To say it has been raining, in 2023 NZ, would be an understatement. With the January floods and Cyclone Gabrielle in February, many businesses have depleted their Emergency Funds. Even if your business hasn’t yet returned to Business-As-Usual, it is time to rebuild your Emergency Fund, so you can be resilient when the next catastrophe hits.

How much should my business save for a Rainy Day and Emergencies?

A Rainy Day Fund relates to savings for one-time, unexpected expenses, like car repairs or replacing broken appliances. Look at your essential equipment and consider how much it would cost to repair or replace. For a restaurant, this might be $1,000 - $5,000. For a factory, it might be ten times as much. If you have service warranties to keep your equipment running, this may reduce your Rainy Day Fund requirements.

An Emergency Fund is for covering your expenses and outgoings when income stops suddenly, such as a natural disaster or death/disability of key personnel. The usual rule of thumb is three months’ worth of expenses, but you may need to factor in additional amounts for your circumstances, like loan payments. During 2020 and 2021, the more resilient businesses covered six months’ worth of expenses.

That sounds like a lot! How is it possible?

Set yourself an achievable $ target for each week. Make an automatic transfer into separate bank accounts for holding your rainy day and emergency fund. The separate bank accounts could be interest-bearing deposit accounts, but the Rainy Day Fund needs to be accessible at short notice. Each time you make further cost savings (see below) increase your automatic transfer. The important thing is to make a start and be consistent.

Can’t we just rely on business insurance policies?

Simply, no. The January floods were widespread, so it took weeks for some businesses to be contacted by their insurance loss adjuster or geotechnical engineer. Then more weeks for their insurance claims to be accepted. Some Christchurch earthquake claims from 2010-2011 took years to settle. Your business needs to be able to manage for itself, until insurance comes through.

Shouldn’t we pay off all our debts first?

You need to build your Rainy Day Fund too. If you have an unexpected expense, you may have to get into MORE DEBT if you don’t have a Rainy Day Fund.

Review your Business-As-Usual (BAU) Practices

Take a closer look at your BAU processes, practices and expenses, and make improvements where you can. Select some easy wins, “low hanging fruit”, and build momentum from there. Involve your team. Ask them to question why and how they are doing things. Offer small incentives for identifying cost savings.

Reduce Overhead Costs

Utilities - A client of ours saved 50% on their telecommunications costs by changing their provider. Utility companies in general rely on our apathy for change and won’t tell us how we can make savings. Even if you want to stay with the same provider, you can still make savings, by contacting them to ask for a price match.

Subscriptions – Are you paying for software apps or services that you no longer need? We had one client who was signed up to five different payment services. After reviewing her sales traffic, she trimmed it back to two payment services.

Wants vs Needs – Buy smartly. If barista coffee is essential for your client meetings, then investing in an espresso machine and quality beans, may work out cheaper than sending across the road for take out (and better for the environment).

Increase Gross Margins

Have your selling prices kept pace with increases in the minimum wage, product costs and freight? Review each product individually, make increases where you can, and look for cost savings. Simplify and improve your processes and eliminate products which are unprofitable or distract from your main offering. On a production line, it takes time to re-tool between jobs, so try to batch similar jobs together. In a take-away, you can have fewer menu items so preparation takes less time.

Eliminate wastage, particularly arising from errors and re-work. Use as much of your raw materials as possible. Ethique famously turns the scraps from their solid shampoo bars into minis which are sold as samples or in travel packs.

Improve your stock control systems and cash control systems. There is a cost to holding too much stock, but also a cost to stock shortages (in lost sales). All your excellent work could be quickly undone by a light-fingered staff member or customer. A retail client of mine discovered a sales counter manager had been taking cash from the register after hours. Several years ago, a hospitality client discovered his business partner had been stealing cash and alcohol to fund his drug addiction problem. Sadly, this happens too often.

Get Smarter about Debt

Loans, Credit Cards, Finance Companies, BNPL

At the same time as you are saving for your Emergency Fund, get smarter about your debt. Talk with your financial advisor and read your loan/finance agreements. Understand what each loan or finance agreement costs you, in fees and interest. Find out what fees you will pay for early repayment. Pay at least the minimum owing on each one and try to eliminate one debt at a time.

Eliminate expensive debt, such as credit card debt and third-tier lending (say, from a finance company). Some finance companies offer quick, no-security, low repayments, but I have seen client who have agreed to pay 28% - 36% interest per annum on these loans. Avoid Buy Now, Pay Later (BNPL) schemes, or as I call them Buy Now, Pay Forever. Their ease of application and low repayment instalments, mean that you can be fooled into thinking that you have more money than you have. Debts such as these, can be very hard to shake off, if they become entrenched, because very little of your standard payment is going towards paying off the loan principal.

Sorted recommends three different strategies to get rid of debt fast[i]. I favour the debt avalanche, because you tackle the debt with the highest interest rate first, as I described above. However, the debt snowball, where you pay off the smallest debt first, is excellent if you need to tick them off and build momentum. There is also debt consolidation, which is transferring all the debts into one lower interest loan. This can be tidier to manage, but you need to ensure that you don’t use it as an excuse to drawdown on your credit card again.

Be Proactive about Tax Payments

A sure sign that a business is in difficulty is that it can’t keep up with its GST, employer taxes and income taxes. Rather than burying your head in the sand about tax debt, it is far better and cheaper to be proactive. If you enter into an instalment arrangement before the tax is due, IRD will usually waive the 5% late payment penalty. You can spread the amount over weekly, fortnightly or monthly instalments. Read our blog “Applying for Tax Relief”[ii] for two case studies where we have helped clients.



It’s Going to Rain More Often

I’m writing this blog as another atmospheric river is crossing the North Island, but I’m not just talking about literal rainy days. Severe weather events, Covid outbreaks, economic recession should all figure in our business planning over the next few years and we need to be prepared. We need to review our Business as Usual practices, get smarter about debt and save for emergencies.

-         Serena Irving

Serena Irving is a director in JDW Chartered Accountants Limited, Ellerslie, Auckland. JDW is a professional team of qualified accountants, auditors, business consultants, tax advisors, trust and business valuation specialists.

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An article like this, which is general in nature, is no substitute for specific accounting, tax and financial advice. If you want more information about the issues in this article, please contact your adviser or the author.

  [i] https://sorted.org.nz/guides/tackling-debt/how-to-get-out-of-debt-quickly

[ii] https://www.jdw.co.nz/applying-for-tax-relief