The problem of cash flow

Terry Sage of Trades Coaching New Zealand


This month’s story could be a sad one, is most certainly a very common one, has broken many families and partnerships, is totally avoidable and is definitely redeemable.

I am talking about that worldwide problem of “cash flow” or, more accurately termed, the lack of it.

It all starts with going into business under-capitalised, and we expect for the first job to pay for its generated costs.

Sounds like that’s the way it should work, but when you have to wait for payment and you have to pay some bills before the funds come in, the pressure builds up.

You also need money to live on until the job pays out, you need fuel, and you may have wages to pay — the list can actually become extremely long.

As the months go on, and if you are very frugal with your accounts, then it should all come right. But tradies are just not known for being frugal.

If you’re not careful, the problem just compounds, and your creditors increase, you get further into debt, the supplier accounts go on stop, and the stress goes through the roof. All because you had no money to start off with.

Now that’s a very simplified version of what can, and does, happen. There are many variations and even more contributing circumstances which make up all the stories of the thousands of construction liquidations.

There is a number one common factor that crops up in most cash-strapped businesses, and is one of the leading causes of liquidations. That factor is the Inland Revenue Department (IRD).

Before you start throwing things at the wall and shouting obscenities all directed at the IRD, it’s not their fault. They are only doing their job.

Yeah, they could do it a little more kindly sometimes, but if you pay your taxes they will not bother you.

So why do they become the common factor? It’s simple — they become that creditor that’s the easiest not to pay because we don’t have to see them every week — they are just a faceless entity.

To their own detriment and also yours, it can sometimes be months before they start chasing you, by which time the small amount has doubled, perhaps tripled, with the addition of interest and penalties.

From experience, I can tell you this problem is so common it’s scary. But, as mentioned earlier, in most cases things are definitely redeemable. It is also totally avoidable — if you started off with proper financial planning, forecasting, budgeting, reporting and collateral.

That’s a lot of ifs there, and in an ideal business set-up you would have had them all. But we live in a human world and not an ideal one.

So let’s skip the avoidable bit and concentrate on the redeemable, just in case you are one of the many thousands of businesses that owe money to that faceless entity.

How is it redeemable? First, get your head out of the sand and deal with it because ignoring it just increases the interest and penalties.

Second, open a dialogue and start talking to the IRD. You need to have a plan to repay. Don’t just say, “hi, you reckon I owe you a million bucks? That’s a load of rubbish and I can’t pay you, so what are we going to do about it?”

Work with them and they will work with you. Have a full cash flow forecast written, file an IR590 form, put together a workable repayment plan over 24 months, and look at the option of an up front lump payment.

Sounds easy right? Yeah, nah, never going to happen . . .

Just don’t stick your head back where it came from. There are companies out there that can do all this work for you or with you. Call your accountant — some of them are good at this and some aren’t interested. If all that fails give me a call and I will talk you through it.

Now don’t get your hopes up here, but there are lots of cases where the IRD has greatly reduced your debt with them because you have made an effort to pay.

Don’t be just another statistic just because your head was stuck.

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