Beware of the rainy day
If things are going badly in good times, how will we cope with the bad, asks Hannah McQueen.
This week, titan of industry Fletcher Building was hauled over the coals by commentators for its continued woeful performance – and for good reason.
A construction company losing money hand over fist in the midst of a construction boom almost defies belief.
While few other local companies rival Fletcher’s scale, its woes should still be a shot across the bow of all Kiwi businesses, because it’s proof you can’t afford to be complacent just because the economic winds are currently in your favour.
Every day, about 10 businesses go into liquidation – and those stats are derived from the ‘‘good’’ times.
Smaller businesses – those with fewer than 5 employees (which is about 89 per cent of businesses) – are much more likely to fail than bigger businesses.
Economic conditions are only cited as a reason in 7 per cent of cases.
Cash flow is almost always the number one concern of any small business and it certainly keeps my clients up at night.
Whether they’re running start ups or major businesses, it’s always front of mind.
While the times might still be good, I see two factors that have the potential to exacerbate those late-night sweats – a rising wage bill and slower payment times.
Fonterra started dragging the chain when it decided thousands of its New Zealand suppliers must wait up to three months for payment.
Not long after, accounting software company Xero reported only one in nine invoices issued by small businesses are paid on time, and small businesses then take longer to pay other small businesses.
When big corporates decide to slow their payments, it has a cash flow domino effect through the economy.
In Australia, payment times got so sluggish they held an inquiry and their Small Business ombudsman recommended the government legislate to set maximum business-to-business payment times. The government declined to do so.
This is relevant to New Zealand businesses as Australia remains our second largest trading partner.
It’s not just cash coming in that’s a problem, there are also looming changes that will affect the amount of cash going out.
From April 1, the minimum wage will go up from $15.75 to $16.50, just under a 5 per cent rise.
That alone is perhaps not dire, but over the next three years it will rise to $20, a 27 per cent rise from the current level.
While philosophically we can all agree low-paid workers should be paid more, there is no doubt this will impact small businesses.
Rising costs mean a business has less cash to grow and if it can’t grow, it’s hard to become more profitable and pay its staff more.
It’s like putting the cart before the horse. Business owners are constantly berated for failing to improve their productivity but increasing their costs will do nothing to assist that.
They say necessity is the mother of all invention, and it’s true plenty of innovations have been born out of recession or depression.
But when continual improvement is a base requirement for a company’s survival, that improvement requires both creativity and cash.
Both of which are jeopardised when a business is under financial strain.
In fact, creativity declines 30 per cent in the face of financial stress.
Perhaps these things don’t yet feel like much of a problem for your business – the economy is strong, inflation is low, and money is still cheap.
But when one of our biggest companies is under strain, it’s not just investors, Kiwisaver members and Fletcher’s suppliers that should be paying attention.
It’s the warning shot all businesses need to listen out for, to start readying their deck as the business waters start to get choppy.
Remember, it wasn’t raining when Noah started building the ark.
''It's a warning shot all businesses need to listen out for, to start readying their decks as the business waters start to get choppy.''