Posted on Jan 13, 2020
There are many jurisdictions around the world that require a license to operate a business.
In New Zealand, to be a plumber, or a pharmacist, or an electrician, you need a licence. Yet, to operate most types of business, a license is not mandatory.
A recent article in the NBR (“Commercial property set to boom in 2020” Andrew Bevin) was not so much interesting for it’s comments on the state of the commercial property market – most of which were everyday knowledge to those of us in the industry – but more for one quote in particular.
BDO construction and real estate national leader James MacQueen was quoted as saying, with respect to the construction industry, “We’re still seeing a lot of companies that don’t truly understand their cost structure and are not properly measuring their costs. So they don’t really know how they’re going and they can lose a lot of money before they realise they’ve lost it.”
Whilst it might seem incredible that large organisations in the construction industry, turning over tens and even hundreds of millions of dollars don’t know their costs, history over the last couple of years (Ebert, Arrow, Orange-H, Mainzeal etc) would tend to bear out Mr MacQueen’s contention.
But it is a problem that doesn’t just apply in the construction industry. Unfortunately it is widespread through the business community, that owners and managers just don’t know, or don’t understand, their numbers.
There are no shortage of numbers available to business managers. Even the most rudimentary business can be run on Xero, and have all manner of different reports. But reams of numbers don’t mean much if the skill to interpret them is not present.
We have previously expressed the view that there is a good case for financial literacy being taught in our educational institutions. If young adults were released into the world with even a basic understanding of how money works, then the difficulties in the lives of many caused by debt and it’s consequences may be alleviated. And then taking the development of that financial literacy even further into our business world may be a tool which could make a major difference to business life in New Zealand.
The media do a great job in showcasing successful businesses, and highlighting the spectacular failures. But in-between there are massive numbers that speak volumes about the business landscape in New Zealand.
97% of enterprises have fewer than 20 employees
70% of enterprises employ nobody but the owner.
28% of New Zealand’s GDP is generated by enterprises with fewer than 20 employees
Only 37% of companies survive the first 6 years.
Not all of those failures can be put down to lack of financial competence. But many can. And unfortunately most often failure has a ripple effect.The failure doesn’t just impact on business owners and staff, but also clients and subcontractors and more.
Which leads us back to financial literacy. A basic understanding would benefit every individual. But in the business community, a little more than financial literacy could enhance the survival and success rates of many more small businesses.
Perhaps in addition to needing technical skills as a plumber, a pharmacist or an electrician, those who are business owners should have to undergo testing in finances in order to obtain a licence to operate a business. In the food business you need Food Safety certificate to prove you know how to handle food safely. But you don’t need proof that you understand a profit and loss, or can read a balance sheet. A lack of basic food hygiene can threaten people’s health. But a lack of financial literacy can kill a business.
Until evidence is required of the financial ability of business managers, as an industrial landlord we will carefully seek evidence that potential tenants are able to pay their bills.