We love acknowledging and appreciating the success of a business, don’t we? The time, money, effort, luck- all that paved the success story are often encrypted in golden letters in history. But have you ever been so keen on acknowledging and discussing a business failure- relatively not, we presume? The topic gets swept under the carpet, maybe because we all like happy endings or because failure stories don’t lead to fruitful consequences.
Business failure is a term used to describe businesses that terminate trading due to hostile market circumstances, losses, fraud and inability to pay creditors.
At the present time, as the world battles a pandemic, we want to throw some light on business failures in New Zealand, because, believe it or not, a lot many businesses are suffering gravely amid the COVID 19 mayhem. But first, let us understand the reasons as to why businesses fail-
Why Do Businesses Fail?
In New Zealand, almost half of the businesses borne in the mid 2000’s without employees could not last for more than five years. This means that businesses and start ups do fail, but why would they? Let’s explore-
Firstly, there could be an issue with connecting well with customers, knowing the needs and how customers want a particular product. This helps businesses understand what service/product one should sell and how much one should sell it for.
Secondly, networking is key- advertisements, social media, brand ambassadors, events- all are the package that actually give validation to business’ designing, manufacturing and selling propaganda.
Thirdly, we feel that adaptability is an essential trait. Reaction to competition, technology or other changes in the marketplace is important as it keeps one very much in the game. For example- do you remember the Blackberry Boys anymore? Not as much you would know an iPhone or the recent Android launch.
There is another possible reason for businesses to fail- mismanagement. A business includes many parties like salespeople, marketers, accountants, investors and cleaners- how well are they managed and synced in their respective roles is utterly important for a business to be streamlines and eventually succeed.
Last but not least- businesses without a plan, ample cash reserves and risk appetite are prone to fail as cash flow is a business’ oxygen- impacting the dying, surviving and thriving aspects.
New Zealand Business Failure Overview
In the early years of European settlement in the Kiwi land, reckless immigration schemes, specs of capitalism and property speculation was a major reason for business failures. Reasons that have led to business failures in the country are Bankruptcy, corporate failure and fraud.
Since the 1960s several individuals have got into financial difficulty via extreme spending and use of credit, and not via a personal business failure. By the 1980s more than half of bankrupts were either wage workers or unemployed, and not employers or self-employed. Later on, there were 2,000 to 3,000 reported bankruptcies every year (in the 1990s and 2000s)
In the early 1990s there were more than 1,000 corporations that were liquidated every year. However, from 2002 to 2008 this number plummeted to less than 200 per year.
Let us look at few scenarios that showcase the history of business failures in New Zealand-
- The Standard Insurance Company was ~90 years old when it collapsed in 1961.
- JBL failed in 1972. Many investors and lenders lost money.
- Then came the 1987 share market crash, which swept the feet off ground for many businesses.
- From 2006, a number of finance companies collapsed, and investors lost their money.
A COVID 19 Consequence- Burger King Tearjerker
How much have you craved a nice burger while you abiding the lockdown rules of your country? Well, there is some sad news for Burger King lovers from New Zealand- owners of the franchisee have been placed in receivership owing over NZD 65 million. The reason is attributable to one word- coronavirus. The fast food chain that has more than 80 outlets across NZ has been hit hard from the COVID 19 lockdown as restaurants have been closed as part of the level four lockdown.
Receivership is one of the most serious situations that a limited company can face wherein a ‘receiver’ is appointed by the creditor to administer and ‘receive’ the company’s assets so that the secured creditors can recoup their money.
The parent shareholding companies of the chain have been put in receivership, which is part of a plan to find a brand-new owner. Receivers are expected to look for aid from both suppliers and landlords. Precisely, the aim is also to restart the business and find an owner who will be confident in the brand’s long-term prospects.
Reportedly, the developments would not affect Burger King staff’s (~2600 in number across NZ) terms of employment. The Government wage subsidy is helping to make payments to all the staff members in the lockdown period, but without any sale in the current times, it has resulted in worrisome cash flow to fund trade creditors, as well as make rent payments.
How Can Businesses Avoid Failures?
While the consensus believes that there are chances for New Zealand-based businesses to fail during the Covid-19 lockdown, the Government wage subsidy does embark a ray of hope.
For instance, the Central Bank, RBNZ has launched a TLF or Term Lending Facility, which is a new longer-term funding scheme for the banking system, in assistance to (Government’s Business Finance Guarantee Scheme) to aid boost lending to businesses. Official Cash Rate has been reduced (to 0.25%) and a Large-Scale Asset Purchase programme (LSAP) has been implemented amid the situation. Moreover, the bank has added NZD 3 billion of LGFA or Local Government Funding Agency debt to its LSAP.
Besides leveraging from this, businesses should ideally maintain a balance between getting cash in the door through sales and covering their expenses. They can also work on a strong business plan. Further, even when businesses are reliant on some level of credit, high debts should ideally be avoided, and so should unrealistic projections. An effective marketing strategy is another boon that should always be prioritised.
The pandemic has also directed that businesses need to look beyond the present and think about the future even when one can’t predict what tomorrow brings. Security against recessions and likewise turmoil can be controlled to some extent.