What to do if Your Business has Financial Trouble

In the unpredictable economic landscape New Zealand small business owners navigate, encountering financial distress is a stark reality for many. Cash flow issues, grappling with the decision to sell a business with outstanding debts or the daunting prospect of not making payroll, is stressful business owners. Understanding the steps to take can be crucial for your business's resilience and continuity.  

This article provides actionable advice for New Zealand small business owners facing these challenges. 

Recognising when your business needs help 

As a business owner, early action is crucial. The sooner you recognise the signs of trouble, the sooner you can take steps to address them and resolve issues.  

Here are some key indicators that your business might be in trouble: 

• Cash flow issues: This is a major red flag. Are you constantly juggling bills and struggling to meet payroll? Are your accounts receivable growing faster than your accounts payable? 

• Decreasing sales: A shrinking customer base, increased competition or a change in market trends are common reasons small businesses face financial trouble. Are you seeing a decline in foot traffic, online orders, or overall revenue? 

• Mounting debt: Is your business debt burden becoming unmanageable? Are you relying heavily on credit cards or high-interest loans to pay bills and keep the business afloat? 

• Low employee morale: Are your staff unhappy, disengaged, or experiencing high turnover? Low morale can lead to decreased productivity and customer service issues. 

Other warning signs: 

• Difficulty obtaining inventory or supplies. 

• Increasing customer complaints. 

• Negative press coverage. 

• Legal issues. 

Taking stock: Assess your situation 

Before taking any action the first step is to understand the root causes of your current situation, so you can mitigate risk and minimise its escalation.  

Here's a few things you can do: 

Financial analysis 

A thorough financial analysis is crucial for identifying the root cause of your business troubles and developing an effective turnaround plan. This analysis goes beyond simply reviewing bank statements, and involves a comprehensive look at your financial ledgers: 

• Gather and analyse financial statements: Collect your income statement, balance sheet and cash flow statement. Review your bank accounts and understand your income and expenses. Track where your money coming from and where it's going. Are your accounts receivable growing, indicating slow collections? Are there areas where you can tighten your belt without sacrificing quality? 

• Evaluate company assets and liabilities: Assess all company assets (inventory, equipment, property) and liabilities (loans, accounts payable). Can underutilised assets be sold or monetised to improve cash flow? Are there outstanding debts impacting your financial health? 

• Review cash flow: Pay close attention to your cash flow statement. This document details the inflow and outflow of money within your company over a specific period. Analyse your operating cash flow, which reflects your core business activities (revenue minus operating expenses). Is there a negative cash flow from operations? 

• Cash flow forecast: Create a cash flow forecast that estimates your future cash inflows and outflows. A well-constructed cash flow forecast is a powerful tool for navigating a business turnaround. By anticipating future cash needs, you can predict potential money shortages before they happen, make informed investment decisions, and use your cash flow forecast to monitor your progress. 

Business and market analysis 

Your success hinges on understanding both your internal operations and the broader market dynamics you operate within. Here's a two-pronged approach for small businesses: 

• Market research: Is there a shift in your target market's preferences? Have your competitors changed strategy? Conduct market research to identify any external factors impacting your company. 

• Internal review: Are there operational inefficiencies? Are there gaps in your marketing strategy? Is your customer service falling short? Conduct a thorough internal review to identify areas for improvement. 

Taking action: Advice to turn things around 

Once you've identified the problem and assessed the situation, it's time to develop an action plan to save your business.  

Here are some key strategies to get your business back on track: 

• Develop a plan: Set SMART (Specific, Measurable, Achievable, Relevant, and Time-bound) goals and outline actionable steps to achieve them. Your plan should include strategies for improving cash flow, reducing costs, increasing sales, and boosting profitability in the long run. 

• Reduce costs: Carefully analyse your expenses and identify areas where you can cut back without sacrificing quality. This could involve renegotiating supplier contracts, reducing overhead costs or streamlining operations. 

• Renegotiate with suppliers: Can you reduce spending by securing a better deal from other vendors or extending payment terms? Don't be afraid to negotiate with your suppliers, especially if you've been a loyal long-term customer. 

• Improve cash flow: Can you collect outstanding debts or offer early payment discounts to incentivise faster payments from clients or customers? Consider factoring this into your invoices to get immediate access to working capital. As a last resort, a small business loan could bridge temporary cash flow gaps. However, carefully evaluate the loan terms and interest rates before taking on additional debt. 

• Boost sales: Develop a targeted marketing strategy to reach new customers and re-engage existing ones. Consider offering promotions, discounts, or loyalty programs to boost sales. 

• Improve customer service: Excellent customer service can help you retain existing customers and attract new ones. Focus on providing a positive customer experience at every touchpoint. 

• Revisit the business model: Sometimes, adversity necessitates innovation. Evaluating your business model for adaptability to current market demands can reveal new avenues for revenue that align more closely with current consumer behaviour. 

Transparent communication: The first line of defence 

Communication is key. Keep your employees, creditors, and investors informed throughout the turnaround process. Transparency builds trust and can help secure the support you need. 

Dialogue with creditors  

If payment deadlines are looming and stress levels are rising, proactive communication with creditors is essential. Many creditors may be open to renegotiating terms, offering payment extensions, or setting up manageable repayment plans. Early and honest communication can foster goodwill and potentially avert legal complications. 

Candid conversations with your team  

Transparency with your employees is crucial, particularly if their wages are in jeopardy. Engage in open dialogue to explore collective temporary solutions, such as deferred payments or reduced working hours, ensuring any changes are legally compliant and consensual. 

What to do when you can't make payroll 

Prioritising a solution for payroll is crucial, as non-payment can lead to severe legal and reputational damage. Exploring emergency funding options, negotiating grace periods with creditors, or seeking immediate investments could provide temporary relief. 

Immediate assessment and cash flow review  

Begin with an urgent financial assessment to identify any immediate cash sources without exacerbating your company's financial situation. This could involve reviewing outstanding invoices that could be collected more promptly or temporarily redirecting funds from non-essential budget areas to cover payroll. 

Alternative payroll solutions  

Discuss possible temporary payroll solutions with your employees, such as delayed payments, partial payments, or using vacation days to cover shortfalls. Ensure any agreements are made in writing and comply with employment laws. In some cases, leave without pay might also be a possibility, particularly for longer-term solutions. However, this approach should be discussed openly with employees, ensuring it's a voluntary and legally compliant option. 

Future planning and prevention 

Once the immediate payroll issue is resolved and employees have been paid, it's vital to plan to prevent similar situations. This might involve adjusting your business model, improving cash flow management, or setting up an emergency fund specifically for payroll purposes. 

Selling a business with debt: A last resort 

Selling your business may be a last resort option when facing financial difficulties, but it's important to understand the implications, especially if you have outstanding debt.  

Here's a quick overview: 

• Debt transfer: The buyer may not always be willing to assume your business debt. You'll need to negotiate the terms of the sale, determining if the debt will be transferred to the new owner or remain your responsibility. 

• Impact on sale price: Debt can significantly reduce the attractiveness of your business to prospective buyers, potentially lowering the final sale price. 

• Tax implications: There may be tax consequences associated with selling a business with debt. Consulting a tax advisor is crucial to understand your possible tax liabilities. 

• Alternatives to consider: Before resorting to selling, explore alternative solutions like restructuring your debt, renegotiating with creditors, or implementing a turnaround plan. In the most severe cases, if all other options are exhausted, liquidation might be the only remaining course of action. However, this should be a last resort due to the financial and legal implications involved. 

Leveraging government support and expert advice 

Facing a business turnaround doesn't have to be a solitary struggle. New Zealand offers a wealth of resources and support available to struggling SMBs. Here's how to tap into this valuable assistance: 

Government support: 

• Ministry of Business, Innovation and Employment (MBIE): The MBIE website provides numerous resources for businesses, including information on financial assistance programs, business mentoring initiatives and industry-specific advice. They also offer the New Zealand Business Capability Framework, a helpful tool to assess your business practices and identify areas for improvement. 

• Regional Business Partner Network: This nationwide network connects businesses with experienced advisors who can offer practical guidance and support on various business challenges. 

Professional expertise: 

• Business mentors: Mentorship programs connect you with experienced business professionals who can provide valuable strategic advice and support based on their own experiences. Many business associations and government agencies offer mentorship programs specifically for struggling businesses. 

• Industry associations: Most industries have established associations that offer resources and support to members. These associations can connect you with industry experts, provide educational workshops, and advocate for your interests in government settings. 

• Accountants and financial advisors: A qualified accountant or financial advisor can be an invaluable asset during a turnaround. They can help you analyse your financial situation, develop a turnaround plan, negotiate with creditors on your behalf, and manage your tax obligations. 

• Legal counsel: Consulting with a lawyer can be crucial if you're facing legal issues like debt collection or restructuring agreements. They can ensure you comply with all legal regulations and protect your business interests. 

• Tax advice: For businesses facing complex tax situations or a significant tax bill, consulting with a qualified tax professional can be highly beneficial. They can help you navigate tax regulations, ensure compliance, and potentially identify opportunities for tax deductions or credits that could improve your cash flow. 

• HR support: Consider involving HR experts like Employsure to support your team's wellbeing and navigate sensitive situations effectively. This expertise can range from crafting clear communication strategies and understanding your obligations regarding wages and pay to offering employee resources for stress management. 

Long-term sustainability: Building a stronger business 

While addressing immediate financial issues is crucial, it's equally important to focus on long-term viability. Your turnaround plan should encompass strategies for sustainable operation, including: 

• Revenue growth strategies: Develop a plan to increase sales by exploring new markets, expanding product offerings, or improving marketing effectiveness. 

• Cost reduction initiatives: Identify areas for ongoing cost reduction beyond immediate measures, such as streamlining operations or renegotiating supplier contracts. 

• Building business resilience: Implement strategies to mitigate future risks, such as diversifying your customer base or developing a robust cash flow management system. 

Staying positive and motivated 

There are various reasons why small businesses fail, many of which are out of your control. Turning around a struggling business can be a stressful and emotionally draining process.  

Here are some tips to stay positive and motivated throughout the journey: 

• Focus on the long term: Don't get discouraged by setbacks. Remember, returning a business to profit takes time and effort. Focus on the long-term goals and celebrate small victories along the way. 

• Build a support network: Surround yourself with positive and supportive people who believe in you and your business. Talk to your mentors, colleagues and family for encouragement and guidance. 

• Self-care: Taking care of yourself physically and mentally is crucial during challenging times. Make time for relaxation, exercise, and activities you enjoy. 

Act now for a brighter tomorrow 

Navigating financial difficulties demands prompt, informed actions and, occasionally, tough decisions. Leveraging professional advice, exploring all available avenues for support, and maintaining open communication channels are pivotal steps towards recovery and a return to profit. Facing financial distress is undoubtedly challenging, but with a strategic approach, it's possible to succeed in guiding your business to stability and growth. 

Don't delay seeking professional guidance if your business is in troubled waters. Early intervention can be the key to turning around your business's fortunes or turning off the lights.