We talk to Baker Tilly Staples Rodway Auckland director and licensed insolvency practitioner Tony Maginness about this operating environment. This includes the potential downside of business optimism, a mistake some directors make when trying to cover operating costs and the reason directors often seek help too late when their business is in trouble. 

Q. Radio New Zealand recently reported that the tax debt owed to Inland Revenue as at March this year stood at $9.4 billion, up from $6 billion in 2023. Micro and small-to-medium businesses were reportedly responsible for 65 per cent of outstanding debts. How we did we get to the point where businesses owe Inland Revenue that much?

We’ve noticed financial stress too often leads company directors to keep back taxes to pay running costs, juggling which creditors they pay in any given month or trading on when the writing is on the wall. Owners take risks in hopes of earning their losses back, until the debt is impossible to repay.

The difference is that Inland Revenue is much more proactive in following up than it was three years ago, and this behaviour won’t go unnoticed for long. The risks go beyond just prosecution. They could mean rebuilding your reputation, savings and relationships from scratch, for something that usually started as a small decision.

If your business’s survival relies on something changing in the near future, it’s not a viable strategy. The best thing to do is to talk to an expert before Inland Revenue comes knocking. Closure may not be your only option. 

The earlier you act on your tax debts, the better – even if it means making the tough decision to wind up your business.

It can feel embarrassing when years of work haven’t worked out. Yet many owners and directors tell us they wished they’d done it sooner – or at least asked for help.

Q. You once said shame is a huge reason business owners don’t seek help when they’re in trouble. What would you say to those people? 

If you’re struggling, don’t try to “work it off”. Ask for advice. You may not always get the outcome you dreamed of, but going too far down the debt spiral is a lot tougher on your wellbeing.

The need for resets is something we all understand when it comes to elite sportspeople, and increasingly, businesspeople. Over the past few years, mental health advocates have done a fantastic job of destigmatising the need to speak up when things are getting on top of us, noting that we can’t perform at our peak when our minds aren’t in the game.

The trouble is, many of the business owners we see in our insolvency practice aren’t taking that lesson into their business practices. They start seeing debt creeping up, or cash flow drying up, and keep pushing through without asking for help until it’s too late. 

So often we hear: “I feel like a failure.” It shouldn’t be this way. It’s time we reframed business check-ups the same way we did mental health or sports ones. Almost every successful performer has a team behind them. Consulting others on strategy and if needs be, correcting course, is a smart way to get the best possible outcomes for you, your business and your employees.

Q. What’s something that businesses often get wrong?

Too many business leaders don’t know their margins. For a start-up, it could be tempting to undercut competitors to win work and get noticed. Being busy is not the same as being profitable. Many businesses that go into insolvency have a decent pipeline of work, but their outgoings are higher than their earnings.

It may sound obvious, but aim to consistently build in a solid margin. This also makes it easier to plan and retain your workforce, if you’re an employer. 

Q. Recent surveys have shown that confidence is rising and more businesses are planning to invest. What questions should businesses be asking themselves against this backdrop of rising business debt?

In all cases, the questions to ask before you borrow or invest are:

• Will this improve productivity?
• Strengthen margins?
• Open up a new revenue stream?
• Make the business more resilient?
• If the recovery takes longer than expected, does the decision still stack up?

It’s good that confidence is returning. The opportunity now is to turn that confidence into real, sustainable growth by taking the right approach to borrowing and investment.

Q. Is there a risk that the return of optimism can erode discipline when it comes to managing debt?

Absolutely. Almost all predictions are that the economy has turned a corner, and the Reserve Bank itself is predicting a return to growth in the September quarter.

One risk is that with the “finish line” in sight, many businesses can fall into the trap of thinking they can afford to be more lenient on their payment terms when clients ask for a bit more time. When you’ve done business together for a long time, it’s understandable to want to help. Unfortunately, this is when you’re most likely to get into trouble yourself.

One bad debt can wipe out the margin on several good jobs, so strict and consistent enforcement of payment collection is key.

Liquidations have a long tail, taking 18 months to catch up once the economy rebounds. Time and time again, we see clients with plenty of work go under because their cash flow isn’t under control. Don’t fall at the last hurdle. Stick to your contractual payment terms – and keep an eye on cash flow. 

Q. As a specialist in turnaround and restructuring, can you explain how you and your team can help businesses experiencing financial difficulties?

A. We take an objective view of business issues. We’ll want to know all the details of your difficulties and see the relevant paperwork, including your financial position and forecasts. Then we look at appropriate strategies and processes, taking into account things like your business model, underlying assumptions, current conditions, management effectiveness, business performance trends and whether your directors are adhering to the Companies Act.

We advise on potential for turnaround, help you implement a strategy and work with your funders, if that applies. As insolvency practitioners, we try to save businesses, but if that’s not possible, we can help with an orderly wind-up, and work to get the best possible result for stakeholders.

Often the results are “known in advance” but if the outlook isn’t good, there are a range of options for businesses, from work outs and creditor compromises through to voluntary administration, liquidation and receivership.

But again, it’s better to contact us sooner rather than later. We’d much rather be the people who help turn your business around than the specialists who help read its last rites!  

• Do you need help from a business recovery specialist? Contact our team today…