Author Katrina Shanks, CEO Financial Advice NZ. Article originally published in Stuff.co.nz.
OPINION: Many thousands of businesses took up IRD’s offer of PAYE and tax deferral payments as a result of the downturn of business caused by the Covid-19 lockdowns and border closures.
Those businesses are now having to find the funds to pay these back, with instalment arrangements needing to be paid off by 8 April, 2024.
Finding the money to clear this debt at a time of high inflation, when margins are being tightly squeezed, interest rates are starting to bite, and ongoing labour shortages are making day-to-day business difficult, and could be challenging for some.
If that’s you, you will likely know that it’s at times like this that cashflow is king – it’s what you need when you have to pay back debt.
But how do you obtain more cash to make these essential payments and keep your business going? What levers have businesses got to pull to get through this?
You have four options: increase your debt, you can find an equity injection (people putting money into your business, new partners etc), increase your revenue, or decrease your expenditure.
Let’s look at these.
Increase your debt
If you already have deferred payments to IRD you have most likely used up all the available borrowing avenues lenders are prepared to give you.
But maybe you still have options, so it may be a good time to have a talk to your bank about what credit lines could be available to you.
Make sure you have worked your numbers and have a plan about how you’re going to make repayments. If you go in prepared, with a financial plan, you will have a much better chance of being successful than if you just walked in hoping for the best. A carefully thought-out strategy will go a long way to convincing a sceptical banker that you’re a good and safe bet.
Find an equity injection
This won’t be easy in the prevailing trading conditions, but if you’re successful, it could help set up your business for the long term.
Increasing equity usually involves acquiring additional ownership or investment in your company, and there are several ways you can do this.
If you want to keep as much of your business for yourself as you can, you could invest some of your own personal money to keep things going, or even take out a personal loan. But if that’s not an option or a risk you don’t want to take, you might seek outside investors, maybe other businesses in the same line, or even friends. You will, of course, have to sharpen up your sales pitch and be prepared to open your books.
Another way of doing this is to convert debt to equity. Talk to your creditors to see if they would be willing to forgo some debt in return for a stake in the business.
Along the same lines, what about considering merging with your biggest competitor? Formulate a plan that shows how merging would lead to market dominance in your region, and you might be surprised at the reaction.
You could kill two birds with one stone by offering shares to staff. This will not only give you cashflow but will give you a workforce that’s really motivated to ensure success.
If you usually pay dividends to shareholders, you could retain them for a short period to reinvest in the company to keep things going or even to fund a change in direction or product.
Increase your revenue
This may mean increasing your prices on existing items or services.
In doing this, be careful to ensure you don’t price yourself out of the market. Remember, that although price these days is vital, so is quality, and you want to be known for value. Also, understand which items/services can be increased and which can’t.
Review your margins on each product/service and reposition your business so those with the biggest margins are where you focus your business to improve your bottom line.
Check out the latest trends in your line of business. Do online research or check your competitors to see what’s popular and selling and try to source new stock offerings to help increase your overall sales and turnover.
Decrease your expenditure
This is easier said than done if you are already running on the smell of an oily rag but it can be an effective way to improve profitability.
First thing, review all your expenses to weed out those that your business can survive without. Are all those trips vital? Are there cheaper options for your internet and phone services? Can you make do with cheaper stationery? Are all your employee expenses fit for purpose?
Negotiating with suppliers can often pay dividends, be it by discounts for bulk purchases or longer payment terms.
You can also look at ways to streamline your operations or reduce wastage, and make sure you monitor your inventory regularly so you’re not carrying excess stock that ties up cash.
Make sure your moves don’t affect your business’s ability to trade in the most efficient way possible while ensuring your staff and customers are top of mind.
Lastly, don’t be afraid to reach out to an expert. A fresh eye over your operation can often spot things you are too close to see.