Liquidations are climbing, billions of dollars in tax remains unpaid, and many NZ businesses are still dealing with financial problems that can be traced back years. Brent Norling, commercial law expert and Director at Norling Law, sees these pressures firsthand and explains why the fallout for small and medium-sized businesses could take years to work through.
Why are so many NZ businesses struggling?
The liquidation numbers are the highest they’ve been since the Global Financial Crisis, with construction accounting for almost a third of them.
For many NZ businesses, failure isn’t necessarily the result of one bad decision. It can be a series of events that compound over time.
In construction, those problems can often be traced back to the Covid response. From there, another company might go into liquidation without paying its bills, a job may be mispriced, or cashflow may tighten. A business might be able to recover from one of those setbacks, but several in succession can become much harder to overcome.
That makes the current environment different from five years ago, when mismanagement may have played a larger role. Today, external pressures are contributing to many of the problems businesses are facing.
Why NZ businesses need to act early
For struggling NZ businesses, waiting for the situation to improve can significantly reduce the options available.
That applies to both sides of a debt. If you’re a creditor waiting to be paid, the longer a debt is allowed to drag on, the lower the chances of recovering the money can become. Strong collection processes can therefore be important in getting paid earlier.
For the business owing money, acting early can be just as important.
There can be multiple options available when financial problems are addressed early. Leave it too late and those options can quickly narrow, sometimes to just one or two.
Part of the problem can be psychological. Business owners may believe things will eventually come right, while their identity can also become closely tied to the business they’ve built. If they assume liquidation is the only possible outcome, it can be tempting to put their head in the sand rather than find out what other options exist.
The $10 billion tax problem
One of the clearest indicators of the pressure businesses are carrying is overdue tax.
Total tax debt was sitting at around $2.5 billion to $4.5 billion in March 2020, depending on which figures are used. That figure is now around $10 billion.
There are also around 20,000 taxpayers with debt more than two years old, with that number continuing to grow.
Importantly, less than $1 billion of the roughly $10 billion total is owed by large enterprises. The majority of the problem sits with small and medium-sized businesses.
Unpaid tax can also grow quickly as interest and penalties accumulate. This can contribute to business owners feeling defeated as they watch the amount they owe continue to increase.
But owing tax doesn’t automatically mean a business has reached the end of the road.
There can be opportunities to negotiate, including arrangements where interest and penalties are written off or where part of the core tax debt is reduced. The outcome depends on the circumstances of the individual business, but the recurring theme is the need to be proactive.
Can businesses recover from historic tax debt?
For some businesses, the problem isn’t necessarily their current performance. They may now be operating in a positive position while still carrying legacy debt from previous years.
Working through that requires a realistic assessment of what the business can actually afford.
Rather than relying on an optimistic forecast of what the sales pipeline might deliver, cashflow needs to reflect what the business can reasonably achieve. From there, a proposal can be built around a repayment arrangement that has a realistic chance of succeeding.
This can effectively ring-fence historic problems and give the business an opportunity to move forward.
It also highlights why waiting can be so damaging. A business that seeks help while it still has options has far more room to negotiate than one that waits until it can no longer meet its obligations.
The domino effect of business failures
One business going into liquidation rarely affects that company alone.
Creditors can be left with unpaid invoices, putting pressure on their own cashflow. They may continue trading and absorbing that loss for another two or three years before eventually reaching their own breaking point.
That creates a lag between the original failure and the wider consequences flowing through the economy.
Around 3,000 small and medium-sized businesses are going into liquidation each year, while many others continue carrying old debt. As more businesses fail today, the impact on their suppliers, customers and creditors may continue emerging for years.
Why construction remains under pressure
Construction is particularly exposed to this domino effect.
Cash can take a long time to move through the different businesses involved in a project. Retentions can also mean 10% is held back, sometimes for a year, which may represent much of a business’s margin.
If the company holding those retentions then goes into liquidation and the money hasn’t been held in trust as it should have been, the businesses further down the chain can be left out of pocket.
Combine delayed payments with tight margins, cashflow pressure and debt management issues, and it becomes easier to see why construction represents such a significant portion of current liquidations.
Hospitality is also feeling the pressure
Hospitality is another sector experiencing significant financial stress, with insolvency numbers up by around 40%.
Managing stock and wastage can create challenges, particularly when demand changes unexpectedly. Seasonality adds another layer, with businesses needing to adjust their operations between busy and quieter periods.
Pricing can also become a problem.
If rent and other operating expenses increase but menu prices don’t reflect those costs, a busy venue isn’t necessarily a profitable one. A business can look successful from the outside while struggling to generate enough margin to cover its expenses.
More business owners are walking away
Perhaps one of the more concerning changes is the number of business owners who no longer want to start again.
Historically, someone whose company failed may have been more willing to restructure and continue operating through another entity. That still happens, but there are now more owners reaching the point where they simply want to find employment instead.
Years of financial pressure can take their toll. Some businesses may still have assets available when they’re liquidated, but the owner no longer has the appetite to continue.
The implications can extend beyond the individual owner. When a business closes completely rather than restructuring and continuing, employees can lose their jobs and economic activity disappears with it.
Despite those pressures, building a business can still provide significant satisfaction. Creating something, developing a team, setting goals and seeing people progress can all make business ownership rewarding. New technology can also create opportunities to build and operate businesses in ways that weren’t previously possible.
Key takeaways
- Liquidation numbers are at their highest level since the Global Financial Crisis.
- Construction accounts for almost a third of current liquidations, with cashflow, retentions and the flow-on effects of other failures contributing to the pressure.
- Many business problems are the result of several events compounding over time rather than one isolated mistake.
- Total overdue tax has grown to around $10 billion, with the majority owed by small and medium-sized businesses.
- Around 20,000 taxpayers have debt that is more than two years old.
- Acting early can create significantly more options for both businesses owing money and creditors trying to recover it.
- Historic tax debt may be negotiable depending on the circumstances, but businesses need a realistic view of their cashflow and ability to repay.
- Hospitality insolvencies are up around 40%, with stock, seasonality, pricing and operating costs creating additional challenges.
- Business failures can have a delayed domino effect, with creditors sometimes carrying losses for years before experiencing financial trouble themselves.
- More business owners are choosing to walk away rather than restructure and start again, potentially creating wider consequences for employment and the economy.
Next steps:
If your business is under financial pressure, carrying historic tax debt or you’re unsure what options are available, get in touch with Brent Norling and the team at Norling Law to start the conversation early.
If you’d like to watch more, check out this episode below.
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Disclaimer:
The information in this article is general information only, is provided free of charge and does not constitute professional advice. We try to keep the information up to date. However, to the fullest extent permitted by law, we disclaim all warranties, express or implied, in relation to this article – including (without limitation) warranties as to accuracy, completeness and fitness for any particular purpose. Please seek independent advice before acting on any information in this article.
