The New Economic Climate
There is a sense of buoyancy in the New Zealand economy. There are predictions of 4 per cent growth in GDP, and even mention of inflation.
It seems that the COVID-19 pandemic has not caused the widespread business failure that was anticipated. However, the news isn’t all good. The buoyancy in the economy has been largely the result of support in the form of government funding. Now that businesses are coming to grips with the pandemic economic climate, we are certain to see the demand for business liquidation increase.
The reality is that many countries – including New Zealand – are awash with debt that can only be dealt with by productivity gains that result in increased taxation revenue, or increased taxation rates that create a capital erosion burden on revenue earned.
However it is sought to be achieved, the economies of the world must somehow balance their books involving debt retirement. When those policies come forward it is inevitable that a correction will take place.
Lowering the economic tide will not necessarily result in broad-based business insolvency, however. External economic circumstances are most likely to impact those companies that have underlying issues that have not been resolved – or perhaps more to the point, are unresolvable. In other words, if a business had issues before the pandemic, those issues may have hastened the business’s inevitable end.
It’s also worth considering that there are issues within certain sectors that may take down otherwise robust companies. While many will adapt, some companies’ business models will be so entrenched that they cannot readjust to the new business environment unless demand is restored. To give one example, consider how a well-established supply chain provider in the food and beverage industry will be seriously impacted by the pandemic. Sector-based demand shifts will see companies able to survive only if demand returns before they run out of capital resources.
Insolvency, however, is normally associated with the shortcomings of a company’s management. The environment within which it trades is relevant; but more important are the internal dynamics. How well does the management understand critical accounting processes? Has record-keeping been subordinated to the demand of operations? Are costings analysis predicting a positive outcome? Has the company invested its scarce resource in a manner that maximises returns? Are human resources managed so that the ideal outcome of optimisation and equity are achieved? These questions – and many more that relate to the allocation of capital resource for the purpose of creating surpluses – must be considered.
Can a better outcome be achieved?
The internal dynamics of a business can certainly change. That does not mean that structural alterations can be made with ease – for example, moving away from a long-term leasehold interest – but the approach taken to a company’s issues can change as quickly as the adoption of an alternative frame of thinking by management.
The reality is that the creation of wealth is a function of applying human ingenuity to the allocation of capital resources for the purpose of earning revenue at a level greater than expenses caused. Within this triangle, the only alterable element is human ingenuity and how that is applied to use resources to achieve the purpose.
Bridging the abridgement
Government recognises that company failure takes down the capital invested and impacts on the lives of people associated with the company, including creditors.
Rehabilitation is a much better outcome for a business than failure. There is a legal process designed specifically to help businesses get back on their feet. Voluntary administration can help a struggling company transition back to full health. This is not an easy process; it requires a strong commitment from all parties involved.