General (20)
It is said your health is the most important asset you have. That’s why doctors advise us to conduct regular health checks on our bodies, ensuring we’re continuing to run at optimum efficiency and that our internal systems are all working properly.
Regular health checks pick up early signs of issues before they become full-blown health problems that could endanger our lives.
In the same way, a business health check can provide you with early warning of potential issues, especially to do with solvency. So how do you conduct a business health check? We’ve created this great checklist for you to use:
Business health checklist
Answer these questions truthfully with Yes/No. At the end of the list, add up your answers and see where you come out.
- Are you paying creditors in partial payments, instead of the full lump sum?
- Do you have a high staff turnover?
- Are you debtors out of control?
- Are your financial records and data management out-of-date?
- Do you have underutilised or under-performing assets on the books?
- Are your purchasing patterns irregular?
- Are you often swapping out suppliers?
- Are your company assets showing signs of age or obsoletion?
- Do you have slow-moving stock?
- Are you behind on GST and PAYE?
- Are your customers deserting you for other competitors?
- Are you paying high interest costs on your loans?
- Do you have creditors pressuring you for payment?
- Are you facing a formal or statutory demand?
- Have you made inaccurate costings?
- Are relationships between the director and shareholders strained?
- If you lost your major customer, would you be vulnerable?
- Are you concerned about your ability to trade on?
If you answer yes to either of these questions below, you are technically insolvent under Section 4 of the Companies Act 1993.
- Are you struggling to pay creditors when due?
- Are your business liabilities greater than your assets?
How did your business fare?
Count up the amount of times you answered Yes to the above questions. That number will tell you how your company performed in the business health check.
The results:
Less than 5: A healthy business
Congratulations, your business is fit as a fiddle. While there are always areas you can improve, it looks as though things are running smoothly and you’re in no risk of insolvency.
Between 6-12: Early warning signs
While you’re still trading and things don’t seem that bad, you’re not as healthy as you’d like to believe. Don’t ignore these early signs, as they can lead to bigger problems later on. Call McDonald Vague to talk about a treatment plan to get your business back on its feet.
More than 12 or yes to questions 19 or 20: Your business could be in trouble
Your business could be insolvent or at risk of becoming insolvent. To understand where your business is at, you should talk to a qualified professional who will help understand what your next steps should be. Contact us now to find out more.
In the midst of financial difficulty, it can be hard to see a way out. Being insolvent means you’re not making enough money to pay your debts or you owe more money than the total value of your assets.
Neither situation is ideal, but there are ways around it to avoid company liquidation, receivership or administration.
Your best option is being upfront with your creditors. Trying to avoid them limits your options, and gives them more grounds to hire a debt collector or petition the court for your liquidation.
A creditor compromise is an informal agreement between you and your creditors to either reduce your debt, or alter your payment plan to something you can afford. While a creditor’s compromise is an informal agreement in that it’s not set through the courts, you will still need to approach a lawyer to help you draft one.
After finding a lawyer you will need to:
- - Gather all relevant information about your finances.
- - This includes statement of affairs, financial accounts, profit and loss statements, and asset portfolios.
- - Show how much money you will be able to pay.
- - Propose a plan to help you repay your creditors.
To be accepted, at least half of your creditors, representing 75% of the total money you owe any must agree to it. If enough creditors vote to accept your compromise, the agreement will be binding on them and on you with no need for approval through the courts. It’s a good idea to offer more to your creditors than they would receive by placing your business in liquidation.
If your business is to pay a lump sum off a reduced debt total, your creditors will write off the debt balance and cut their losses. If you’re making repayments over time, during the period of the compromise debts are frozen and creditors can’t take action against your company. You’ll be temporarily protected against liquidation proceedings, receivership and administration.
The perils of a creditor compromise
Many creditor’s compromises are based on hope and promises that can’t be delivered. Such action only delays insolvency, and isn’t helpful for you or your company. To implement a practical plan, you may appoint a compromise manager. For the sakes of both parties any manager should be independent, and not the debtor company’s director or solicitor. An independent compromise manager will help the debtor company keep trading, while ensuring the creditors receive what they are promised. This role also provides a level of oversight and accountability to ensure the terms of the agreement are met. In some cases, if your repayment plan is close to what a creditor would receive through liquidation, a compromise manager can mean the difference between a positive or negative vote.
A creditor’s compromise is a good option if your business is financially sound, but is going through a period of financial difficulty. It’s a second chance to help you keep trading and turn your company’s future around. If you would like help drafting a creditors compromise, or an independent party to act as credit manager, contact the experienced team at McDonald Vague.
For more information about options if you have a company in financial trouble, download our FREE Guide for NZ Companies in Financial Difficulty.
If you’re wondering whether to sell part of your business or start winding it down you should ask yourself one question: would selling a portion of my business increase the value of the part I retain.
Here are some scenarios where the answer might be ‘yes.
Enables Expansion
Would a cash injection from a partial business sale allow you to buy the equipment or hire staff needed in order to expand? Through expanding and reaching new markets, the part of the business you retain could be worth more than the existing business.
Create Value
Could selling part of your business create synergies that would add value for the portion you retain?
Grow Revenue
Is there an opportunity for the investing company to refer business? For example, if you run an auto-workshop and the potential investor owns a courier service and wants you to service their fleet, it could be a mutually beneficial investment.
Reduce Costs
The sale might be a good idea if it could reduce your operating costs. Combined, your two companies might have better buying power. There could be opportunities to share equipment or pool resources. A sale might help you save money in the long run.
Intellectual Capital
Anyone who invests in your business becomes invested. Your interests are now linked and it’s in their best interests to see you succeed. If they’re able to bring intellectual property, knowledge or skills that can increase the value of your business, selling part of your business could make sense.
Reduce Risk
Could selling part of your business help you become more financially stable? Property managers do better when real estate sales fall because more people are looking to rent. On the flipside, real estate agents do better when property values increase as more people want to sell their homes. Mutual investment between a property management firm and a real estate company could reduce the risk for the other during the low point of the business cycle.
If you answered ‘yes’ to one or more of those questions, selling part of your business might be a good idea. On the other hand, if you want the money from a partial sale for personal reasons it might be a good idea to look at winding down your business. Winding down a company doesn’t necessarily mean you have failed. Done properly, and with the proper IR433 form filed you can close down your business but keep hold of the company until you have the assets, IP or capital to launch again.
Allowing your company to go insolvent and declaring personal bankruptcy come with longer term consequences. The government can prevent you from travelling internationally (without authority), from working within some industries, from temporarily or sometimes permanently being a company director.
If you need a cash injection and partially selling your business won’t increase the value of the part you hold on to, it might be better to voluntarily wind down on your own terms instead of waiting for the statutory demands to arrive.
Related Articles:
Winding Up A New Zealand Company
For more information on your options regarding selling your business or winding down, download our free guide, Options for Companies in Financial Difficulty.
Signs a company in financial trouble suffers from bad decision making
by The McDonald Vague team
The “Decision Maker” could be the most crucial role within an organization. Even if you have advisors who help with the process, the final decision rests with you. Chances are, you’ve seen colleagues make decisions you predicted would land somewhere between bad and worse; and we're guilty ourselves.
While comparing Darwin’s Theory of Evolution to business success, author Leon C. Megginson said "It is not the strongest that survive, nor the most intelligent. Rather it is those who are most responsive to change."
Having a company in financial trouble is an owner's worst nightmare. With that in mind, here are four cautionary tales of bad business decisions.
1. Overconfidence
All businesses need confident leaders, but it takes humility to read the writing on the wall if things head south.
In the 1970s and 80s Kodak enjoyed 90% of the American film market. Despite reports predicting the decline of film sales, growing competition from Fuji, and the rise of digital cameras, technology Kodak developed in 1975, former CEO Walter A. Fallon believed US consumers would never abandon them. In 1992 Kodak enjoyed peak revenue of $20.6 billion. In 2012 they filed for bankruptcy.
2. Indecision
Sitting at the top is never easy. When facing complex decisions in an ever-changing marketplace, it’s easy to ask for one more report, opinion or analysis before making up your mind.
Prior to 2008, as more Americans were getting interested in hybrids and fuel efficient cars General Motors, Ford and Chrysler continued to produce gas-guzzling Hummers and SUVs. They knew the market was shifting, but dealer contracts made change difficult so the Big Three did nothing. Ford received a $9 billion credit line, while Chrysler and GM got an $80 billion handout from the US government. Had these three car manufacturers tackled their issues head-on, their situation wouldn’t be as bad today.
Read more: Challenges facing the construction and dairy industries
3. Short-Sightedness
It’s easy to make bad decisions if you constantly take the same approach. Just because it’s worked before, doesn’t mean that will always be the case.
In 2000, Netflix cofounder Reed Hastings approached Blockbuster with the idea of becoming the digital streaming wing of their video rental service. As you’ll remember, most internet connections also ran through phone lines and the speed was less than ideal, so Blockbuster CEO John Antioco laughed Hastings out of his office. In 1994 Blockbuster was valued at over $8 billion, in 2010 with $1.1billion revenue losses they filed for bankruptcy. Blockbuster failed to adapt with changing technology and went the same way as Kodak.
4. Isolation
Informed decisions are usually better than uninformed ones. That’s nothing new. It’s good to listen to a business coach or support team before taking steps that will affect the future of your business.
Chairman of US cable company Time Warner, Gerald Levin was so confident in their merger with America Online that in 2000 he decided, probably against the advice of his legal team, not to place a collar on the transaction. A collar would allow Time Warner as the seller to revisit the terms of the transaction should the buyer’s stock drop below a certain price.
In 2000, just after the merger announcement and before it was completed AOL shares fell 50%, Time Warner wasn’t able to renegotiate and their shareholders are still paying for that decision.
Overconfidence, indecision, short-sightedness, and isolation. Of course these bad decisions are easy to spot with hindsight, but I suspect if these CEOs had been more open-minded, humble and less stubborn about their position, we could be streaming Blockbuster movies on our Kodak smartphones today.
For more valuable information, download our guide Options for Companies in Financial Difficulty.
The drivers of farm receiverships in the dairy industry
by The McDonald Vague team
New Zealand is a major player in world dairy markets; the world relies on our milk, whole milk powder, butter and cheese. Since 2003 with the fall of the NZ Dairy Board and the rise of Fonterra, the whole industry has undergone massive change, driving some farm receiverships, followed by intensive growth.
So why are many farmers now feeling the pinch, while the price of milk at local supermarkets rises?
It’s easy to blame the falling milk solids price on European and North American dairy subsidies and overproduction. By the end of 2015, an extra two billion litres of milk from cows across the EU flowed into already flooded markets. Is the answer therefore simply about supply and demand? Fonterra operates in a highly regulated environment. Many people don’t realise that it has a legal obligation to take all (100%) of the milk it is offered, so it cannot limit how much it buys. That milk needs to be processed or dumped, so is usually processed. At the same time, it has an obligation to assist (supply) new entrants (often who compete with Fonterra) into the market.
Chinese demand for dairy has dropped since the 2008 melamine scandal, where a Chinese company largely owned by Fonterra added the industrial chemical to their milk powder to give false results on protein tests. Six children died, while hundreds of thousands became very ill as a result.
Following the 2013 botulism scare, Russia brought severe economic sanctions against New Zealand’s dairy products that are just now being lifted. While the botulism scare was badly handled by Fonterra it needs to be noted that much of the Western world including New Zealand has placed sanctions on Russia following the Crimean /Ukrainian crisis. This means a much smaller market place internationally to sell all of the product internationally.
Laying the blame at the feet of others is easy. What happens if we turn inward and look a little deeper?
Some believe that New Zealand is being held ransom by a company that claims it’s too big to fail. As Fonterra returned profits to their supplying farmers during the dairy boom, it could be argued that they missed out on opportunities to invest in greater efficiency and profitability. Instead, the dairy farming explosion drove land prices through the roof. Greater intensification resulted in more cows than we are able to feed, and when drought hits we’re forced into buying hay from offshore. Production costs rise, as does the price of milk for regular kiwis.
Read more: Construction companies facing financial trouble
What many people probably don’t realise is that, while large and powerful, Fonterra is also vulnerable to the whims of its shareholders (the farmers). The shareholders are not always willing to allow working capital to develop markets, as those same shareholders want the working capital to be paid to them as milk powder payout or share distributions. This means some borrowings/debt which farmers are also averse to.
The low milk prices look set to continue for the next few years, meaning many farmers will have to seriously cut spending, or face selling their farms and entering liquidation or receivership. It puts extra pressure on farmers needing to comply with environmental regulations, animal welfare allegations, or needing extra feed after a dry summer and long winter.
When it comes to dairy farming, there are so many factors out of your control which makes it difficult to avoid all of the indicators of business failure. In this instance, it’s important to focus on what you can.
What should dairy farmers be doing?
Look carefully at your farming systems. Is it possible to rely more on your own grass and paddocks over importing feed? Build a good relationship with your banking rep and your accountant. Undertake a line-by-line examination of income and expenses; and ask yourself if you’re farming as efficiently as possible. Have you considered ways to diversify how you are using the land, such as investing in the development of ‘on farm’ feed sources, particularly in light of the fact that stock numbers are being reduced in order to match feeding ability with available grass/protein.
Meanwhile, Federated Farmers are expected to launch a risk management tool that will help farmers better face price fluctuations. While it may help many through the lean times, the trade-off comes during peak season.
Risk management is an important aspect of dairy farming. Whether assessing international markets or local price forecasts, a good risk management plan can help you prepare for the worst while expecting the best.
For more valuable information, download our guide Options for Companies in Financial Difficulty.
Problems facing the construction industry & why companies are failing
by The McDonald Vague team
New Zealand is experiencing a building boom. Huge housing demands in Auckland and Canterbury should see builders set for at least ten years. Why then are more construction companies going bust and declaring insolvency or facing liquidation?
Over 100 rebuild related firms have gone belly-up in Christchurch since the February 2011 quakes, collectively owing $35 million! Mainzeal, Tribeca, and Valiant homes will be familiar names if you read Auckland liquidation notices.
In both cases, the problems facing the construction industry seem to fall into one of two camps:
1. Companies expanded far too rapidly as they expected a windfall slice of the boom.
After the earthquakes and big housing announcements from the government lots of companies started taking on extra staff and buying up materials in preparation for all the work that was going to come their way.
As the number of competitors grows, so does the price of building materials. This inflates costs across the board and makes quoting for jobs very difficult. Companies are constantly aware that they have to charge enough to cover costs but be cheap enough to win the tender. A few poor calls can lead to an early demise.
A few misquoted jobs, or paying staff while waiting for red tape to clear caused some overinflated construction companies to close their doors. In the case of Waikato building company Stanley Construction, a system error on a single project caused their financial downfall. Thanks to quick action Stanley Construction avoided liquidation by reaching a company compromise with creditors.
Read more: The reason behind an increase in dairy farm receiverships
2. Mismanagement and bad financial decisions
Many tradesmen saw the potential in the housing boom and decided to leap from wage earner to company director. Being an excellent tradesperson does not make you good at cashflow, GST, PAYE and all the other factors that face business owners. Not keeping up to date with tax returns and invoicing will cause a business to collapse, no matter which industry you are in.
With building booms come the rise of cowboys – tradespeople who ride in, do a slapdash job and try to leave before people are any wiser.
Not spending enough time, using cheap materials, and generally cutting corners on construction projects can save you money in the short term. But, as any good tradesperson will know, you don’t make money if you have to return to the job and do it again.
With the rise of social media, cowboys will be named and shamed fairly quickly, effectively ensuring they don’t pick up any more work.
How can you avoid failure in the construction industry? Work with your accountant to make accurate financial plans. Don’t take on more workers, vehicles, tools and materials because you “hope” more work will come your way, use their advice to grow within your means.
Have a business plan, and make sure staff, suppliers, contractors and creditors are paid on time. Your accountant should also be able to help with this, or recommend a bookkeeper who can do it for you.
Finally, do excellent work on-site. Happy customers mean good referrals, and you save money by not returning to the job for a do-over.
For more valuable information, download our guide Options for Companies in Financial Difficulty.
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