Understanding your level of financial commitment

As a small business owner, it’s easy to love watching the takings from a particularly good week of trade or a big sale come flooding in.

As pleasant as this is, it will only ever tell half of the story unless you’re also closely watching what debts, bills and other financial commitments are coming due.

“New and small businesses can be very vulnerable to cash flow issues resulting from not understanding their level of financial commitment,” says Arpit Nagpal, a registered financial adviser from Aarit Finance Limited.

“Many people see an opportunity and jump on it, without working out if it’s a suitable opportunity, whether they can commit to it long-term and how they will manage their financial commitments as a result.”

Financial commitment and cash flow

Financial commitments are pledges to meet certain expenses in future. They can include your rent, utilities, insurance, loan repayments and tax bills.

Inland Revenue Department (IRD) spokesperson, Gay Cavill, says when small businesses have a good understanding of their financial commitments, they are better able to plan, expand and succeed in business.

“Knowing financial commitments that relate to your specific small business industry, your business cycle and the stage of your business, will see your business better placed to meet its commitments as they fall due,” says Cavill.

Nagpal adds that being well aware of your financial commitments – and limits – will usually translate into a business that boasts a healthy cash flow.

“If you’ve got a liability coming up in a few months’ time or a year, you need to be thinking ‘how much funds do I need and how can I achieve that?’” says Nagpal.

A 5-step financial commitment planning process

Here’s how Nagpal recommends businesses plan for regular financial commitments in five simple steps:

  1. Identify your financial commitments: make a list of all business activities that trigger financial responsibilities. This could include employing staff (wages and super), opening your doors (rent/mortgage repayments, insurances, utilities and subscriptions) and tax obligations.
  2. Save the dates: identify when each of these obligations is due, set yourself reminders. (Here’s an infographic with the key 2019-20 end of financial year dates you need to know).
  3. Do your sums: next you need to calculate how much each of these financial responsibilities is going to cost you. Adopting good record-keeping practices and leveraging digital accounting software, can help you to regularly estimate the cost of your obligations. Review your obligations every quarter or six months. And keep a buffer for unexpected expenses.
  4. Set aside funds: separate your business finance from your personal finance and dedicate a certain business account (or accounts) to meeting your financial commitments. Regularly move the estimated cost of obligations into that holding account. Nagpal says strategies for meeting commitments can include ramping up your savings and finding new opportunities when business is quiet.
  5. Pay on time: avoid penalties – and take advantage of potential discounts – by paying on time.

Keep a close eye on your financial obligations

As a small business owner, it can be tempting to focus on the sexier parts of your business: the marketing, the networking, the graphic design, the website tinkering.

However, all too many businesses overlook the importance of cash flow, budgeting and planning, and by the time it’s finally caught their attention it can be too late.

“It’s important to know when to seek assistance, funding and/or investment into your business before things start to go wrong,” Cavill says.

Nagpal adds: don’t be afraid to reach out for help.

“Sometimes you need to raise a flag to say ‘yes I need help’,” he says.

The information on this website is provided for general information only and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from financial, legal and taxation advisors. Although every effort has been made to verify the accuracy of the information as at the date of publication, Prospa, its officers, employees and agents disclaim all liability (except for any liability which by law cannot be excluded), for any error, inaccuracy, or omission from the information for any reason, including due to the passage of time, or any loss or damage suffered by any person directly or indirectly through relying on this information.

How to improve your credit score

It’s the sort of thing that is rarely front of mind, but a poor credit profile can put the brakes on a business looking to grow, limiting your access to business finance or making it more expensive.

It’s common for your credit history to be checked when you’re seeking a business loan to purchase say new machinery or fund a business expansion, adds Business Development and Performance Coach Gaylene Hughes, from JDI Business Coaching.

“In the event that you’re buying an asset, a good credit history may mean you can borrow at lower interest rates when the need arises,” says Hughes.

“It’s important to remember that your personal and business credit history are linked and follow you.”

What is a credit profile

It’s best to think of your credit profile by breaking it up into the following two categories:

Credit report – contains information about your credit history including your credit score, current borrowings, all the times you’ve been given credit by a bank or company, unpaid or overdue loans, court judgments against you, and payment and default history.

Credit score – this score is calculated based on your credit report. Each credit reporting agency has its own formula that usually ranges from zero to 1000, but sometimes as high as 1500. The higher the score, the better.

In New Zealand, there are three main credit reporting companies: Centrix, illion and Equifax.

It’s free to get a copy of your credit report, but like most things in life, if you want the information quickly, you’ll need to pay for it.

How to improve a poor credit score

In New Zealand, you have the right to ask for a copy of your own credit report, and check and correct information that’s wrong.

You can request a copy of your report as often as you wish, and credit report companies are obligated to provide it without too much delay. They can charge a small fee if you want the information within three working days, but not more than $10.

If you unexpectedly find out you have a poor credit score, the first step is to look for mistakes and get them corrected.

If you believe that your poor credit rating is the result of fraud, you also have the right to ask that your credit file is ‘frozen’ and not released to anyone without your permission. You can then complain to the credit reporting company.

The Office of the Privacy Commissioner explains that freezing your report should make it more difficult for a fraudster to obtain new credit in your name, as credit providers will usually not grant new credit when they’re unable to do a credit check.

If your poor credit score is not the result of a mistake or fraud, improving your credit score might take time.

Indeed, a default can stay on your credit record for up to five years, even after you have paid the amount in full.

Rest assured though that credit reports include both positive and negative credit history, so there are steps you can take to improve your credit score over time.

8 tips for improving your credit score

Hughes shares her eight tips for improving your credit score:

  1. Pay bills and make loan repayments on time. “Set up weekly or monthly automatic payments if you can, from an account that’s harder to access.”
  2. Check for mistakes. Everyone makes mistakes, including credit reporting agencies. So make sure they don’t negatively impact your business by checking your credit report for errors.
  3. Manage your cash flow. “It’s important you understand your cash flow and avoid any penalty charges, especially for unpaid or partially paid PAYE, GST and tax to the Inland Revenue,” Hughes says.
  4. Transparency. “If you do get into trouble with creditors, talk to them. They’ll possibly be open to putting a payment plan in place: better to be paid something than nothing.”
  5. Don’t maintain more debt than you need: You shouldn’t be scared of debt, but too much can be your undoing. “Live within your means. Don’t be swayed by sales talk or a ‘special’ that’s just too good to be true. That can result in overcommitting to things you can’t pay off.”
  6. Consolidate. “If you have a credit card, ideally pay it off each month. If you have more than one credit card, consolidate the debt onto one card then cut the others up. Carefully manage any corporate credit cards within the business by regularly reviewing and paying these.”
  7. Know your numbers. “What’s your income and what are your regular outgoings? Live within your means where possible and get some budgeting advice – it’s amazing where you can make savings.”
  8. Follow up debtors. “Regularly follow up people who owe you money and remember it’s not a good thing to have too many eggs in one basket – do work for more than one customer.”

The information on this website is provided for general information only and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from financial, legal and taxation advisors. Although every effort has been made to verify the accuracy of the information, Prospa, its officers, employees and agents disclaim all liability (except for any liability which by law cannot be excluded), for any error, inaccuracy, or omission from the information or any loss or damage suffered by any person directly or indirectly through relying on this information.

Business loan or personal loan? Options for funding your small business

Small business owners often use their own money or personal finance to grow their operation. Business funding, however, can be a more attractive alternative – for many reasons.

When you launch your own small business, your business and personal lives can easily become intertwined, as well as your finances. If additional funds are needed, small business owners often take out personal finance rather than business finance, as it may seem easier to access. But this is not always the case, with new alternative lenders providing fast and easy business finance solutions.

The risks of putting personal finance into your business

Accessing personal finance to fund your business can be fraught with danger.

“The biggest risk of injecting personal finance into your business is that you’re not going to derive any income, and you’re not going to be able to pay yourself back,” says Melissa Bailey, head of operations at Kiwitax, which has been working with small businesses in New Zealand for over 13 years.

“If you’ve obtained personal debt to be able to inject the business with the funds, then if the business isn’t going to derive an income to be able to service that personal debt, then you’ll be personally liable for that debt.”

Keeping your business finances separate

Ideally, says Bailey, any debt a business takes on should be in the name of the business, rather than personal debt in the name of you as an individual.

“It’s always best to have the separate entity and keep the finances separate,” she says. “If you’ve got a company, trust or partnership, then it would be best to have that finance under the name of that entity. It’s always tidier to have separate entities with their own separate liabilities.”

As well as being tidier and easier to manage at tax time, a good history of repaying debt can add value to a business in the longer term, as you’re building a strong credit history.

“If you have had finance and you have kept up with the repayments, then the creditworthiness of your business will increase,” Bailey says.

Taking on good debt

The word debt usually has negative connotations. However, Bailey explains it’s important to understand the difference between good debt and bad debt.

“Business is all about generating income,” she says. “Often you need to purchase assets, and the aim is to generate or derive a greater income from those assets directly. Or you may need to purchase stock in order to generate revenue,” she says.

“People don’t often have a big chunk of funds sitting aside to buy assets, and it’s not always a good idea to use that money in the bank account to pay for an asset anyway, because an asset is not claimable in the year in which you purchase it due to asset depreciation rules.

“Finance is really good for enabling the business to get assets from which to derive income – that’s good debt, it’s income-producing. That’s a real plus about finance.

“It’s the ability to buy assets without affecting your liquidity.”

Taking out business finance can also be tax-efficient, says Bailey, in that interest can be claimed as a deduction for the business.

“Any finance is, of course, going to generate interest charges,” she says. “However, all of those interest charges are claimable in the entity.”

If you’re looking to expand your business, buy new equipment or simply manage your cash flow during a quiet period, find out how a Prospa Small Business Loan could help. Get in touch on 0800 005 797 to discuss your options or find out more.

The information on this website is provided for general information only and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from financial, legal and taxation advisors. Although every effort has been made to verify the accuracy of the information, Prospa, its officers, employees and agents disclaim all liability (except for any liability which by law cannot be excluded), for any error, inaccuracy, or omission from the information or any loss or damage suffered by any person directly or indirectly through relying on this information.