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For many years, the low value asset threshold for depreciation had been set at $500.00. This meant that everything over $500.00 had to be capitalised and depreciated as a fixed asset. The cost of many business items has increased significantly since the rules were last reviewed. At the same time, the useful life of the items has decreased. This is why the government was reviewing the rules and planning to increase the threshold.

The pandemic came along and the under review low value asset rules were a perfect option to allow some quick action to help stimulate business investment. The updated rules were one of the first COVID-19 Business Response measures, announced in March 2020.

The New Low Value Asset Rules

From the 17th March 2020, the low value asset threshold for depreciation has been increased to $5,000.00.

This is a ten-fold increase from the previous threshold of $500.00. The governments intention for this is to spur business investment. It is hoped that businesses will be encouraged to spend more in order to take advantage of the ability to expense items costing up to $5,000.00. This was a direct reaction to the drop in business confidence as a result of COVID-19.

12 Month Time-frame for New Rules

This new threshold is strictly limited and expires on the 16th March 2021. In order to expense a low value asset costing up to $5,000.00, you must purchase it on or after the 17th March 2020 but before the end of business on the 16th March 2021.

There was initially some confusion around when the rules would come into effect. This was largely due to the chaotic situation in the early days of the pandemic and the requirement for the rules to be amended by legislation. The 12-month period is as outlined above and is not in line with the standard 2020-2021 tax year.

Low Value Asset Rules from March 2021

From the 17th March 2021, the low value asset threshold for depreciation will be $1,000.00.

This is double the old limit of $500.00 and is in line with the original uplift intentions signaled before COVID-19.

There is no time limit on this adjustment. It will remain effective until varied by future legislation.

Benefits of the Adjusted Low Value Asset Rules

Benefits for Small Business Owners

If you have been put off investing in your business because you would have to wait years to claim the full tax benefits, this may be the opportunity you have been waiting for. Need a few new computers? Now’s the time to invest. Need to refresh the workspace to make it a bit more inviting and productive? Now’s the time to invest. Need to optimise your online presence for post-covid growth? Now’s the time to invest.

If you run a small business selling to other businesses, this is a perfect opportunity to market the tax deduct-ability of your products. For many savvy business owners, it might be just the sweetner they need to convince them to spend up to $5,000.00 with you.

Benefits for Residential Property Investors and Landlords

The Healthy Homes Standards are a potentially costly burden for may landlords and property investors to bear. These changes offer the ability to implement the required expenses and claim the full tax deduction in this tax year.

This means that you can invest in the new heatpump, glazing or insulation and claim the full amount as an expense (as long as it remains under $5,000.00).

The requirement for you to include a statement of compliance with the Healthy Homes Standards has also been extended by the government. You were required to comply with this new regulation from the 1st of July 2020. This has now been delayed until the 1st of December 2020.

There will not be a better time to get the required upgrades done.

Depreciation Adjustments Announced with Same Legislation

The government also announced changes to the commercial investment property depreciation rules in the same package of tax changes. This will allow depreciation in much the same was as prior to the 0% rules which were passed in October of 2010. If you would like to view the IRD information on this announcement, click here. This depreciation rule may apply to your AirBNB properties.

 

If you would like a run-through of the new rules and how they may benefit your business, feel free to get in touch with us. You can book in a free chat with one of our team or simply flick us an email.

New Zealand’s Budget 2020 was promised to be the “jobs budget” by the Prime Minister just prior to its announcement.  Unfortunately, it is difficult to see how this budget saves or creates many jobs in the short to medium term.  Of course, it must be noted that there is $20Billion+ in COVID-19 recovery spending yet to be announced and some of this additional funding could be well-targeted.

There are a few announcements that will certainly save or create jobs in the long-term.  These include:

An existing $12Billion infrastructure fund has been increased by an additional $3Billion. This $15Billion will be used to fund soon-to-be-announced infrastructure projects.  Some 1,500 projects, totaling $136Billion, have applied for a share of this funding. This suggests we may see less than 200 projects actually break ground nation wide.

This additional $3Billion will help to plug the gap that will inevitably be left by private and council infrastructure schemes that are deferred or cancelled. So this will likely save jobs as opposed to create many new ones.  However, while changes are being made to the Resource Management Act to fast-track these projects, it is still safe to assume that it will take some time for these projects to commence. This will add to short-term pressures in the infrastructure sector with skilled workers in high demand globally.

8,000 additional public/transitional homes will be built. This will undoubtedly help save the jobs of builders as some private sector projects will likely be delayed. We have already seen some developments delayed till next year at the earliest based on the prospect of falling house prices making them less economical in the short term. Like with the infrastructure boost, this will not happen overnight. The government has already demonstrated how difficult it is to build even 1,000 homes over the past two years. This suggests we may be waiting at least 8 to 16 years to see the outcome of this announcement.

11,000 “green jobs” will be created in the regions.  These will be for the likes of pest and predator control and in upgrading DOC tracks and huts.  These initiatives will add real value to the nation, but again these jobs will not be created overnight. Many of these jobs will also not be long-term. With predator free targets in place and limited land for planting trees, once the work is done what will these jobs evolve into?

$1.6b towards training – a significant investment will be made in training.  Long-term this will definitely benefit New Zealand, but it will do little to solve the immediate problems created by the pandemic.  It is also questionable whether jobs will exist for these newly up-skilled people in a potential recessionary environment. The infrastructure spending and target of 8,000 homes will give some work. However, policy and legislative pressures on other sectors to benefit from the training boost, like farming and the primary sector, will likely see less demand for jobs in this sector over time. This investment needs to be targeted to the future of work or the government needs to change its legislative agenda towards the primary sector if it wants these trainees to have somewhere to work.

Policy consultants and bureaucrats. While very little funding has been allocated towards assisting the private sector, the Government sector has been sprayed with “helicopter money”.  This will certainly support the Wellington job market and economy.

What is in Budget 2020 for Small and Medium Businesses?

Disappointingly, there is very little in this budget in the way of near-term support for businesses. However, Government spending is stimulatory and there is certainly no shortage of new Government spending in Budget 2020! There is no doubt that this additional spending will help support the economy in the long term. However, it will take some time for the stimulatory effect of that spending to filter down into the wider economy and many small businesses are crying out for help now.

In terms of short-term relief, there really isn’t much for businesses (yet).  However, here are some of the measures that were announced:

  • An 8-week extension to the Wage Subsidy for businesses that have suffered a 50% decline in revenue for 30 days prior to applying for the extension when compared to the same 30 days last year.  See below for more detail on this.  This will be a welcome relief to the accommodation, hospitality and tourism sectors who are really hurting.
  • A $400m tourism recovery fund.  This seems to be aimed mainly at accessing advice around adapting tourism businesses towards domestic and Trans-Tasman markets. There also appears to be a focus on marketing New Zealand to Kiwi’s. Unfortunately there was limited detail in the budget announcements and it seems this fund is destined to be ‘working grouped’ over the coming weeks.
  • $150m in loans to R&D providers.
  • Additional funding for WINZ to place 10,000 primary sector jobs.
  • Financial support for businesses to retain apprentices.

Overall, the $50Billion COVID-19 recovery fund includes just $4Billion in business support. With $3.2Billion of this being consumed by the extension to the wage subsidy there is certainly not a lot to be optimistic about in the short to medium term. These announcements have simply bought the government a few more weeks to come up with some targeted, practical support for the sectors most damaged by the economic shutdown.

Extension to the Wage Subsidy Scheme

From the 10th June 2020, businesses who continue to be severely affected by COVID-19 will be able to apply for another 8 weeks of Wage Subsidy. Applications will be open for the extension for 12 weeks from the 10th June 2020.

The qualifying criteria around turnover has been substantially tightened from the first phase of the scheme. To qualify, a business must have suffered a 50% turnover reduction for the 30 days before the application is made compared to the same period last year (or a comparable period for a business that is less than 12 months old or experiencing high growth before COVID-19).

The same full-time rate of $585.80 and part-time rate of $350 will apply. At this stage, we understand that all other criteria will remain broadly the same.

Hospitality and Tourism Sectors

It goes without saying that two of the worst affected sectors are tourism and hospitality.  The shift to Level 2 is only a partial relief in these sectors so the extension to the wage subsidy will be much welcomed news for these businesses struggling for survival. While the wage subsidy scheme is not without its flaws or critics, there is no doubt that so far it has saved jobs and businesses, especially in the hospitality and tourism sectors. However, many employers in these sectors are going to need more than just the wage subsidy to survive long enough to be around for the recovery.  Presumably, there will be some more targeted relief in the coming weeks, but what these sectors need the most is some certainty about when restrictions will be loosened so that they can properly plan ahead and take necessary steps to mitigate the losses until they can begin trading again.

Tax Changes in Budget 2020

No tax changes were announced in budget 2020. However, New Zealand’s debt is forecast to balloon from $118Billion to over $317Billion in the next 4 years. Core crown debts alone will be well over $200Billion, 54% of GDP. This massive increase in Government debt and makes future tax increases a very strong possibility, if not ineviatble.

Where will the Additional $20Billion+ in Spending Go from Budget 2020?

As we mentioned earlier, there is still approximately $20Billion+ in funding to be allocated. The Finance Minister suggested that there will be further announcements in the residential housing space but hasn’t really signaled where the rest will go.

Perhaps the Government wants to stand back and get a feel for how much of a positive impact shifting to Level 2 has before deciding how to spend this money.

Considerable Room for Improvement

While the government has moved quickly with things like the wage subsidy to help save jobs in the immediate term, the recent announcements in budget 2020 have very little impact where it is most needed. We will continue to monitor announcements closely to see if some targeted, long-term relief is announced to support the hundreds of thousands of small and medium businesses across New Zealand. These businesses are a lifeline for countless families and the backbone of local communities across the country. While large organisations benefit from hundreds of millions in loans and large infrastructure projects, the government has so far overlooked the little guys in their long-term plans.

We’re Here to Help

At MBP, we’re here to help. The government’s additional COVID-19 funding for the regional business partner network has already dried up after helping less than 1% of the businesses desperately in need. That’s why we partnered with local business leaders to fully fund a range of our services that are essential for business survival and success in the face of the challenges we are presented with.

If you and your business need a hand, reach out and book in a chat with our team. We’re happy to help however we can.

Before you go down the path of seeking capital from outside your business or borrowing funds, identify any other ways of raising capital. If you need funds then sometimes it’s not a loan that you need.

Identify areas in the business to make savings

There’s a good chance that you can generate at least some of the capital you need by using business savings. If you can generate the cash internally, it’s often a better option that increasing your debt or taking investors on board. Look at how much you’ve got available in cash reserves or what contracts or payments are due.

Then look at ways you can make savings and increase your cash flow, such as selling equipment you don’t use very often (and leasing it when you do need it), cutting down on travel expenses, moving some staff from full-time to part-time roles, re-negotiating deals with suppliers for better credit terms and reducing your own salary.

It’s also important to chase up any late payers. Make sure you have robust systems in place for handling debt and collecting what you’re owed.

You’ll be surprised at how much all these savings can add up, generating more cash in the business that can be used to reinvest in business growth.

Shorten Cash Cycles

Shortening your cash cycle will increase your cash reserves, keeping your business going and providing a buffer in times of financial uncertainty. The longer your business goes without cash, the longer it takes you to pay your creditors, and the riskier your business becomes. Encourage your customers to pay using online and mobile payment options – the cash is then in your account immediately. If you have to invoice, do it immediately and incentivise your customers to pay early, such as offering discounts. You can also shorten your credit terms.

Focus Your Attention on Sales

Increasing sales is one of the best ways to improve profitability and bring more cash into the business. There are a number of different ways you can improve your sales numbers, such as making sure you and your staff are all trained in how to cross-sell and up-sell, investigating new distribution channels like an online store, implementing a professional sales system so that you can track customer buying behaviour and predict their needs, or even look into franchising your business if demand warrants it.

It’s important to remember the 80/20 rule: 80% of your sales will come from 20% of your customers, so look into ways you can sell more to your existing customers while still trying to gain new customers through your marketing strategies.

It’s always worth considering a price increase too. There are ways to increase your prices without losing sales, and it’s something that should be done now and again, even if it’s just to keep up with inflation.

Alternatives to Capital

Before you jump into researching the different sources of capital that are available, first consider the alternatives. It could be that, depending on what your growth goals are, you don’t actually need extra capital, you just need to be thinking a bit more creatively.

Raising Capital to Grow Sales

If your main goal is to increase sales, you don’t always need extra cash to be able to do this. There are other options that can help your sales numbers and it’s worth looking into them before you go borrowing money.

Strategic alliances are often worth checking out. Business owners are increasingly discovering the advantages of joint ventures and strategic alliances and many experts see strategic alliances as one of the best paths to rapid growth. There are many ways in which you can work with other businesses or people, ranging from short-term joint ventures to more formal long-term commitments. You can form strategic alliances with suppliers, with customers or with complementary businesses or with non-profit organisations such as charities. Think of how often you see a Subway attached to a service station.

It might also be worth looking at updating your business model. A change in your business model might help you find new opportunities for growth to increase your business’s revenue. Direct selling is the shortest route between your business and its customers. It involves buying directly from you without any go-between. It’s probably the simplest and certainly the most direct business model.

Like many businesses, you might currently sell some items through the web but is it time to make a bigger investment in the online world? Global e-commerce is rising daily and the opportunities for growth are significant.

Whether you want your goods distributed widely through wholesalers or via carefully selected retailers, the tweaks you can make to your distribution channels are almost limitless. If you’re a retailer, you might consider also selling at the wholesale level, and vice versa.

Raising Capital to Expand

Your goals may be more focused on expanding your business and you’re considering how to increase your capital to do this. Before you borrow the funds you need, consider other ways of achieving expansion.

For example, look into leasing equipment instead of buying it. If you want to boost your capacity so you can handle more orders, that doesn’t necessarily mean you have to fork out for the additional equipment you’ll need – you can lease it. The monthly lease payments are often less than what loan repayments would be. You can also lease equipment only when you need it, rather than having it sitting around gathering dust and being unproductive when you don’t.

It’s also worth looking into contracting out some work, especially for large projects. Contractors will often have all the resources they need to handle work, and when you bring them on board you’re getting access to those resources.

You could also consider forming partnerships to jointly produce your goods. For example, if you manufacture coffee tables, you might align your business with one of your suppliers, making it cheaper to get the raw materials you need.

Talk Through Your Options for Raising Capital

There is a lot to consider when looking at raising capital. To talk through all your options, get in touch with an MBP Business Partner. You can book in a free 30 minute chat with us HERE.

Dealing with a sudden cash flow crisis, even if you’re working hard to avoid shortfalls, is hugely distracting. A formerly reliable customer might take much longer to pay than anticipated or a large consignment might fail to show up, leaving you out of pocket. If you’re starting a business, it could simply be taking longer than expected to turn a profit.

Red Light Warnings for a Cash Crisis

Develop red light systems to warn you automatically if something needs querying:

  • Check as early as possible if leads, orders, or sales, fall below a certain threshold, or if planned sales are delayed or a substantial customer stops buying from you.
  • Key indicators such as profit margins, liquidity ratios and stock ratios deteriorate beyond an agreed limit. Make sure you have regular feeds of how your business is performing.
  • You also need to know about any substantial invoices that are in dispute, particularly late debts and customers exceeding their credit limits.

Building productive relationships with your key suppliers is important, so they are prepared to extend extra credit to you when you need it.

If you have accounting software then it should be relatively easy to view your red flags weekly, monthly (or any period you set).

Identify the Causes of a Cash Crisis and Take Action

Below are some common causes and possible solutions of a cash crisis you may need to solve:

  • A major customer hasn’t paid on time. Implement stricter credit control and better debt collection procedures. Contact them to ensure you have the right purchase order and the invoice has been sent to the right person. Even check if your contact has gone on holiday and forgotten to pass on your invoice.
  • A rise in the cost of production has eroded your profit margin. Try and source less expensive materials or supplies or decide if you need to raise your price. Monitor your gross profit margin for any further profit slippage.
  • Your business overheads have blown out. Identify specific expenses that have increased and see how you can reduce them. Regularly monitoring your net profit margins to spot any out-of-proportion increases so you can take timely action.
  • Your business is growing faster than your capacity to fund the growth (your working capital). There’s usually a time gap between selling goods or services and getting paid by customers. Meanwhile there are bills to pay. See if you need to slow down to avoid failure through overtrading or raise the necessary working capital to get you over the temporary cash shortage.
  • Sales have been slower than predicted. Review your marketing plan and sales campaigns. Alternatively, if you can’t see any future improvement in immediate sales, consider other markets and targets.

There may be other causes such as the failure of a major contract or you bought a large asset at the wrong time and you now need that cash reserve for working capital. In each case, understand the cause and the action you’re taking to avoid a repeat, such as diversifying your customer base or using your cash flow statements and forecasts to time purchases more appropriately.

Sourcing Finance in a Cash Crisis

If you do find yourself in a cash crisis (it’s a temporary hitch and the business is still sound), there are a number of funding options to consider, ranging from self-financing or bank loans to finding a business partner. The relative attractiveness of each option will depend on the size of your cash flow shortfall and how long you’re likely to need the cash.

Internal Funds

Before you look for external sources of funding however can you free up cash from within your business? For example:

  • Offer customers a discount for early payment or ask them to pay immediately.
  • Offer for customers to pay by credit card when usually you don’t.
  • Hold a sale of surplus or slow-moving stock to raise cash quickly.
  • Ask suppliers to take back excess stock and a credit or give you longer credit terms.
  • Sell underused assets and rent the equipment instead, as and when required.
  • Downgrade or sell vehicles and lease instead.
  • Reduce your drawings from the business until revenues improve.
  • Your accountant and advisers may be able to suggest other ways to release the locked-up cash in your business.

Bank Loans

If you need a business loan and have a good banking track record, it could be little more than a formality to get a higher overdraft facility or access to a business loan to tide you over. If you’re going to need quite a lot more money, you’ll likely have to present a more detailed business plan and financial forecasts.

Invoice finance

If you have cash tied up in unpaid invoicing, you might qualify for invoice finance. This facility enables you with immediate access up to 80 per cent of the value of any unpaid invoices that your business might have. It helps free cash flow by releasing money from unpaid invoices as and when you need it.

Partners and Investors

If your business can’t afford to service loan repayments out of surplus cash flow, then it may need more capital so you could consider taking on a business partner to invest in your business. There are advantages but also pitfalls to avoid. Get expert advice first from your accountant and your lawyer – they may know of suitable investors. Be aware that you’ll need to share the ownership of your business if you go down this path.

Family and Friends

You could ask family, friends or business colleagues to help out with a temporary or longer-term loan. It’s best to put the agreement in writing and get everyone to sign it, so that both sides are clear on what has been agreed. Be aware that this sort of agreement could strain personal or working relationships if things go wrong, so treat it as a last option.

Summary

Managing cash in a crisis is stressful for any business owner, but you do have options starting with preventative measures such as cash flow statements and forecasts and sourcing finance.

Need to talk about your cashflow and options? Book in a free chat with the team at MBP here.

If you’ve been reviewing your business’s financial position and are looking for ways to improve your cash flow, one of the first things to look at are your expenses. As your business grows, so will your costs, but there are things you and your employees can do to keep them down as much as possible and so improve your cash flow by optimising overheads.

It’s important not to rest on your laurels. Continually thinking of ways to reduce your overheads is essential for a healthy cash flow, so conducting regular reviews of your business expenses should be a regular task.

Reducing Expenses

Although there’s no getting around paying for things like phones, internet, power, office equipment and rent, there are ways to optimise these overheads and keep these costs to a minimum. Review these expenses and consider the following:

  • Communications – with fierce competition in this industry, it should be easy for you to negotiate a better deal for phone and internet use. Talk to your current supplier about a new deal and if they won’t come to the party, shop around for a new one.
  • Energy costs – some of this is obvious, such as turning off things when they’re not in use. Green energy options are worth looking into, especially if you’re shopping around for a new energy supplier.
  • Rent – if your business is not client-facing, you might consider working from home. Not only can you claim your home office as a business expense, but not paying commercial rent is a huge saving. More and more businesses are becoming virtual – it’s worth considering if yours can be as well.

It’s worth joining industry associations relevant to your business. They often organize discounts for their members. And the networking contacts you make will often have ideas about savings or deals they’ve made that are reducing their expenses.

Outsourcing

The great thing about outsourcing is that it frees you up to spend more time in activities that grow your business. This is especially true of administrative tasks, so you could look at outsourcing:

  • Payroll – this is time consuming and often stressful, especially if you make mistakes. Outsourcing this task eliminates those factors and frees you up for more profitable activities.
  • IT systems – unless you’re an actual IT-based business, retaining someone to look after your IT needs is a very costly expense. Outsourcing your IT often means you can negotiate a contract that’s almost as good as having someone on site because there’s lots of competition in the IT industry.

You might also want to consider reducing your staff expenses by converting some of them to part-time instead of full-time employees, especially if the workload justifies it.

Ways to Save

There are a number of things you can look at here, tried-and-true methods for keeping costs down. Some of the most effective are:

  • Business taxes – talk to your accountant or a business tax specialist about ways you can legally save on your taxes. For instance, can you claim an area of your home as an office, which is a legitimate business expense?
  • Importing – you could look at importing your business’s raw materials. It could be that they’re cheaper to buy from an overseas supplier than the one you’ve been using locally.
  • Make the most of technology – moving your accounts to a cloud-based system, reducing manual paperwork processes and communicating with your customers over Skype or Zoom instead of visiting them face-to-face will all help reduce costs. You can even have your staff work from home and, as mentioned above, save on renting a commercial space.

Summary

As with most things in business, optimising overheads comes down to planning and creative thinking. Talk to your staff as they might have ideas on savings, and it’s important to make sure that they’re doing what they can on a regular basis to keep costs down.

It is also important to keep in mind that cutting expenses can often lead to a slower recovery for your business following a cashflow crisis. Making smart choices in what to save on so that you don;t limit your ability to scale back up in the future is essential to your long term survival.

Optimising overheads by cutting costs is a short-term solution to what may be a long term issue. If you need some advice and support, reach out to the team at MBP for a free 30 minute consultation. You can book a chat with us HERE.