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.