Saurav Wadhwa
Covid-19 and the subsequent lockdowns at various levels have affected the global economy and New Zealand is not immune to the adverse effects of the pandemic. The measures announced by the government have had some softening impact, but small business owners are among the worst hit and will continue to face tough challenges for a length of time. The following ten steps should help them to revisit their financial position.
Wage Subsidy: Round Two of Wage Subsidy is available until September 1, 2020.
If you meet the criteria and have not already applied, then, please do so.
Round Three of Wage Subsidy (called Resurgence Wage Subsidy) is for two weeks of payment and is open till September 3, 2020.
The criteria are similar to the previous one, the main being a drop in revenue.
A revenue drop of at least 40% because of Covid-19 for a 14-day period between August 12 and September 10, 2020, compared to a similar period in 2019.
The scheme of Wage Subsidy is being administered by Work and Income Department.
Small Business Cash Flow Loan Scheme: If you meet the criteria for Wage Subsidy, you are also eligible to apply for the small business loan. This loan is provided by the Inland Revenue Department (IRD). Application are open till 31.12.2020. The maximum amount loaned is $10,000 plus $1800 per full-time-equivalent employee. The annual interest rate will be 3% beginning from the date of the loan provided. Interest will not be charged if the loan is fully paid back within one year.
Estimate Provisional Tax- Tax year 2020 might have been a good year for you. It also means that your provisional tax due on 28.08.2020 (first installment) will be 5% up on 2020 tax. Review your numbers and estimate Provisional Tax for 2021 to ensure that you are not burdened by unnecessary tax bills. For example, in 2020, your taxable income was $200,000 on which, $56,000 (28%) was paid as Income Tax. However, the last five months of results show that you have experienced a drop in revenue.
Thus, it should coincide with the Income Tax for 2021. Perhaps you need to estimate the tax bill 2021 to be 40% below in 2020 to $33,600. It means that your P1 payment due on 28.08.2020 will be $11,200 as opposed to $19,600.
Contingency Cash Reserve: You should ensure that you have minimum of three months of Cash Reserve. In order to build your Contingency Fund, look at all your business and personal expenses for a month. These expenses should be fixed in a nature that is not related to the proportion of income.
It means that you should calculate your expenses against no sales for three months; multiply that number by three. The sum that you get is the amount you should have in your Cash Reserve Fund available on demand.
Review of Insurance Policy: Insurance is a very complex area. The insurance industry is under fear. You can easily under or over-insure yourself. Look at what Risk you are insuring (Life, Health, Car, Fire, Theft). Then look at what is the realistic probability of it happening. What is the insurance expense vs your business or household income? Perhaps this is the time to do comprehensive review of your insurance policies.
Review of Personal/Business Debt Structure: Some small business owners are too busy to review their finances. You can make a list of all your debt, including car loan, home loan, business loan and others. Include the principal amount owing, interest rate and time left on the loan.
Do a comprehensive review of your loans. The idea is to shift the high interest rates loans to the low interest rate. For example, look at ways how can you shift credit card balance or car loan to the home loan rate. For your home loan we all are in highly volatile interest rates situation. You can divide your home loan into three parts, then fix them for six months, one year and two years. By doing so, you will diversity your risk and hedge yourself from up/down in interest rates.
Property Investment: This depends on your personal financial position. If you own three to five properties, you may want to consider selling a property. Currently, the market is very hot. You can sell a property and reduce your lending. However, if you do not own a property, it may be a good idea to invest now. Basic financial principles are a key in making right decision.
Diversification is important- do not put all your eggs into one basket. If all your investment is tied into financial markets (KiwiSaver, Stocks, Bank Deposit), then you should diversify into property.
Look at the yield percentage, rental demand in the area and other important factors.
Hedge yourself from any volatile financial set back: Review all your assets. Only look at income-earning assets. Divide them into three categories, namely Cash (Bank Deposits, Term Deposits), Paper Assets (Stocks, KiwiSaver, Managed Funds) Real Assets (Land, Building). Include all assets that you own in New Zealand and Overseas.
Make a list of these assets including market value, date of purchase and the net yield percentage. Then look at financial principle that how you can hedge your assets from any volatility.
Customer Services: As a small business owner, Customer Services is a key to your business success. You need to communicate with your customers. If they are struggling offer them ways you can serve them better. Help them. Offer them multiple ways they can contact you. Offer them various payment options. Remember the most important thing is we are all in this together.
Investment in IT: Investment not only means investing your money but also investing your time.
You must learn new things such as use of online meetings, digital paperwork, virtual collaboration and so on. You need to ensure that you have a policy against fraud, spam and any unauthorised use of your emails, phone and websites. A simple, two-factor authentication which is offered by most providers can add an extra layer of security.
You can install two factor authentications on your online software, Emails and Websites.
Saurav Wadhwa is a Chartered Accountant and a Tax Specialist. He is the Managing Director of the Auckland based firm IBBZ Accounting Limited. He can be reached on 027-5555458. Email: saurav@ibbz.co.nz; website: www.ibbz.co.nz. The above article should be treated as general information and not as specific advice. Please contact your professional accountant for advice related to your company. Saurav Wadhwa, his firm and Indian Newslink absolve themselves of all liabilities in this connection.
