Financial management

Before starting up your business, or buying new equipment or premises, you’ll need to have a good idea of how much money you’ll need to achieve your business outcomes. This will involve exploring the costs and benefits of different options. Consider:

• Will this thing (that I need to raise money to buy) increase the business’ income or the ability to make income in the near future?
• Will it decrease the business’ expenses?
• What level of quality and performance do I need at this point in my business’ life cycle? In other words, would a cheaper item do a good enough job for the short term?
• Could I achieve the same outcome by doing things differently?
• If I buy this and it proves to be unnecessary, will I be able to recuperate most of my costs by selling it?

Only invest in the things that benefit your business.

There are a number of different ways to get money to invest in your business, whether that is to help you start your new business or to grow an existing one. The most common of these are explained below.

Self-funding

You can self-fund the start-up of your business, or some aspects of it, yourself. If you’re in position to introduce private funds to get some aspect of your business going this can solve a short-term problem. For example, if you and your spouse are saving for an overseas holiday which has had to be cancelled, you could both agree to use the funds to purchase a piece of equipment or contract another person in the short term to get you over a ‘temporary staffing hump’ without employing them full-time.

This type of funding needs to be managed as part of the business’ financial management system. Make sure your accountant knows that this is ‘money introduced’ and have them apply the correct accounting treatment to it. You may be able to consider it a loan in which case the business pays you back, or it may be considered as equity, which means it’s an investment that is designed to give the business a boost, which you don’t need to be repaid. That’s your choice but talk to your accountant.

Self-funding is sometimes referred to as bootstrapping.

Family investment

If you have family members who wish to invest in your business, this can work similarly to self-investment, with the funds considered either a loan to be repaid or a gift that is not repaid. It is important to discuss this fully with your family member(s) and your accountant. A loan-based funding arrangement needs to be documented and signed by all parties. Your lawyer should also be consulted.

Debt finance

Debt finance involves borrowing money that you pay back with interest within agreed time frames. “Lenders only want to lend to businesses that are solvent, profitable and liquid” (Oliver and English, 2012, p. 165).

Solvent means that the business owns more than it owes. Liquid means that assets can be sold for cash quickly.

Bank and institutional lending

Banks provide a number of avenues of funding for businesses including:

• overdrafts
• secured business loans
• unsecured business loans
• business credit cards.

A secured loan is one where you nominate assets that you personally own, such as your house or vehicle that the bank can take ownership of if you are unable to repay the loan. An unsecured loan is one where you do not commit to using your assets as a form of guarantee. Interest rates for unsecured loans are higher than for secured loans because the lender carries more risk.

Interest rates can vary depending on the bank and whether the loan is secured or unsecured. Also consider the fees involved as well as the term of the loan and if there is a fee for discharging (repaying in full) the loan early.

Because interest rates and lending terms change regularly, check directly with your bank or the bank’s website for details.

Non-bank business lenders

A variety of other financial institutions provide loans to small businesses. They usually require the business to have a history of trading and charge higher rates than banks. Businesses that provide loans are regulated by the Financial Markets Authority (FMA) (Financial markets conduct regulatory system, no date). Additionally, by 31 March 2025, lenders will need to be licenced and their activities monitored, amongst other requirements (Conduct of financial institutions regime, no date).

It is wise to shop around and carefully check the terms and conditions. Some loans may be interest only, requiring you to pay the full amount borrowed back when you discharge (pay back) the loan. Others require you to pay back a portion of the interest and the capital (the amount borrowed) from each scheduled repayment. This is called a table loan.

Seek professional advice before taking out a loan.

Crowdfunding

Crowdfunding is a way to finance your business through many small loans made by individuals. Individuals can receive products, services, or other rewards for contributing or they may wish simply to donate to a business idea they believe in or find appealing.

Crowdfunding's popularity stems from the advantage of starting your business with a source of customers who believe in your product – and there is also lower commitment and risk than taking out a traditional loan. PledgeMe is a local example of a crowdfunding platform.

However, crowdfunding requires an idea that is immediately attractive to a lot of people. It also requires some marketing and promotion ability because you need to post your business idea as a campaign on the website. This entails the development of images, video etc. as well as a clear goal and timing for the campaign. If the idea is appealing enough, people will support your campaign by contributing money to help you achieve that goal. However, if you do not reach your funding target by the due date, the loans and donations lapse, and you may be left out of pocket for any investment you made in marketing.

A crowdfunding campaign can also be time-consuming to manage and is not without obligation. It takes time to develop the campaign and interact with your ‘backers’ and give them updates. And if you pledge rewards, such as one of your products, failure to deliver on this can negatively affect your business’ brand, and you’d need to refund all money ‘pledged’ or collected from backers.

Crowdfunding is commonly considered debt funding, because it is a loan which is repaid in the form of goods or services.

Pebble Time is a smartwatch that raised over $20 million on Kickstarter, making it one of the most successful crowdfunding campaigns at the time. The campaign offered backers the opportunity to pre-order the Pebble Time smartwatch at a discounted price, along with other rewards such as exclusive watch faces and engraving options. Pebble Time's success was attributed to its innovative features, sleek design, and strong marketing efforts. The campaign demonstrated how crowdfunding can be used to finance a business idea and generate significant interest and support from backers.

Equity finance

Equity finance involves selling shares in your company. The people who buy shares are called shareholders, and because they own shares, they own a portion of your business that relates to the proportion of shares they hold.

Major shareholders – those who own a high proportion of the total shares – typically have a say in how the business is run; minor shareholders generally don’t get a say.

“Equity funding isn’t an option for sole traders. If you want to sell shares, you’ll need to be a company (although you can sell an interest in a partnership)." (What is Business Finance?, no date)

Angel investment

Angel investors are individuals or companies that provide funding for start-ups usually in exchange for a share of the business. To access this funding, you will need a strong business plan and an innovative business with opportunities for growth. Since the lender is taking a substantial risk, you will also need to be willing to relinquish some ownership or equity. This can range from 20 per cent to 50 per cent depending on the size of the investment you require.

Venture capitalist investment

Venture capitalists are similar to angel investors though they are usually only interested in a business that has already moved through the start-up stage and has shown its potential. A venture capitalist expects some control over the business and often may bring in their own people with expertise to work with the founder(s) to grow the business. Their goal is to take the business to the stage where they can make a profit by selling their shares in the business at a higher rate than they bought them for or floating the company.

Floating a company, also known as ‘going public’ is the process of converting a private company into one that is publicly listed on the stock exchange. This involves selling a proportion of the total shares to investors, a process called an initial public offering, or IPO.

Government support

National and local government agencies provide grants, loans or support for small businesses in Aotearoa. To access these you may need to fill out an application and abide by terms and conditions, e.g. by submitting reports to demonstrate your compliance. The type of programs available, and the conditions for accessing these vary. Grants do not come with a cost, and do not need to be repaid provided they are used for the purpose they were given for.

“The Regional Business Partner Network is a gateway that connects you to the right advice, people and resources… Funded by the New Zealand government, the RBP Network consists of 14 regional growth agencies throughout the country.” (Home, no date)

Your regional business partner can help you access national and local government support and other sources of funding as well as further information to help develop your business.

Regional business partners are reputable providers, however there are people out there who may try to scam you. “Beware of funding scams, in which fraudsters trick you into paying fees to find grants. If a company claims to be able to help you get grants, do your research first. Try the Commerce Commission for information on bogus grant-finders.” (business.govt.nz, no date b)

Read this case study about how Neocrete got started with help from a government agency: Te Pokapū Auaha Callaghan Innovation.

Making a profit relies on selling your products or services for enough money to cover all business costs, including taxes and levies, and have some left over, which can be put back into the business to help fund later developments.

A big part of this is working out how much to charge for your goods or services. The three main ways of pricing are:

1. Cost-based pricing
2. Competitor-based pricing
3. Customer-based pricing

We’ll get into pricing in much more detail later in the programme, but the key point is that you need to have a markup on your goods or services to ensure a profit margin. The following video will help you learn about pricing.

Watch this short video (4:41 minutes) to learn about these three price options and then complete the activity below to help ensure you have a good understanding of mark-up percentages.

Case Study Activity - Calculating Markup

A bakery sells cakes and wants to calculate the markup on its products. The total cost of ingredients and labour for a cake is $20 and the bakery wants to make a profit of $10 per cake.

Use the information in the video to calculate the markup percentage in this instance. Once you have your answer, select the label below to see our answer and how it was derived.

View the answer and explanation

The answer is 50%

1. First determine the total cost of producing the cake, including ingredients and labour. In this case, the total cost is $20.
2. Next, we add the desired profit per cake to the total cost. $20 (total cost) + $10 (profit) = $30.
3. To calculate the markup percentage, we use the formula:
   Markup percentage = (Selling price - Cost price) / Cost price * 100
4. Substituting in the values we have:
   Markup percentage = ($30 - $20) / $20 * 100 
   = $10 / $20 * 100
   = 0.5 * 100
   = 50%
5. Therefore, the markup percentage for the bakery's cakes is 50%.

If you didn't get the correct answer, please go back and review the information and try again until you have a clear understanding of mark-up, as it's important to the success of your business.

Don’t feel guilty about building in a profit margin! If you don’t your business won’t survive, and you won’t be able to continue delivering your products or services. Make it realistic to begin with and consider increasing it as your expertise grows or your ability to compete grows. At all times you should know how your profit is worked out, so that you can amend the formula if needed when times change.

Knowing about different types of taxes and levies is crucial for small business owners. Whether you outsource your accounting, use software or a mix of both, it's helpful to have a basic understanding.

Make sure you put enough money aside to ensure you are able to pay your taxes and levies when they are due. How to approximate these amounts and how to register with the required providers is covered in the next module. Below is an introduction to the three key types you need to be aware of as a small business owner.

Income and provisional tax

Regardless of the type of business you have you’ll need to pay income tax and may be required to pay provisional tax. “Income tax and provisional tax are the same tax. Provisional tax is just a way of pre-paying your annual tax bill in several instalments.” (business.govt.nz, no date e)

The following video explains income and provisional tax for businesses in Aotearoa. Here are a couple of terms to be familiar with to get the most out of this video:

• Gross sales refer to the total income generated by a business before deducting any costs, expenses, or allowances.
• Net profit is the amount of money a business has left after subtracting all its expenses, including operating costs, taxes, interest, and depreciation, from its gross sales.

Watch: Business Basics - Income and Provisional Tax (6:55 minutes)

Goods and services tax (GST)

You’ll only need to register to pay GST if your business has earned over $60,000 in gross sales in the last 12 months or if you think it will within the next 12 months.

Watch: Business Basics | Registering for GST (5:46 minutes)

Watch the video to find out more about how to manage GST for your business.

Check out IRD’s Key dates. You can use the filters to the left to show only the dates you’re interested in. Search for GST payment dates. Note that these are for monthly filing.

ACC levies

The Accident Compensation Corporation (ACC) is responsible for prevention, care and recovery after injury for New Zealanders. To enable them to do so, all earners in Aotearoa pay ACC levies.

“The ACC collects three different levies from all employers and workers in New Zealand.

1. The Earner’s levy, a flat rate of $1.21 per $100 of your liable income.
2. The Working Safer levy, a flat rate of $0.08 per $100 of your liable income.
3. The Work levy, which is based on what kind of business you run. The riskier your line of work, the higher this levy will be.

‘Liable income’ refers to income between minimum and maximum threshold, as set by the ACC every year.” (Tax 101 for sole traders, no date)

As a small business owner, you'll receive a yearly invoice for your business’ ACC levies.

If you have employees, their ACC levies are included in their pay as you earn (PAYE) tax. PAYE is tax deducted from your employees' wages or salaries, and not included in the yearly invoice mentioned above. 

Learning more: Seminars, webinars, and workshops

Inland Revenue (IRD) provides free seminars you can attend or watch recordings of. Go to the Seminars page to find and register for seminars that are being run near you: Seminars

To watch video-recorded presentations, go to: Webinar and presentation videos

Remember that you don’t have to manage your taxes all by yourself. Getting an accountant is a good investment for your business. Accounting software can also be a big help, especially when utilised in conjunction with an accountant. It can also save you money when you have an accountant. Accounting software will be covered in the next section.

Accountants can do more than help you pay your taxes, they can provide advice when creating your business plan, help your business interact with government agencies, apply for loans and more. Read the article below about why it is a good idea to hire an accountant: Why you need an accountant or bookkeeper

You need to keep financial records for your business to show you comply with legislation and to be able to correctly file and pay your taxes. Record-keeping is also beneficial to your business in other ways, such as providing visibility of how your business is doing. Managing business information in general is covered further later on in this module.

Watch Business Basics | Record Keeping: (3:13 minutes)

Take a look at the following video for an introduction to business record-keeping and utilising an accountant and accounting software.

Here are a couple of terms to be familiar with to get the most out of this video:

• Assets are the resources owned by a business.
• Liabilities are what the business owes.

Now open and save the following factsheet from IRD: Record keeping - checklist

This factsheet tells you about some of the benefits of keeping good records. It also has a checklist of the types of records you need to keep. It’s a good idea to save this so you can come back to it when you’re setting up your business processes.

Double-entry bookkeeping

Modern accounting in Aotearoa is based on double-entry booking. Double-entry bookkeeping, or double-entry accounting, means that for every business transaction at least two financial entries are recorded.

Read the following chapter from the Xero What is bookkeeping guide: Chapter 2: Double-entry bookkeeping

It explains:

• why double-entry bookkeeping is used
• how business accounts are structured
• where the chart of accounts fit in, and
• what happens during a transaction.

Accounting software

Accounting software can record all of your business transactions but will often have more features such as:

• coding transactions (linking the transaction to the relevant account in the chart of accounts)
• tracking financial performance
• invoicing
• generating reports
• filing GST returns.

A couple of big names in accounting software you might have heard of include MYOB (Mind Your Own Business) and Xero (a software company founded in Aotearoa). As previously mentioned, accounting software and accountants work well together. If you enlist the help of an accountant, they can point to the software that will align best with their services and may be able to provide you with a package.

If you are a sole trader, you might like to consider a tool like Hnry (another from Aotearoa). Hnry combines accounting software with accountant services.

Identify what you think are the most important things to consider when choosing accounting software or services with your business then investigate the options to ensure you get what is best for your business.

In the Business Basics Record Keeping video you watched earlier, you were introduced to two key financial reports: the balance sheet and the profit and loss statement. A third financial record that you need in order to have a good understanding of the financial health of your business is the cash flow statement.

• Balance sheet (also called a statement of financial position): Shows what a business’s financial position is at a moment in time.
• Profit and loss statement (also called an income statement, or statement of financial performance): Shows financial performance in a particular period of time.
• Cash flow statement: Records money coming and going for a particular period of time — like your bank statement, but with insights into patterns and/or problems.
  • While this statement, like the others, is reflective – it looks at past and current performance – it can be extremely useful to create a cash flow forecast which estimates future income and expenditure. We’ll get into how to create a cash flow forecast later in the programme.

Together these are sometimes referred to as “the big three” financial statements.

Review the following three statements, with interpretations. Then use the information provided in the statements to complete the activity that follows.

• Balance sheet
• Profit and loss statement (P&L)
• Cash flow statement – it should be noted that negative values (outgoings) can be shown in brackets, with a negative sign in front and may be in red text, for example, all of the following show outgoings of 10,000:
  • (10,000)
  • -10,000
  • (10,000)
  • -10,000

If your expenses are more than your income, your business is losing money and is said to be ‘in the red’. That is, you are spending more than you’re bringing in.

More information about financial management

Most major banks run some type of general information programme for customers who are small business owners. It’s important to them that business customers are able to manage their money, as well as manage business growth and crises with equal ease. Go to your bank’s website and look under the ‘Business’ tab or webpage. You may find topics to help, workshops to go to, or help getting started on a topic of interest. Some industry associations, Chambers of Commerce and local business networks also run information sessions. This is another reason to join.

Summary

Sound financial management is essential to the long term sustainability of your business. By now you should have a basic understanding of:

1. different types of business finance you can use to raise money to invest in your business
2. the importance of markup to your business’ profitability
3. the three most common taxes and levies for small businesses in Aotearoa
4. the financial records you are required to keep and how long you must keep them for
5. the ‘big three’ financial statements that indicate the health of your business.

In the next topic we’ll look at the structures, premises, equipment, and processes you need to run an effective business.

Some banks also run workshops, seminars and webinars for business customers or provide access to insights that economists think is happening in the world of finance.