Auckland small businesses carry a higher fixed cost base than operators elsewhere in New Zealand — rent, wages and the cost of living that drives wages. When trading softens, that fixed base is what causes the trouble.
Know your break-even
Two calculations underpin most good decisions and a surprising number of owners have never done either.
Contribution margin is selling price less variable cost — what each sale contributes toward fixed costs and then profit.
Break-even is fixed costs divided by contribution margin percentage. That is the revenue at which you cover everything and make nothing.
The related figure is your margin of safety — how far current sales sit above break-even. A business trading eight percent above break-even has almost no tolerance for a downturn, and knowing that changes decisions.
Why discounting is usually the wrong first move
Discounting reduces price without reducing cost, so the whole discount comes out of contribution.
An item costing $60 selling at $100 carries $40 contribution. Discount 10 percent and contribution falls to $30 — a 25 percent reduction from a 10 percent price cut, requiring 33 percent more volume to stand still.
Run that calculation before any promotion. The reverse also holds: a 10 percent price increase on the same product lifts contribution from $40 to $50, meaning you could lose 20 percent of volume and be no worse off.
Collection is faster than cutting
The quickest cash levers, roughly in order:
- Chase overdue accounts systematically at defined intervals rather than when you notice.
- Invoice immediately on completion rather than monthly.
- Take deposits and progress payments on longer jobs.
- Negotiate with suppliers before due dates, which preserves the relationship in a way that missing payment does not.
- Contact Inland Revenue early if tax will be difficult — instalment arrangements are far easier to agree before a due date than after.
Build a thirteen-week cashflow forecast
A quarter ahead, updated weekly, rolling forward. Model when customers actually pay rather than your terms, and include tax dates and loan principal — the two items most commonly omitted, and precisely why businesses are surprised by both.
The value is lead time. A shortfall visible eight weeks out has many solutions; the same shortfall on the day has almost none.
Occupancy cost
Rent is a twelve-month cost and frequently the largest fixed item. Points worth attention at renewal, when you have leverage:
- Outgoings — what is included and whether capital costs can be recovered.
- Whether the ratchet on rent review is negotiable.
- Make good, which is easier to address at renewal than at exit.
- Whether you need the space you have, given how the business has changed.
Separate the tax money
The single habit that prevents most small business tax debt: move GST and PAYE into a separate account as they are earned. That money was never yours, and businesses that bank it in the operating account discover this at the worst moment.
Provisional tax deserves specific attention. In a growth year the standard method bases instalments on a smaller prior year and produces a large terminal payment. Provision for it separately rather than being surprised.
Where support actually exists
Free and worth using:
- business.govt.nz for cashflow templates, contract guidance and compliance tools.
- Regional business partner programmes, which provide capability assessment and can subsidise advice.
- Chambers of commerce and business associations, particularly for networking and local advocacy.
- Your accountant, if you arrive with questions rather than just dropping off records.
The honest check
If the business cannot service its obligations, directors have duties not to trade in a way creating substantial risk of serious loss to creditors. Continuing to take deposits and incur obligations while insolvency is realistically in view creates personal exposure.
Take advice early. The options at month three are considerably better than those at month twelve.
General information only, not financial advice.
