Most of us go into business because we want to make a decent living doing something we enjoy. We want to be able to provide for our families and enjoy the fruits from our efforts.

One of the biggest mistakes business owners – particularly new business owners – make is confusing profit with revenue. Don’t assume just because the money is in your bank account, it’s available for you to use. As a business, you need to put your liabilities – debts, paying suppliers, payroll, tax obligations, etc – first.

Remember that the money you take out of the business can’t be used for growth, and growing the business is what will allow you to continue to increase your personal earnings over the coming years. So think carefully about what you’re taking out of the business and if it’s really necessary.

Here are our tips for thinking about how much money to take out of the business:

PAY YOURSELF REGULARLY

There are a number of ways of paying yourself: drawings, salary or dividend. Paying yourself a fair and reasonable amount each month is a much more sensible option than taking out huge chunks of money at once. Regular payments help you to budget your household expenses, the same as if you earned a salary. And – perhaps more importantly – large chunks of money can look suspicious to the IRD, who may decide to investigate your company or to a liquidator if everything goes horribly wrong. Your accountant can advise you on the right amount to take out monthly and how to do this in a tax-efficient way and in compliance with your director obligations.

If you cannot pay yourself, you should be asking whether your company is a serious business, or just a hobby.

ARE YOU FULFILLING YOUR DIRECTORS DUTIES?

Of course, the other factors to consider when you’re taking money from the business is if you’re leaving enough money behind to fulfill your legal obligations. According to sections 131-136 of the Companies Act, you need to meet certain obligations under Director’s Duties for your company.

How much you can pay yourself may be restricted by the structure of your business or the business constitution. The company will need to pass a solvency test before and after making distributions to shareholders. 

As a company director, you are accountable to your shareholders, and you must not carry on the business in a manner likely to create a substantial risk of serious loss to the company creditors. You need to act in good faith and in the best interests of your creditors. Chapman Tripp published an article in May 2016 that explains when directors may or may not be liable.

Your business must also pass the “Solvency Test”, meaning that at any time you own more assets than liabilities and you are able to pay all your debts as they fall due. Exactly what this means varies depending on your business, and you can find more information in our article about Director’s Duties or on the NZ Business page.

WHEN NOT TO PAY YOURSELF

There are certain situations where you, as the business owner, shouldn’t draw money from the company for personal expenses. If your business is in financial trouble – for example, you don’t have enough liquid cash to pay your upcoming debts – you need to do whatever you can to ensure you’re meeting your trading obligations and remaining solvent. You should know not to pay yourself until the business can get back on its feet. 

Remember, if your business is forced to liquidate, you may have some personal liability. Your accountant should be able to advise you when your business is in financial trouble and when you’re no longer meeting your Directors Duties under the Act.

If you’re concerned about the state of your business and worried about the funds you’re taking out, this is where a business recovery specialist can help. Contact us now.

Insolvency by the Numbers: NZ Insolvency Statistics June 2024

In our 43rd Insolvency by the Numbers, we look at our data set for June 2024. We review how the month has tracked compared to prior months and years.

We once again await the Reserve Banks latest announcement around the OCR in July 2024 to see if there will be any signal of change in when the rates may drop. The consensus appears to be that there will be no change till 2025 and no signalling otherwise. There are however murmurs that when the rates begin to drop they will be dropping quickly, time will tell how this plays out.

Business confidence is reaching new lows, this includes the expectation to hire new workers in the coming year along with the prospect of making capital investments into the business.

From an inflation standpoint we await the June quarter figures, which still take far too long to come out after the quarter has ended at 6+ weeks. We have seen reductions in the Auckland fuel tax, and the adjustment to the personal income tax bands at the end of July may have some effect on inflation.

Centrix data showed 474,000 people were behind on their payments in May, amounting to 12.64 percent of the credit active population, we expect this to start flowing through to bankruptcy and other personal insolvency options in the coming months.

The housing market continues to cool as we enter the winter months, with buyers in less of a rush as they appear be in a buyers’ market holding the power as prices begin to creep down.

Company Insolvencies – Liquidations, Receiverships, and Voluntary Administrations

June 2024 continues with the elevated levels seen compared to the last 6 years, as you can see above the 2024 line continues to follow the overall monthly ups and downs and appointments are by no means rocketing off into the sunset. The expected June drop from our end of financial year highs arrived as expected when combined with winding up applications data we expect the trends from prior years to level out through the rest of the year before dropping off in December.

Insolvency practitioners are definitely busier than they have been the last few years, evident as teams gear up and we begin to see job listings for new insolvency roles in firms.

Overall total insolvencies for the year remain high, and are in line with the 2015/2016 figures, as we came down from the highs of the GFC. Month on month June had 224 total appointments, 71 appointments above the long term average of 153 and well above past Junes (2023: 189, 2022: 99, 2021: 154, 2020: 144). We expect that these higher insolvency appointment levels will continue into 2025 given the back log of debt currently sitting with the IRD and other creditors.

For June shareholder resolution insolvent liquidations remained high while we saw a decrease in solvent liquidations down to 6% from the long term average of 15%. The spike in Voluntary Administrations and Receiverships dropped off somewhat but remained elevated since increasing from March onwards. As mentioned in prior months we have seen a rise in personal receiverships by 3rd and 4th tier lenders in attempts to recover their bad debts that were lent out in the good times and are now in default, demonstrating the hazards of providing personal guarantees on corporate lending.

We expect increases across all types of appointments to continue throughout 2024 and into 2025.

Winding Up Applications

It looks like the early peak in February may have come back to bite as we see a drop in our traditionally higher months of June/July when typically, creditor recovery action is in full swing. This drop off was not just from one class of creditor with both the IRD and commercial creditors falling off in the numbers of applications that were made.

Even with the above drop we remain for the year to date above the last 4 years figures having 504 total applications. The calendar year to June in prior years saw 122 in 2020 , 343 in 2021, 228 in 2022 and 426 in 2023. To show this increase in 2024, we are half way through the year and are above to total year winding up applications seen in 2020 (239) and will exceed 2021 in July (562)

Personal Insolvencies – Bankruptcy, No Asset Procedure and Debt Repayment Orders.

The slight increase seen in April personal insolvency figures has continued its slow climb in May. This rise is almost entirely driven by bankruptcy figures with 73 in May, the split between debtor and creditor petition remaining consistent on earlier months with a 40 debtor / 33 creditor split.

As outlined above Centrix data shows for the month of May 474,000 people were behind on their payments and as we have previously mentioned we expect that numbers will continue to increase slowly as job losses, high interest rates and cost of living continues to pressure people over 2024 and 2025.

Where to from here?

Like last month the signs continue to point to the NZ economy being in for continued pain for the foreseeable future, it is likely to get worse before it gets better. We foresee continued rising appointments when compared to prior years. The OCR is unlikely to be dropped in the next 6 months potentially 1 year and inflation continues to be above the target of 2% and may be for some years with non-tradable inflation refusing to come under control.

If you want to have a chat about any points raised or an issue you may have you can call on 0800 30 30 34 or email This email address is being protected from spambots. You need JavaScript enabled to view it..