There are three rescue procedures in NZ, the compromise (Part 14), the Court approved scheme of arrangement (Part 15) – an option seldom used, and Voluntary Administration (Part 15A).

Liquidation is not a rescue procedure. It is usually a terminal procedure. Liquidators typically trade only for a short term for the purposes of the liquidation. The purpose of liquidation is to realise and distribute assets, not business survival.

Some companies however advance liquidation for the purpose of restructuring and to purchase back part of the business from the liquidator (at market value). Some companies advance liquidation with a known purchaser lined up to purchase the business in a clean structure. The consideration attributed is often pre approved by the secured creditors in these cases.

Receivership can be a rescue procedure. It can result in the rescue of viable parts/businesses but the primary duty of a Receiver is to get the best return for the secured creditor (usually the bank). Business survival may be an outcome. Banks may agree to a VA proceeding to avoid the negative publicity from appointing a Receiver or to protect the value of the business goodwill achieved from the stay in an Administration.

A company compromise under Part 14 of the Companies Act 1993 is a useful method without (in theory) having to go to Court. There is however no automatic moratorium (like with a VA) so sometimes you go to Court anyway. A compromise requires the identification of classes of creditors and 75% approval by class. There is often no outside independent manager involved. The compromise is the likely least expensive option but it requires approval to essentially be assured in advance. It works well for smaller companies with lesser creditors involved.

A Voluntary Administration is advanced where the company is cash flow insolvent or likely to become insolvent. No Court application is required. The Board of directors can appoint an Administrator. If there is a winding up application (by a creditor) on foot, the Court will likely adjourn the winding up application if the Court is satisfied that it is in the interests of the creditors (Section 239ABV, Companies Act 1993).

A business must be truly viable to be successfully rehabilitated. The appointment of an administrator for any other reason apart from rehabilitation is unlikely to gain the requisite support.

Liquidation versus Administration

A liquidator can only trade on for limited purpose of winding up. An administrator on the other hand has wide powers including the power to borrow. Some contracts will have termination clauses on liquidation but not on Administration. Both options have their advantages.

The best option is best discussed and well considered before advancing. Contact our team for advice on the options available if your business is in need of rescue, restructure or an orderly termination.

Tuesday, 25 June 2019 12:58

Received A Statutory Demand ?

A statutory demand is a claim under Section 289 of the Companies Act 1993. Failing to comply with a statutory demand or applying to set it aside within the specified timeframes will result in your company being deemed to be insolvent and liquidation may follow.

A company is insolvent if it is unable to pay its debts when they fall due.

Non-compliance with a statutory demand served on your company allows the creditor that served the statutory demand to apply to the High Court to appoint a liquidator. The most common basis for a company in New Zealand to be placed into liquidation by the High Court is from failure to comply with a statutory demand.

If you receive a Statutory Demand you need to act quickly. You can either pay the specified sum, enter into some form of compromise to pay the debt, or offer up some form of security to the satisfaction of the creditor.

If the debt is disputed you must apply under Section 290 to have the debt set aside. You will need to engage a lawyer.

The court may grant an application to set aside a statutory demand if it is satisfied that

(a) there is a substantial dispute whether or not the debt is owing or is due; or

(b) the company appears to have a counterclaim, set-off, or cross-demand and the amount specified in the demand less the amount of the counterclaim, set-off, or cross-demand is less than the prescribed amount; or

(c) the demand ought to be set aside on other grounds.

If no action is taken, nor a liquidator appointed voluntarily (by the shareholders) within 10 working days of the service of the Winding Up Proceeding, the Winding Up Application hearing takes place and if the High Court is satisfied that the company should be wound up, an order for the Company to be wound up is made and the Court appoints a liquidator. A liquidator is nominated by the applicant creditor and provides a consent to act prior to the hearing.

If your company does not satisfy the solvency test and is risking trading insolvently then the shareholders of the company can voluntarily appoint a liquidator so long as the appointment occurs within 10 working days from the service of a winding up application (which follows after the expiry of the statutory demand).

Pending Winding Up Proceeding – options to consider

Your company may be closed by the liquidator or the business sold. You can save your company from facing Court liquidation proceedings with the following options:

• Voluntary liquidation (if liquidation is inevitable)
• Voluntary Administration
• Company Compromise – Part XIV Companies Act 1993
• Debt Restructuring and a workout
• Advice on your options early on

Liquidation may be inevitable and a way out of a downward spiral. Speak to an Accredited Insolvency professional. It may not mean losing your business. Some companies advance liquidation voluntarily in order to restructure.

Get Advice

For advice on statutory demands, liquidation, hive down, voluntary administration or compromise contact our team at McDonald Vague.

If you need a CAANZ and/or RITANZ Accredited Insolvency Practitioner to consent to act as liquidator on an upcoming court liquidation or to manage a voluntary liquidation, Boris, Iain, Colin or Peri would be pleased for the referrals and to assist.

 

Other Links:

1. Statutory Demand Infographic

2. Guides on Statutory Demands and Options

3. Serving Statutory Demands

4. Further Discussion on Statutory Demands - Steps to Take

It is probably stating the obvious – but if you don’t ask your customers for payment for the goods or services you provide, there is a good chance they won’t pay you.

A lack of cashflow causes issues for any business and particularly so for small businesses that operate on modest turnover and small margins of profit. It leads to the slow payment of creditors and can, if left unchecked, lead to the winding up of the business.

The problem usually comes about, primarily in small businesses, when the owner is working in the business providing the goods and services etc during the week and the paperwork is done later if there is time.

I am aware of one occasion when a small business was liquidated by an unpaid creditor. On appointment by the High Court, the liquidator identified that some customers had not been invoiced for several months. Once the invoicing was brought up to date, and payment was received, the company was able to pay all creditors and there were surplus funds distributed to the shareholders.

The whole liquidation process, and the costs incurred in that process, would have been avoided if the director had made the time to send out the invoices.

Doing the paperwork should not be seen as something that you do when you get round to it because no matter how good you are at the services you provide, if you don’t get paid for what you do your business won’t survive.

If you want to do the invoicing yourself, set aside a specific time each week to get that task performed. It’s more important for the wellbeing of your business than squeezing in another job.

If you don’t have the time or the skills to do the invoicing, be prepared to pay someone who can. Yes, it will cost you some money, but it will be a small price to pay for having the invoices issued in a timely manner, leaving you free to carry on the work that earns the money in the first place.

Even in New Zealand’s currently comparatively benign economic conditions, some businesses inevitably find themselves struggling to survive. If you want your business to survive and then flourish, you need to put a business recovery plan in place.

Managing a struggling business is stressful and demanding on directors, management and staff alike. The thought of impending failure is emotionally taxing on all stakeholders. Gambling on the business’ success with money from your family or friends, or extending credit with suppliers just to get by is often a poor strategy. Hope is never a reliable method.
Moreover, the ethical challenges involved in risking other peoples’ money is a major stressor for most people.

 

Why Businesses Find Themselves Struggling

Businesses can often struggle when they grow beyond the directors’ skill set or their ability to control the business’ increasing complexity. Ill health can also pose problems for a business, as can losing interest in the business once the competition catches up or passes it by and the excitement of building something fresh and new fades.
Similarly, many businesses fall into the trap of relying too heavily on a single customer or supplier. Others find technology has eroded their competitive advantage or suffer from being poorly managed.

 

Corrective Action

Returning to a healthy, dynamic commercial standing requires a thoughtfully considered strategic plan of action. There are several short-term remedial actions which are often an option:


1. Identifying redundant assets and selling them off
2. Converting stocks to cash
3. Adopting a more aggressive recovery policy for debtors
4. Negotiating extended terms from suppliers
5. Exploring debtor factoring or looking at invoice financing options

There are also three well-established restructuring or turnaround options including hive down, compromise, and voluntary administration.

 

Hive Down

This strategy is appropriate where a struggling business is being restructured in the face of potential liquidation with a new corporate owner assuming control. The proposed restructure is pre-packaged and agreed with secured creditors prior to a formal liquidation process being initiated.

The problem business is sold to a new corporate entity at market value most often based on an independent market valuation. The trading name, associated goodwill and intellectual property is safeguarded. This may take the form of a sale to the failed entity’s current management team or its existing directors. It thus demands certain steps to be taken to avoid phoenix company issues emerging at a later date.

An arms-length sale by an insolvency practitioner following formal appointment to an unrelated third party where the director is not involved either in management or a directorship role avoids creating a phoenix company situation.

 

Company Compromise

This strategy falls under Part XIV of the Companies Act 1993. It is simply an offer to pay the compromised debt over an agreed time period and at an agreed rate. The debt involved is frozen at the date of the compromise agreement. This resolution requires agreement by the various classes of creditors and needs a majority of creditors representing 75 per cent of the value of each class of debt to agree.

This option provides breathing space for the company to turn its fortunes around while still being able to trade. The compromise manager may be involved in overseeing the trading on or hold a lesser position. The role is defined in the agreement and agreed by the requisite number of creditors.


Voluntary Administration

This option provides a struggling company experiencing financial difficulties with some breathing space. An externally appointed administrator reviews the business fundamentals and provides a report to creditors outlining a potential rescue plan together with a recommended course of action.

The outcome may take the form of a Deed of Company Arrangement (“DOCA”), the liquidation of the business or the return of the business to the hands of its directors.

A voluntary administration arrangement tends to benefit creditors, both secured and unsecured and often leads to a Deed Administrator managing the company for a set period of time through the aegis of a rescue plan.

A voluntary administration formally begins following the appointment of an administrator by a secured creditor, by the board, or as a result of a shareholder resolution. Voluntary administration is more expensive than a compromise model due to the mandated statutory compliance and reporting requirements for formal meetings and public advertising. For this reason, they are more suited to larger businesses.


Final Observation

Any business can find itself is troubled financial waters. The key to surviving and thriving is to identify a strategically solid path forward, involving some form of restructuring or combined with a hive down, compromise or voluntary administration solution.



Friday, 09 November 2018 14:00

Insolvency Lawyer or Insolvency Accountant

As it is in all areas of business, when you are seeking advice or input on insolvency matters it is important to go to the right source.

There are lawyers and accountants that specialise in insolvency but, depending of the circumstances, and what you are looking to achieve, who you choose is important.

Under the current legislation, the Companies Act 1993, anyone, without conflict of interest, and with a few other exceptions, can take an appointment as an Insolvency Practitioner and be appointed as liquidator or receiver of a company. They do not have to have any formal qualification and do not have to be registered or subject to any particular code of conduct. This situation is likely to change with current law changes being considered but for the time being the current provisions of the Companies Act apply.

So both lawyers and accountants can be appointed as liquidators or receivers and can be referred to as Insolvency Practitioners.

There are also Insolvency Practitioners who may be neither a lawyer or an accountant, who can also be appointed as liquidators or receivers.

Generally speaking, there are two ways that a business could be involved with an insolvency matter – either as a creditor seeking to recover a debt, or as the business owners deciding on a course of action because of the financial situation the business is in. The information or advice you would need from a lawyer and / or an accountant is different in each case.

Insolvency Lawyer:

If you are a creditor of a business that has failed to pay its debts as they fall due, you may decide to take action to have the debtor company liquidated.

To do this, we recommend you consult a lawyer experienced in the insolvency field to prepare statutory demands for service on the debtor company and, in due course, to prepare and file the application in the High Court to have the debtor company liquidated.

The lawyer will, prior to the matter being heard in Court, obtain the written consent of  Insolvency Practitioner(s), to be appointed,

If you are a director/shareholder of a debtor company that has been served with a statutory demand or liquidation proceedings, you may want to consult with an insolvency practitioner to gain an understanding of your rights and obligations and the options that are available to you.

Insolvency Accountant:

Many of the insolvency practitioners practicing in New Zealand have formal accounting qualifications or accounting backgrounds. This is understandable given that a lot of the work carried out by insolvency practitioners involves the review and analysis of accounting information.

IP's often then engage lawyers. Some of the larger accounting firms will have an insolvency practice as part of their firm’s structure. McDonald Vague, are Chartered Accountants specialising in business recovery and insolvency

If you are the shareholders or director of an insolvent company, your business accountants, who prepare your annual financial reports etc, may identify the fact that you are technically insolvent but, under those circumstances, they cannot be appointed as liquidator of your company. You would need to appoint an independent insolvency practitioner.

Accreditation Protection:

Accreditation for insolvency practitioners acknowledges IPs with appropriate experience. The main benefit is, accredited IPs are subject to the code of ethics, CAANZ rules and standards, CPD, practice review and a disciplinary body. If the practitioner is a CA and accredited, the designation is CAANZ accredited IP, whereas a non-CA but member of RITANZ is RITANZ IP Accredited by CAANZ. Dealing with an accredited practitioner provides more assurance to the appointor that the appropriate actions will be taken.

You can check the accreditation status of a particular IP or look for an accredited IP by following the links to the RITANZ or CAANZ websites 

Conclusion:

Getting the right advice at the right time and from the right person can make a big difference to the final outcome in any given situation.

If you need legal advice in relation to an insolvency issue, then see a lawyer with expertise in that area of law.

If you need practical advice in relation to insolvency options and processes and the related accounting issues, then speak to an experienced insolvency practitioner.

The team at McDonald Vague are experienced and independent insolvency practitioners with the formal qualifications and experience to be able to provide good practical advice on your situation.

Tuesday, 18 September 2018 14:53

Winding Up A New Zealand Company

The winding up of a company in New Zealand can occur in three ways –

• A voluntary liquidation initiated by the shareholders of the company (solvent or insolvent companies); or
• A Court ordered winding up initiated by a creditor of the company; or
• A short form removal also known as Section 318(1)(d) process (solvent companies)

The purpose of this article is to set out the different processes involved with these options.

Voluntary Winding Up:

The process to be followed by the directors and shareholders of a company to wind the company up depends on the financial position of the company, that is whether it is solvent or insolvent.

Solvent Companies:

When the decision has been made that a solvent company is no longer required, it can be placed into liquidation by shareholder resolution after the directors have provided a Certificate as to Solvency pursuant to Section 243 (9) of the Companies Act 1993 (“the Act”).

The process to place a solvent company into liquidation is as follows:

• The liquidators’ consent to their appointment in writing.
• Directors pass a resolution as to the solvency of company on liquidation.
• Directors sign a certificate stating the grounds on which they are relying for their opinion as to solvency.
• A copy of the directors’ resolution is filed at the Companies Office within 20 working days before the appointment of liquidators.
• A special resolution of shareholders is signed appointing liquidators.
• The liquidators give notice of their appointment to the Companies Office.
• A notice of appointment and notice to creditors to claim is published in the New Zealand Gazette and a newspaper for the region in which the company operated.
• The liquidators’ first statutory report is filed at the Companies Office with copies to the shareholders and any creditors.

The shareholder special resolution cannot be passed until after the resolution of solvency has been signed and filed at the Companies Office (but no later than 20 days thereafter).

There is also a second procedure for having a solvent company removed from the Register of Companies known as the short form removal process.

This short form process can be administered by the company’s directors / shareholders or by its external accountants and it is quicker and easier, without the requirement for public notice to be given or the filing of reports.

The down side to this process is that it does not confirm the solvency of the company and does not provide the level of certainty to 3rd parties that a formal liquidation, conducted by an independent accredited insolvency practitioner, does, leaving the possibility of someone making application to the Registrar to have the company reinstated to the Register. In liquidation, the process to reinstate a struck off company involves a High Court application and is costly.

Insolvent Companies:

When the directors of a company conclude that the company is insolvent and should stop trading they have the option to commence the voluntary winding up of the company by having the shareholders appoint a liquidator.

The process to place an insolvent company into voluntary liquidation is as follows:

• The liquidators’ consent to their appointment in writing.
• A special resolution of shareholders is signed appointing liquidators. This requires 75% or more of shareholders by number and by value of shareholding to sign to make the appointment valid.
• The liquidators give notice of their appointment to the Companies Office.
• A notice of appointment and notice to creditors to claim is published in the New Zealand Gazette and a newspaper for the region in which the company operated.
• The liquidators’ first statutory report is filed at the Companies Office with copies to the shareholders and any creditors.

The voluntary process is only available if the company acts within 10 working days of a winding up proceeding being served.

Court Ordered Winding Up:

As the creditor of a company that is failing to make payment of amounts owed, you may reach the stage where the only option left to you is to have the debtor company wound up, or liquidated, by order of the High Court.

The process to have an insolvent company wound up by order of the High Court, on the application of a creditor, is as follows:

• Make sure that you have the correct legal name of the debtor company – not just a trading name.
• Have a statutory demand served on the company. This gives the debtor company 15 working days to make payment or enter into an arrangement to settle.
• If the statutory demand is not satisfied, an application must be filed in the High Court to have the company placed into liquidation.
• Have copies of the documents filed at Court formally served on the debtor company.
• Public notice of the application has to be given in the local newspaper.
• Have the liquidators provide their written consent to being appointed.
• The matter will be heard at the next Court day set for hearing insolvency matters and the liquidation will commence once the Associate Judge of the High Court makes the order.

It is advisable to have your lawyers involved from the beginning of the process to ensure that the statutory demand is properly prepared and served. They will have to be involved in the preparation and filing of the Court proceedings. The creditor making application can nominate an insolvency practitioner to act.

Conclusion:

The processes set out above are the basic steps that can be taken to wind a company up in New Zealand. The processes described may not always be appropriate because of the particular circumstances of the case.

If you are considering winding up your own company, or taking steps as a creditor to wind up another company, and would like to discuss the options, please contact the team at McDonald Vague

Colin Sanderson
September 2018

Is your business struggling under a mountain of accumulating debts? Are you constantly juggling money between accounts in order to pay creditors? Are you days away from defaulting on a debt?

Accumulating too much debt has been the downfall of many businesses, but it does not have to be the case. If your business is struggling with bad debt and poor cash flow, there are several options open to you before you have to consider insolvency.

Creditors compromise

You may be able to reach an understanding with your creditors and negotiate better terms for your debt. If you show your creditors that you are taking steps to settle the debt – such as enlisting the help of a professional advisor – you’ll be more likely to reach an amicable compromise. For example, you may be able to negotiate extended payment dates without incurring additional penalties. If you continue to meet your debt obligations, this could see you on your way to being out of business debt.

Trying for a compromise with creditors should always be your first step.

Debt factoring

Debt factoring (also known as invoice factoring or invoice financing) is when a business sells their invoices on to a third party, who processes those invoices. The usual reason to do this is to receive a loan based on the expected revenue from the invoices. If you need cash in hand fast in order to meet your debtor obligations, debt factoring can be a good short term solution.

Caution is advised if you’re pursuing debt factoring. In the short term it can solve cash flow problems, especially for young firms who might not be able to borrow from a bank. But as an ongoing tactic, there are risks involved. Factoring is usually a more expensive option than a bank overdraft. The best idea is to seek professional, impartial advice before signing over your invoices to debt factoring. 

Debt consolidation

You may also be able to consolidate business debt from a series of smaller loans to one large loan with a more competitive interest rate. This is a common practice in the consumer debt market, that may be beneficial to help you manage debt in your business.

Investors

If you’re strapped for cash, you may be able to raise capital to meet debt obligations through investors. In most cases you’ll be giving away equity in your company, instead of borrowing money you have to pay back. Investors may be reluctant to invest capital if they sense the business is experiencing cash flow issues or is otherwise in trouble.

Asset divestment

Asset divestment is where you sell off business assets – such as property, contracts, plant and machinery – in order to raise funds to service debt. In some cases it can be a valuable strategy to inject new funds into a company – especially if you had assets on your books you were looking to divest for strategic reasons anyway – but is usually a drastic measure that should be carefully considered. Once sold, an asset can no longer perform for you.

Review of expenses and overheads

Conduct a critical review of your expenditures, and benchmark these against industry standards. Are you spending significantly more than other, similar businesses? You can use this information to help you reduce outgoing expenses by targeting the biggest areas of overspend and support the areas of business critical to your success. Telecommunications costs, vacant office space, expensive premises, printing/copying, motor vehicle costs – these could all be contributing to overspend.

If you’re stuck for ideas on how to reduce costs, speak with your staff. They often have a different perspective and clever ideas.

Are you struggling to figure out how to get out of business debt? Before making any drastic decisions, you should talk to a qualified professional advisor. Contact us to find out more.

 

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.

When it comes to due dates and business tax debt, the IRD don’t mess around. Business owners who shirk their tax obligations can quickly find themselves in trouble.

If you know your tax bill is going to be bigger than you can handle, it’s important to deal with that as soon as possible – ideally long before it’s due. If you can’t pay your tax bill, you should look at the following steps:

Contact the IRD as soon as possible

The IRD want to help you meet your tax obligations, so if you contact them as soon as you know there’s a problem, they can help you find a solution. It’s best to contact the IRD before the due date, if at all possible, as it increases your chances of being able to get favourable terms.

You should also file your tax returns on time, even if you’re unable to pay the tax owing. If you’re tax compliant, or seeking to be, the IRD will be happy to negotiate a payment arrangement for you to pay your debt off in instalments over time. This can help you with cash flow management while you try to turnaround the business.

If you are suffering from serious ill health then you may qualify for relief under the hardship provisions.

Call the IRD on 0800 377 771, fill out an installment arrangement form online, or see their website page on installment arrangements for more details.

If you're experiencing serious financial hardship 

In some circumstances, the IRD will write off an agreed amount of your debt if they determine – based on their criteria – you are in serious financial hardship. They will take into account your payment history, your current situation, and your ability to meet future obligations. You’ll need to fill in the Disclosure of financial position IR590 form.

Bear in mind the IRD will look carefully into your household expenditure, and will require you to make adjustments if it’s significantly above average for your region.

Will you be personally liable for business tax debt? 

In theory, your company structure is designed to protect your personal assets in the event of company insolvency or other financial difficulties. However, there are legal means to ensure you’re held liable.

Under a HD 15 of the Income Tax Act 2007, the Commissioner is able to go after personally-held assets of company directors and shareholders in order to recover tax debt. However, this only applies when director and stakeholders have entered into an agreement to purposefully deplete a company of its assets (an asset-stripping arrangement). Such an arrangement is also a breach of Director’s Duties. This clause is rarely utilised to recover debts.

Another Act, the Tax Administration Act 1994, makes provisions for non-compliance with tax laws. Under this Act penalties for a company’s non-compliance can be placed upon an officer of the company. A conviction under this Act could see a company director facing both a significant fine and time in prison. This same Act allows the commissioner to pursue a director personally for unpaid PAYE. The IRD has successfully brought many of these cases against company directors – in these cases the directors have been complicit in breaching their tax obligations.

Are you in trouble with the IRD?

If you’re having problems meeting your tax obligations, or you are trying to make arrangements with the IRD to pay arrears, it's best to be proactive, before you find yourself in even deeper trouble.

If you think your business is in financial trouble contact us to see how we can help.

Key Performance Indicators (KPIs) are quantifiable measurements you can make that help you understand how your company is performing. An effective KPI has to be:

  • - measurable and well-defined.
  • - crucial to achieving your goals.
  • - applicable to your particular business.

When you think about the main reasons for company failure, they often come back to not being able to track how the company is performing. Without a defined method for measuring success and spotting issues, you might not see problems until they are critical. These financial performance indicators can help you monitor your results and gain a better overview of your company.

There are literally thousands of KPIs you could track and monitor. There are scientific calculators that are proven to predict insolvency.  Which financial performance indicators should you be monitoring to ensure your company remains solvent? Does your company meet the Zscore test?

Debt to equity ratio

Formula: Liabilities / shareholder equity

This KPI measures the amount of equity in a business relative to its debts. It’s one of the most important financial performance indicators to consider when looking at your company.

Current ratio

Formula: Current assets / current liabilities

What ability do you have to pay out current obligations? Your current or “cash asset” ratio shows you in one simple formula – the higher the ratio, the more easily you can cover your current obligations. (As a guide, 2:1 is considered a desirable level, with current assets being more than double liabilities.)

While a high ratio is usually desirable, there are some factors that can mean it’s actually a detriment (namely, slow-moving stocks piling up, cash balances remaining idle). Any conclusions drawn from your current ratio need to take into account the nature of your business, your products, and seasonal fluctuations that may impact the result.

Acid test ratio

Formula: (Current assets – Inventories) / Current liabilities

Also known as the “quick” or “quick assets” ratio, this KPI measures the short term liquidity of your firm. The higher the ratio, the better situation your business is in.

Net profit margin

Formula: Net profit / net sales

How efficient is your business’ cost control? The net profit margin reveals the amount of your revenue that is in actual profit. The net profit KPI can be a great tool to measure your profitability against other businesses in the same industry.

Debt service ratio

Formula: Earnings before interest and taxes (EBIT) / Fixed interest charges

What capability does your business have to service your long-term loans? The “debt service ratio” (also known as “interest coverage ratio”) shows how many times the interest charges can be covered by your company’s earnings.

Debt to total funds ratio

Formula: Total assets / total liabilities.

As a business, you have responsibilities under the Companies Act to remain solvent. This KPI can help you measure your solvency and ensure you’re not in trouble. It’s similar to the current ratio, but takes into account all assets and liabilities, not just those that are current.

Z Score Calculator

Your Z Score is a formula that incorporates five key KPIs into a single score, in order to give a good indication of financial health.

  • - The Z Score is a scientifically based formula that measures how closely a firm resembles other firms that have faced insolvency and failure. It is not intended to predict insolvency, but rather uses probability in determining a company's financial state.
  • - The model uses five financial ratios combined in a specific way to produce a single number. This number, called the Z Score, is a general measure of corporate financial health.
  • - Discover your Z Score: Click here to take the test.

Useful tools for business performance indicators

You can use these tools to help you set your own KPIs.

  • Industry benchmarking: This tool from the IRD allows you to benchmark different KPIs against other businesses in your industry across the country. It allows you to zero in on problem areas.
  • ANZ financial benchmarking tools: Simple tools to assist you in benchmarking your company’s performance against your industry and your competitors.
  • ANZ Truckometer: This tool incorporates a set of economic indicators using traffic data around the country, and operates on a principle that demonstrates the correlation between traffic flow and economic activity.
  • Data for business: From Statistics NZ, Data for Business pulls together business statistics to help you make decisions about your company.  
  • Break even point calculator: Handy tool to help you figure out how much you need to sell in order to break even and meet your overheads.

There are many other KPIs that may be valuable for your business to track – talk to your accountant or financial team about which might be most beneficial for your company. 

Are you worried your business is heading for financial trouble? Contact us now to discuss your situation.

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