Risk management

Risk management (14)

In most cases, a business doesn’t go from being profitable to being insolvent overnight.  If you’re busy with the day-to-day running of the business, you might miss the early warning signs that you’re heading for financial trouble

If you’re seeing the early warning signs of financial trouble, you need to take action.  Ignoring your problems and hoping they’ll go away won’t work because these issues don’t normally fix themselves.  We see a lot of businesses that stop paying the IRD when things start getting tight, in the hope of gaining some breathing room.  Unfortunately, while the IRD is not usually your most vocal creditor, the penalties that the IRD can add to your debt are significant and, if you do nothing, your debt can easily become too big to repay.  If your payments to the IRD are not up to date, we recommend that you contact the IRD and work out a repayment arrangement to sort out your tax arrears.  Our business health check might point you in the right direction to addressing what you need to change.

If you’re already in financial trouble, you need to address your cash flow issues urgently.  You will need to take a hard look at your business, get an accurate picture of your financial position, and find out what has caused your cashflow problems.  Your accountant or an insolvency practitioner can help you with this review and can advise you on restructuring and/or refinancing options for your company.  You can find out more about business restructuring options in our articles on our website.

Once you have a turnaround strategy, you can speak to your bank about whether you can borrow more money – if you can, make sure you can afford the repayments – or whether it’s possible to refinance your current debts so that you’re paying less to service them.  You will also need to address any IRD arrears.

If your company is or could be insolvent, you need to speak to an insolvency practitioner as soon as possible to see whether it’s possible to restructure your business and avoid having your company put into liquidation by a creditor.  You will also need to consider whether you are complying with your director’s duties and, if you’re not, what you can do to remedy any breaches.

An external account or business advisor is often one of the first people to pick up that something in your business may not be quite right.  If you’re worried about your business, speak to someone about it and get it sorted.

Want to know more?  Check out our articles and follow us on LinkedIn.

Struggling businesses generally show signs of struggling before they fail. The earlier you pick up on warning signs that your company is or may be heading for financial trouble, the more options you have for remedying these issues with a view to saving your business.

It can be confronting but it’s important that you look at your business critically to determine whether your business need some attention or help. We have set out below some of the questions we often ask our clients about their businesses to determine whether they’re in trouble and, if they are, how much trouble they’re in.

  Early Warning Signs Signs of Financial Trouble Signs of Insolvency
IRD Are you behind with your tax payments to the IRD? Is your company at risk of being reviewed by the IRD? Are you treating the IRD like a bank?


Accounts Payable

Are you struggling to pay your creditors on time?

Are you struggling to fill your current orders meet new orders because you don’t have the goods in stock and don’t have funds available to purchase further goods?

Have any of your suppliers put you on stop credit, threatened legal action, sent your debt to a debt collection agency, or issued legal proceedings against your company?

Have your key suppliers put your business on stop credit?

Has your company failed to pay the amount demanded in a statutory demand?

Has your company been served with liquidation proceedings?



Do you need to increase your overdraft facility so that you can pay your existing creditors and/or your staff?

Do you have very limited cash available?

Is your bank refusing to extend you further credit or trying to reduce your overdraft facility?

Have you been unable to raise new working capital?

Do you have loans falling due and no way to pay or refinance them?


Balance Sheet

Are you getting further and further behind financially? If you’ve spoken to your accountant or your lawyer about your company, did they seem concerned?  


Getting assistance and advice early, before issues get out of control, is invaluable.  It’s better to get in the ambulance at the top of the cliff than to have it waiting for you at the bottom.

If you’re worried that your business might be in trouble or you’re after an independent review of your business, get in touch with the friendly team at McDonald Vague.  We’re here to help.

Want more information?  Check out our articles and follow us on LinkedIn.

Most businesses carry some form of debt, be that in the form of loans, mortgages, or overdrafts. Debt can be an excellent tool to help you grow your company, by allowing you to purchase new asset-producing machinery or expand your locations into new markets.

However, debt can also land your company in trouble. If you’re unable to service your debts, you can find yourself in trouble, or worse, risking insolvency. Not all debts are created equal, and understanding whether you’re taking on good or bad debt can help you to manage business risk.

In this article we look at good debt vs bad debt – which one does your business have?

Good debt

Debt owing on assets that earn income for you is considered good debt. Good debt might be in the form of a mortgage on property, or a loan enabling you to expand your business.

To define debt as “good”, it must:

  • - Bring you positive returns. For example, a mortgage on a property with an interest rate of 6% must be returning a higher rate of profit.
  • - Be something you require but cannot pay for in full. Good debt can be used to acquire assets for your business that you cannot purchase without wiping out your cash reserves. For example, equipment for your business that produces revenue.
  • - Be on a payment schedule you can afford. Good debt fits within the everyday operating costs of your business.

Bad debt

This type of debt doesn’t produce any kind of asset. No bad debt will create an income greater than the interest it commands.

To define debt as “bad”, it:

  • - Does not produce income: Instead of creating income for your business, bad debt only costs you money.
  • - Doesn’t aid you in growing your business: Bad debt is spent on things you don’t need.
  • - Is unaffordable: Your budget is stretched making payments on this debt, and it limits your ability to accumulate cash to acquire other assets.

Good debt vs bad debt: What’s the verdict?

Good debt, if managed well and payments are made on due dates, can be an excellent tool to grow your business. Bad debt can land you in trouble and heading toward insolvency.

Does your business carry a high level of debt? It might be time to undertake a debt audit. Look at each line of debt your business carries. Does it fit in the “good debt” category, or the “bad debt” category? You may be surprised to uncover just how much debt you’re actually carrying.

At McDonald Vague, we can help you figure out how to better manage your business debts. If you think your business may need help with managing its debts contact us now.

No one is immune to being targeted by scammers. People from all walks of life, backgrounds and ages are vulnerable, and everyone must be constantly alert for fraudulent contact, says Auckland business advisory firm McDonald Vague.

“With this week (13-19 November) being Fraud Awareness Week, we want to remind Aucklanders of the dangers of scams and the need to be vigilant. We all receive junk emails, enticing online advertisements, letters offering a private purchase of shares for a low price, phone calls from people purporting to be people who they are not, and so on,” explains Peri Finnigan, director of McDonald Vague.

Ms Finnigan says that her firm is focussing on telling its clients about the need to be careful about business and financial scams. These are the scams that encourage the private purchase of shares and/or property, participation in an investment scheme or a manged fund, investing in a particular business proposal or paying fraudulent invoices.

“These proposals and communications tend to look very credible and, on the surface, perfectly viable. But of course they’re all designed to steal your money. Tax scams are also prevalent where you’re contacted by someone, either online or on the phone, by someone saying they’re from the Inland Revenue or a tax specialist. The IRD will not contact you in this way, nor will any genuine tax specialist.”

McDonald Vague has sent its clients a checklist that will help avoid investing in scams. It includes links to the Financial Markets Authority’s website so clients can check they’re using a registered New Zealand broker or investor, a link to check scam alerts and so on. The firm is also sending these clients a list of ways to help keep themselves safe, and what to do if they think they’ve been scammed.

Ms Finnigan concludes, “As business advisors, we’re also available to help ascertain whether a business proposal is worth considering. The usual advice is, however, if the offer or return seems too good to be true, it probably is!”

McDonald Vague Ltd is a member of NZ CA Limited. NZ CA is an association of independent chartered accountants located throughout New Zealand. NZ CA’s mission is to support its 28 member firms improve their business delivery to their valued clients.

Keeping yourself safe

It’s important to keep yourself safe from scams online. These include:

  • - Always keep your anti-virus software and your operating systems up-to-date
  • - Ensure your passwords are a mixture of letters (upper and lower case), numerals and symbols, and we don’t mean a password such as ‘Abc123!’
  • - Don’t share passwords with anyone, including typing your password into an email
  • - If you receive an email from someone you don’t know or a business that sounds odd, delete it immediately
  • - Don’t click on links or open any files sent to you if you don’t know the sender, and
  • - Use your common sense; if an offer or deal seems to be too good to be true, it usually is.

More information can be found at www.nzca.com.

Barring a major disaster, a business doesn’t go from being perfectly fine to insolvent overnight. There is usually a whole list of precipitating events that go overlooked or aren’t managed correctly in order to get to the point of no return.

Sometimes, you can be so involved in the day-to-day running of the business that signs of financial trouble can pass you by. Usually, your accountant should pick up on these signs, as we discussed in a previous article, but sometimes these signs slip through the cracks.

In this article we look at three different risk stages for business owners. What are the signs you need to look out for to recognise financial trouble? What can you do right now to help avoid insolvency?

Stage 1: Your business could be heading for financial trouble if you’re:

  • - meeting your current tax obligations, but have tax arrears.
  • - struggling to pay your creditors within their normal terms.
  • - increasing your overdraft facility in order to pay your creditors or meet payroll.

What to do: Don’t ignore the problems and hope they go away. Start working toward solutions now before these problems become overwhelming. Speak with your accountant to get an accurate picture of your finances and plug the holes.

Stage 2: Your business could already be in trouble if you’re:

  • - struggling to fulfil current or new orders as you don’t have the available funds to purchase raw materials.
  • - being cut off by creditors for not paying within their terms.
  • - can’t accept new orders.
  • - being threatened with legal action.
  • - under risk review by the IRD.
  • - having a conversation with your accountant and he/she looks very grim.
  • - fighting with the bank, who are trying to rescind your overdraft facility.
  • - forced by your bank or creditors to undergo a review.

What to do: Negotiate creditors compromises, and work towards paying down/paying off business debt. Speak with a qualified professional – like the team at McDonald Vague – about your options to avoid insolvency and improve cash flow.

Stage 3: Your business is in serious danger of insolvency if you’re:

  • - unable to raise working capital and are on stop with key suppliers.
  • - consistently under break-even point with turnover.
  • - not able to meet your outgoings with revenue.
  • - being put under formal review by the IRD.
  • - unable to take a company loan secured over company assets without a personal guarantee too.

What to do: Your business is in emergency mode. You need to act fast to salvage your company. Contact the professional team at McDonald Vague to find out your options.

You can avoid insolvency by catching the warning signs early on, and solving problems before they grow too big.

If you think your business is in financial trouble or have a client who may be, you may benefit from our free Guide to Options for Companies in Financial Difficulty.

If you know your company is heading for trouble, you need a turnaround strategy. We’ve created a free checklist you can use for your business risk management.

This list will assess if your company needs to employ a turnaround strategy, and what areas you should be focusing on.

Place a tick beside any sentence that applies to you: 

Management structure

  • - Are there governance and management standards in place?
  • - Is the management structure appropriate for the size, type and complexity of the business?
  • - Do the members of the management team understand their roles?
  • - Is there a balance in participation, and balance of power?


  • - Is the management team aware of the forces affecting their industry/market?
  • - Are your staff fulfilling the critical functions, sufficiently skilled?
  • - Do they recognise the challenges facing the business?
  • - Are the staff capable of a turnaround?

Decision making

  • - Are the managers on the same page, and do they meet regularly?
  • - Do the managers have a clear strategy/vision and is it appropriate?
  • - Do the managers have high integrity and honesty?
  • - Are decisions made in a way that is appropriate for the business?


  • - Is the business plan appropriate for the size/type of business?
  • - Is management financial information readily available?
  • - Are the management information and key performance indicators adequate for the business?
  • - Is accurate, meaningful management information produced on time?
  • - Do you meet services levels expected?


  • - Are your staff open and cooperative in discussing and addressing the issues facing them?
  • - Are your staff customer focused?

Succession planning

  • - Is succession planning an issue for the business?
  • - Can existing managers be relied on?
  • - Have adequate plans been made for the future?

Commitment to the company

  • - Is the management team committed to the company?
  • - Do the managers have a stake in the business?
  • - Are the managers good at leading and motivating their workforce?


  • - Can you trade profitably?
  • - Do you have support from secured creditors?
  • - Are your secured creditors supporting your trade on strategy?
  • - Will staff see the process through?
  • - Would creditors defer or compound their debts?

Any boxes left unticked could be a problem for you. Add up the number of boxes you haven’t ticked and find your result below.

Less than 5: A healthy business

Congratulations, your business is low risk, and not in need of a turnaround strategy. 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: Time to get proactive

While you’re still trading and things don’t seem that bad, you’re not as risk-free as you’d like to believe. Don’t ignore these important signs – you need to get proactive about business risk management and work through these issues before they become bigger problems later on. Call McDonald Vague to talk about a treatment plan to get your business back on its feet. 

More than 12: Heading for trouble

Your business could be in danger and you need to act immediately. You need to talk to a qualified professional who will help you figure out your company's turnaround strategy. Call the friendly team at McDonald Vague today.

As a small business owner, pursuing outstanding debts can be a painful process. You don’t want to be seen as the “bad guy”, but at the same time, you rely on debtors paying on time in order to service your own cash flow, and if a debtor defaults, your business suffers.

Unfortunately, the creditor who protests the loudest is likely to be paid first. This means if you want to see your money soon, you’ll need to get vocal with your debtor. In this article, we have a look at the small business debt recovery process and suggest ways you can make the debt collection process a little easier for all parties involved.

If you have a debt owing, and your usual debt recovery process (email reminder, follow-up phone call, compounding, etc) hasn’t resulted in payment, legally you have three tools in your arsenal you can employ.

Debt recovery tool one: send a lawyer’s letter

For a fee, your lawyer will draft up a letter outlining your debtors legal obligations and the repercussions of not paying the debt within a certain timeframe. Often, simply receiving a letter on a lawyer’s letterhead will be enough to convince a debtor to move your debt to their top priority. This can be a good first step as it is cheaper than engaging a lawyer for legal action.

Debt recovery tool two: use a debt-collection agency

You can assign small business debt collection to an agency. They will pursue the business on your behalf and attempt to recover your debt. This is a good option if communications between you and the debtor have broken down.

The agency will establish contact with your debtor via mail and telephone, and may also visit in person to collect on the debt. They will also register the default against your debtor, which will remain on their credit record for up to five years. Debt collection agencies settle the majority of claims without legal proceedings, but if required, can also act on your behalf to sue the debtor to recover money owing.

Debt recovery tool three: issue a statutory demand

If you suspect the company owing you money may be insolvent, and the debt is not in dispute, you can have your lawyer issue a statutory demand to recover your money. As we outline in our Statutory demands article, you may be able to recover the outstanding debt, interest owing on the debt, and legal costs associated with small business debt collection.

A statutory demand should ideally come from a lawyer you’ve hired, rather than from yourself or a debt collection agency. Once issued, the debtor has 15 days to pay the amount claimed. If they neglect to do this, you can apply to place their company into liquidation.

Seeking legal action for small business debt collection should not be taken lightly, and it’s important to ensure the debt is not in dispute before issuing a statutory demand.

If you are struggling to manage the debt in your company contact us now.


Picture yourself at the beach. It’s a beautiful day, and you decide to go for a swim. You’re so busy enjoying the sunshine and the refreshing water, you don’t realise you’re drifting further and further from the shore.

Little do you know you’re heading right into shark-infested waters.

Being in business can be the same. Sometimes, you are focused on the day-to-day tasks and you miss the bigger picture. It can be difficult to see when you’re heading for trouble. But it’s important to know there are five huge warning signs pointing you to change before it’s too late.

Sign 1: Your business cannot pay you a wage

If your business is not generating a return to you, why are you doing it? Are you risking or spending your personal equity in a business that is out of fashion or no longer sustainable?

When was the last time you asked yourself these questions? If the answer to the first is no, and there is no realistic prospect of a change in your circumstances, then you should get advice. Your personal equity may be at risk.

Sign 2: The IRD is asking questions

The IRD will only investigate a business if they see activity that is in some way out of the ordinary or you are in arrears. If the IRD is requesting an investigation, then it’s a sure sign you’re not compliant and need to clean up your accounting in terms of your tax obligations. Speak to your accountant immediately about how you might be in breach of your obligations.

If you are in arrears contact the IRD and arrange a repayment plan. If you are suffering from hardship you may qualify for a debt reduction or some form of relief.

Sign 3: You’re struggling to pay debts

  • - Are you juggling money from one account to another in order to find the cash available to pay your debts?
  • - Are you finding it difficult to restock shelves?
  • - Is your overdraft exceeding its limit regularly?
  • - Have you lost key customers?
  • - Are you missing forecasts and budgets?

Answering yes to any of these questions suggests a poor cash flow strategy, and it can sink a business if caught unawares. You could also be in breach of your Director’s Duties if you do not have enough funds to pay your debts as they become due.

Speak to your accountant or an insolvency specialist about your debt situation. A simple solution might be to tweak your terms of trade, use invoice factoring, or to seek a creditor compromise to pay down debt over time. You may be able to give yourself more of a cash flow buffer to create a successful business turnaround.

Sign 4: Your best staff are leaving

If they sense the ship is sinking, are your staff going to brave those stormy waters instead of staying on the boat? Oceanic metaphors aside, if you’re seeing a huge exodus of staff, this could be a clue that your company is in trouble.

Luckily, you have an opportunity here to hire some great minds who can help you turn things around. By hiring some clever people with great problem-solving abilities, you may be able to rescue much of what has been lost.

Sign 5: Your accounts are a shambles

Do you have a balance sheet that you’re regularly reviewing? When was the last time you reviewed a profit and loss statement? Do you know at any given time what your liabilities are or if your business passes the “Solvency Test”?

This is where a business turnaround specialist – like McDonald Vague – can help. We can spot issues in your business and help you repair them … before they result in insolvency or liquidation. Contact us now.

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.

In one of the final scenes of iconic movie Forrest Gump, Forrest discovers he’s a shareholder in “some kind of fruit company,” and that he “don’t have to worry about money no more.”

He unwittingly bought shares in Apple Computers, and if for argument’s sake he’d spent $100,000 in 1977, his shares today would be worth close to $7 billion dollars.

Of course, we all want to get as lucky as Forrest, but it’s pretty rare to blindly wander into a fortune. Becoming a shareholder can be a useful way to diversify your portfolio, and many people enjoy the experience. In our experience, many people in NZ become involved as a shareholder in a small company with a few other mates or acquaintances with a great idea and the best of intentions.

Over 80% of NZ registered companies are small to medium sized and do not offer shares to the public.

Things can and do go wrong however, so before you jump in with investing in a company, it’s important to conduct due diligence to protect your investment and ensure you’re safe should something go wrong.

Conducting Shareholder Due Dilligence

When you come into a business, there are several key drivers you should investigate. First of all is the relationship you have with the other owners. If things are uncomfortable now, they could become toxic at the first sign of trouble. Secondly, you should have some understanding of the industry. Is it in a growth market, or on the decline? What is the market saturation/share? What’s the product’s reputation with consumers? Having inside knowledge of the market can help you see opportunities and add value, as well as avoid disasters.

As part of due diligence, you need to assess the returns from the proposed investment. The expected return may not always be financial, but often it will be. For example, one company we know of asked shareholders to inject a couple of million dollars into the business to allow it to continue to trade. Many factors were considered during the due diligence process, but the decision came down to the fact the particular industry worked on slim profit margins, the company concerned did not have a track record of profitable trading, had many competitors, and it would’ve taken the company approximately 20 years to repay the initial investment.

In that case, when comparing the costs of the shareholders either borrowing the funds or what they could get as a return on the same money elsewhere, the shareholders decided against making the additional investment

The company was placed into liquidation as a result of the shareholders’ decision. From what we have seen the prospect of liquidation should funds not be introduced had been one of the factors that the company directors had asked the shareholders to consider. Which leads to another due diligence point, that you need to consider the common grounds and potential conflict points between shareholders’ interests and those of the directors as they may be different people, and what agreements are in place to deal with these.

Forrest clearly didn’t involve any due diligence techniques, but it is a movie and he got lucky. In the real world, you can’t count on Forrest’s luck. If you’re looking at investing or becoming a shareholder due diligence is important. You must know about the people and company you’re about to enter into business with.

Due Dilligence Checklist

Here are elevan simple questions to ask when conducting due diligence for a shareholding. Finding the answers could save you big time in the long run:

  • - Does the business own all its key assets, including property, vehicles, and IP?
  • - What obligations and liabilities will impact on your buy in? (Check the contracts!)
  • - When will either value or a regular return on investment be available?
  • - Does the business have any upcoming or current court proceedings for lawsuits?
  • - Has the business been to court in the past? What for? (This may highlight potential weaknesses).
  • - What are you expected to bring to the table? Skill? Ideas? Money? All of those?
  • - Can you and do you want to commit to the resources expected? Or are you conflicted?
  • - What are the company’s revenue, profit, and margin (RPM) trends?
  • - Do you trust the managers and board? Research profiles and past business histories.
  • - What risks (both industry-wide and company-specific) do you expose yourself to?
  • - Will your reputation be harmed by associating your name with this company?

Investing in a company is a bit like hiring an employee. With a formal process to work through, you will usually end up with a solid, dependable asset. But without that process, you are gambling based on instinct and first impressions, and that’s not ideal. There are always fish hooks when becoming a shareholder – disputes can ruin a business – but by following the process outlined above, you’ll avoid the majority of potential problems.

If you haven’t gone through due diligence, or you need some advice on what to do next, come and talk to the McDonald Vague team and they can help guide you toward a confident decision.

If your company is experiencing financial difficulty, download our free guide for NZ Companies to discover your different options.