More than a third of SMEs must tackle serious debt

At least a third to half of New Zealand’s small businesses that turn over less than a million dollars every year are struggling with ‘bad debt’ – particularly tax debt – and the situation is expected to worsen over Christmas and January.

Operations and head accountant at Auckland-based accounting and business advisory firm NexGen Group, Alister Siew, said that GST and income tax debt is a huge problem for small businesses.

“Coming into January there will be provisional tax and GST payments all coming due; not to forget terminal tax in April,” said Siew. “If the sample we see every day in our practice is any indicator, expect thousands more companies to sink deeper into debt with the IRD – debt that will cost them use of money interest payments at least 8.22 percent.

“Irresponsible borrowing, particularly on motor vehicles that the business cannot afford, must also take a fair share of the blame. Another factor is poor business decision making; too many SMEs don’t do cashflow projections, they don’t have proper terms of trade and they don’t save for when those tax bills come due.”

Siew said that many SME owners tend to confuse good debt with bad debt and so have accepted that debt may be a way of life for a small business owner.

“Good debt is based on a clear business plan and growth, such as launching a new branch, opening a new shop or launching a new product. These activities may require borrowing, but they’re investments that will pay off down the line.”

Siew offers the following advice to small business owners struggling with debt and cashflow problems:

1. Get your terms of trade right

“Ask customer for an upfront payment or deposit and run credit checks on new clients,” said Siew. “Too often small business owners have bad cashflow due to debtors, forcing them to borrow just to pay operational expenses – this should never happen.”

2. Put in place a robust accounts receivable

Siew said that irrespective of size, a business should have an accounts receivable process in place to ensure strong cashflow.

“Get your terms of trade right and vigorously follow-up money that is owed to you – don’t wait 60 or 90 or 120 days to get paid, and don’t do business with companies that try to force unfair conditions on you, no matter how large they are.

“A very good accounts receivable strategy is to cultivate a good relationship with your customers. When people know you well, and like you, they’re less likely to become problem debtors,” Siew said.

3. Review your costs

Siew said business owners should review their costs and reduce them where possible.

“Even simple things like Internet and telephone bills and Christmas functions. Don’t go the expensive route if you can’t afford it.

“I think that SMEs are taxed too much, but there’s not much you can do about it except to try to source a loan at a cheaper interest rate than the IRD’s 8.22 percent interest rates. Look to consolidate other debts like credit cards and motor vehicle finance.”

4. Increase cashflow

Siew said a very simple solution to debt is to review your marketing strategy and aim to increase sales.

“Get more clients into the business, make more sales, but get the costs down; it’s a very elegant solution,” he said.