Keeping Watch on Financial Affairs

There are numerous reasons for businesses incurring financial difficulties. Directors need to be aware of these so they can ensure appropriate action is taken to prevent the company trading whilst insolvent.

Reasons may include:

 Low operating profits or losses being incurred
 Problems with paying creditors in accordance with the negotiated payment terms
 Problems with meeting loan repayments to banks, financial institutions and other lenders
 Problems with paying income tax installments
 Suppliers refusing to give the company credit
 Legal action being instigated against the company by any supplier for the non-payment of goods or services
 High debtors’ amounts owing above the amount for which the company has budgeted
 High stock or work in progress investments above the amount for which the company has budgeted
 Excessive investment in capital expenditure, especially if it was not budgeted for
 Departure from the budget or cash flow forecast prepared for the business.

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More than “rubber stamping” – What does a director do?

It’s not just a position you give to someone on their business card. Being the director of a company has its responsibilities and by law every private company in New Zealand requires at least one of them.

Essentially the duty of the director is to ensure the smooth running of the company. Well, what does that mean in practice?

Directors are not just a “rubber stamp”. They don’t just go along with everything that management puts forward. They have to be fully informed about the company’s operations and the industry in which the company operates, and keep up-to-date with how
the business is performing. They need to make their own enquiries in relation to proposals that have been put forward by management.

At all times directors should act honestly and should not use their position as a director to improve their own financial position.

The law expects directors to be diligent in the discharge of their duties. This means that they should:
 Obtain information in relation to the operations of the company
 Inspect factories, retail shops, warehouses, outlets and business premises owned by the company
 Attend board of directors’ meetings and be an active participant in those meetings
 Ensure that management is adequately reporting to the board of directors and not using the directors as a “rubber stamp”
 Ask questions and enquire as to the meaning of various matters submitted in reports to the directors
 Ensure that management is adhering to the company’s business plan
 Review Key Performance Indicators, periodic financial statements and the budget and cash flow forecasts to ascertain whether the company is performing in a satisfactory manner
 At all times be aware of the company’s requirements not to trade whilst insolvent
 If unsure, insist that the board appoints an external expert to advise the directors on any particular technical issue that has been submitted to the directors for their approval.

Directors should ensure that meetings are held regularly to keep abreast of what’s happening.


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Create a Customer Database

You probably know who your customers are, or recognize them when they come in. But do you know how to contact them? Do you have the details to be able to keep communicating with your customers?

Successful businesses communicate with their customers at least six times per annum.

Can you write directly to your customers to tell them about forthcoming promotions? or new products that are going to be launched? or new products that may be of particular interest to them?

Direct marketing is an excellent way of keeping in touch with your customers, but to do it you’ll need a customer database. Many businesses miss out on ideal opportunities to create customer databases by not collecting the names and addresses and other pertinent information from their customers.

You need to take every opportunity to do this. For example, information can be collected from a number of sources including:

 Detailed invoices in which the customer’s name and address are included
 Customer questionnaire forms
 Weekly lucky draws – customers are asked to complete an information sheet so that they can enter
 Other similar promotions.

You want to find out general data, such as the name, address and demographic group to which they belong, as well as their interests and hobbies and sales information which records details of the products they have purchased in the last twelve months or longer.

Tell your customers why you want the information – that you’re creating a mailing list so you can send them newsletters and various information on products and services being offered by your business. Bear in mind, however, that some people do not want their personal details listed on a company database.

Questionnaires are a great way to get customer information as well as vital customer feedback. By offering a weekly or monthly draw with an appropriate prize you are likely to encourage customers to fill in all parts of the questionnaire.

What would happen if ...?

Have you ever stopped to ponder what the family business would do if something suddenly happened to the key person?

• What would happen if the key person was unable to perform his or her normal duties?
• What would happen if that person was run over by the “proverbial bus”? 
• Who would take over the business? 
• Who knows the secrets of the business? 
• Who knows the secret formulas, recipes or deals that have been done with suppliers? 
• How would the bills be paid? 
• Would the bank call up the loan? 
• How would the principal’s family survive?

Key questions to be answered include:

• Has the principal written out a set of instructions on what should happen to the business if something should happen to him or her?
• Has this list been given to a solicitor or placed somewhere safe where it will be found if something happens to the principal?
• Has adequate insurance been effected on the life of the principal and on the life of any partners in the business?
• If a partnership or a company with outside shareholders, has a formal “Buy/Sell Agreement” been entered into?

Have the secrets of the business been written down, so that they are available in the event of the demise of the principal?  

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