunity. We pay IRD on behalf of a business, and the business then repays TMNZ at the agreed-upon time in the future.”
It’s easy to arrange; the interest rate is lower than the business’s overdraft, and no security is required, he adds.
“It’s an IRD-approved way for them to meet their income tax obligations on their terms, not the taxman’s.”
Cunniffe says the challenge is that Inland Revenue expects provisional tax to be paid on dates it sets – which don’t always align with when a business earns its income.
“This can especially be the case in April and May. In April, those who didn’t pay enough income tax for the 2017 tax year will have terminal tax due. Their final instalment of provisional tax for the 2018 tax year is in May. As you can see, that has the potential to cause all sorts of cashflow challenges.”
Cunniffe’s advice for business owners is to provide information regularly to their accountant.
“They can help you make sound decisions around managing cashflow and tax. A good accountant can save you a lot of stress – and a bit of money – in the long run.”
Release that cash
In recent years invoice and debtor finance, which releases cash tied up in accounts receivable ledgers, has been increasingly looked at, particularly by growth industries, as a source of funding from lenders.
Sarah Lochead-MacMillan, business development manager for Lock Finance, says they still see business owners not allowing for tax bills and getting behind; not chasing debtors on a regular basis and not spreading their customer risk by spreading their customer base.
“If a business has one customer that takes up more than 40 percent of their ledger (sales), then if that customer leaves the business will find itself in difficulty.”
Her advice for business owners looking to secure borrowing from lenders is to show that you can control your cashflow.
“We know growth sucks cash and occasionally sucks profit. Show that you can recognise that and plan forward to ensure the business regains any profit lost.
“Show you understand your market and your risk and how you plan to manage this. Show how you are committed to your business and that you have some ‘skin in the game’ and aren’t totally relying on the lender.”
Lochead-MacMillan’s tips for business owners struggling to get on top of cashflow include:
- Chase your debtors – ensure you regularly ask for your money.
- Invoice quickly – at the end of the job/service, not the end of each month.
- Tighten your terms and conditions, ensure your customers have a copy and change your payments terms. Try 14 days.
- Control your money and set a budget or forecast – then measure against it so you can see problems as they occur, not months later when they hurt.
- Before you spend money understand what you are spending it on, why you are spending it, how it will enhance your business and what will be the return on your investment (spend).
- Ask for help – talk to your banker, your advisors, and Lock Finance.
The Grow Your Financial Skills Workshop, organised by The Icehouse is a popular two-day workshop designed to help a business owner (or senior leader in an owner managed business) understand financial reporting, budget and manage cashflow better, or to read, forecast and manage the numbers behind the business.
“This workshop is an incredibly practical way to spend a couple of days,” says Liz Wotherspoon, head of growth at The Icehouse. “Our approach is to raise the business owners’ awareness and understanding of the valuable lessons they can learn about their business from their financial information. They just have to know how to read it.
“The numbers tell a story and contribute to good decision-making. Demystifying finance and making it less scary and more compelling means business owners are better equipped to plan and manage for growth without putting the financial stability of the business at risk.”
So what is her advice for business owners looking to grow their business?
“They need to be able to read not just the P&L (profit and loss) but, more importantly, the balance sheet,” says Wotherspoon.
“To quote Matt Bellingham; ‘Revenue is vanity, profit is sanity and cashflow is reality!’
“Owners need to really understand this and manage accordingly. We continuously reinforce the objective of profitable and sustainable growth – not growth for growth’s sake.
“It’s only when you understand what drives profitability in your business that you can make decisions and run your business without the stress of ongoing financial pressures.”
HAS YOUR BUSINESS EVER BEEN HIT BY A BAD DEBT?
The issue of bad debts is something that is downplayed by many until they are hit with the one that creates chaos for their own business. A loss of $100,000 on a five percent profit margin will require additional sales of $2,000,000 to replace. Trade credit insurance protects against such defaults and ensures that you can trade with confidence and expand into new markets without fear of default.
National Credit Insurance (Brokers) NZ Limited is a specialist broker in this area and over 60 percent of all business placed in New Zealand is through NCI.
The company provides a specialist team that helps monitor your debtors and provides advice when a customer experiences problems. Many clients regard this support as more valuable than the actual insurance. NCI has a suite of products ranging from the actual insurance to collections, debtor assessments and company monitoring. This ensures it can tailor a package that aligns with a company’s needs and provides peace of mind to the business owners.
The stress created by a bad debt cannot be underestimated; the anxiety of negotiations to get payment, the explanations to your bank and the need to keep paying your own creditors can seem overwhelming. NCI can ensure cashflow is restored promptly andn without drama.
To find out more call 0800 442 556 or visit www.ncinz.co.nz. With offices in Auckland, Wellington and ChristchurchNCI is well placed to help you.