As the economic crisis deepens, smaller businesses are finding it harder to survive. Business Editor Dene Mackenzie talked to a selection of advisers about survival tips.
There has not been a better time for smaller businesses to look closely at how they operate as the credit crisis continues and New Zealand moves deeper into a recession.
Lawyers, accountants, professional business advisers, banks and succession planners are all urging business owners to constantly review all aspects of their entity to ensure they are not only working efficiently but are also planning for the inevitable recovery.
Mitchell Mackersy Law partner Sally Peart says businesses need to think about their structure in times of an economic downturn, particularly if there is any risk of going into receivership.
If businesses had valuable intellectual property or goodwill sitting in the trading entity, it was possible that it could be seized by a receiver in the event that things went bad.
"This could prevent your ability to start again if your company is wound up."
However, her most important theme was about protecting relationships irrespective of whether they were with suppliers, customers, banks, landlords.
It was "absolutely critical" to keep dialogue going and keep the goodwill in those relationships.
"If you do need to buy some extra time or, for example, renegotiate the terms of your lease, you will be much more successful if you have maintained a good relationship."
Businesses should be vigilant about being paid. The last thing they needed was a long list of creditors who were effectively using them as their bank. Make sure clients and customers were aware of the payment terms and enforce them, Ms Peart said.
"Remember the squeaky wheel gets oiled first so if you make a lot of noise about not being paid, you are more likely to get paid sooner. If a client is really struggling, put in place a payment plan which they can manage."
If a business was struggling to meet its outgoings, Ms Peart recommended they talk to their bank or landlord to try to negotiate some leniency.
"In the end they will rather see a regular income stream than have you falling over altogether - within reason."
Keeping terms of trade intact would give security in the event that a business did not get paid. If businesses were supplying goods on credit, they should ensure their terms of trade had been signed by the customer; that the business had registered a security interest on the Personal Property Securities Register so they could get priority over any other creditors if they did not get paid; or get those goods back.
If things got so tight that staff had to be made redundant, businesses must ensure they had good advice.
There were clear procedures which needed to be followed and it could be costly if they were not. Also, businesses should check employment contracts sufficiently protected trade secrets, she said.
Deloitte Dunedin accounting and advisory partner Mike Horne said his message was two-fold. Businesses needed to be cognisant of the impacts of a slower economy on their business fundamentals but should consider how to position their business for longer-term opportunities.
"Cash flow and working capital management are the key. You need to be proactive in managing and following up on debtors, look at timing of creditor payments, look at stock turn and stock levels as high inventory ties up cash in the short term."
Mr Horne recommends being vigilant and timely in budgeting and cash-flow forecasting. Timely forecasts allowed action to be taken to either lessen the potential down side or take advantage of opportunities.
Understand the existing fixed costs of the business and the extent to which they could be removed or reduced.
Look for discounts, renegotiate supplier agreements and look for more cost effective substitute products of services.
"Don't treat your bank as an adversary. It is very important to proactively work with your bank to ensure that a good relationship is maintained. This is about providing them with timely information and discussing with them performance, funding and cash flow. They want to know you have your finger on the pulse."
Deloitte Dunedin taxation associate director Peter Truman said that with year-end tax payments for the 2008 year generally due on April 7, 2009, businesses should make sure they talk to the Inland Revenue Department on or before April 6 if they were not in a position to pay.
IRD was receptive to repayment programmes and were able to remit many of the late payment penalties that would otherwise apply should businesses fail to pay by the due date.
If payments were late, without IRD agreement, late payment penalties were 1% after the first day, a further 4% at the end of the first week and a additional 1% penalty at the end of each month, he said.
Recently passed tax legislation changed the way provisional tax could be paid.
If projected income was lower than the previous year, it was possible to estimate the 2009 provisional tax at a lower figure, but that must be done by the third instalment date. That would reduce future payments to the IRD.
Tax-pooling companies offered products that financed provisional tax payments.
Rather than making a payment now, only the interest on the deferral period was paid up front, with the underlying tax payable at a future date.
"Provided you pay the future amount, IRD record the payment as being made on the due date and won't charge any interest or penalties."
Interest rates payable to tax-pooling companies were generally 2% cheaper than IRD interest charges.
Mr Truman warned businesses to make sure any GST, PAYE, and residential withholding tax was paid as due. As those amounts had been deducted, as an agent for the Crown, the IRD took a "dim view" of non-payment.
With the common business balance date looming, there are ways to reduce 2009 taxable income and therefore tax payments due for the 2009 year.
Businesses should ensure all bad debts are written off on or before balance date. An income tax adjustment is only available where the decision to write off has been documented before balance date. If registered for GST on an invoice basis, a GST adjustment is also possible at the time of the write-off.
Where trading stock was worth less than the cost to the business, businesses should try to quit the stock before balance date to crystallise the loss, Mr Truman said.
As income tax deductions for holiday pay owing at balance date are only available when the leave is taken within 63 days of balance date, employees should be encouraged to take accumulatedleave within this period.
Physically scrapping any obsolete fixed assets before balance date enabled the remaining book value to be written off.
Opportunities to realise any foreign exchange losses should be considered so that deductions could be claimed in the 2009 year.
Consideration should also be given to bringing forward expenditure from 2010 to 2009. That could include repairs and maintenance, redundancies, marketing and promotion, he said.
"With recent reductions in company and individual income tax rates, this is an opportune time to review business structures to ensure that income is taxed at the lowest rate possible.
"If you are needing to borrow additional funds, ensure these are structured so the interest is deductible for income tax purposes," Mr Truman said.
