Chapter 7 Current Financial Structure A full set of tables is available in the Statistical Tables section. Please view Tables 18 to 26 in conjunction with this chapter. 7.1 Type and amount of outstanding debt New Zealand businesses in the survey had $35,854 million worth of outstanding debt at the end of their last fi nancial year. The majority of this debt was found in businesses with 20 or fewer employees, refl ecting the proportionally large number of these businesses in the New Zealand economy. However, as expected, larger businesses have a greater average debt amount per enterprise than smaller ones. See Table 7.01. Table 7.01 Current Debt Last fi nancial year at August 2004 Business size 1 5 employees 6 20 employees 21 100 employees 101 500 employees Overall Total debt amount $NZ (million) 10,189 11,965 8,557 5,143 35,854 Average debt amount $NZ 194,678 473,369 1,558,980 11,007,790 429,029 Figure 7.01 shows that trade creditors/suppliers and long-term loans were the most common types of debt, accounting for 25 and 20 percent of the total, respectively. Figure 7.01 21
7.2 Sources of outstanding debt Businesses were most likely to owe money to banks, which were a current source of debt for almost one third (32 percent) of businesses. Other signifi cant sources were existing owners (25 percent) and trade creditors/suppliers (24 percent). Results are shown in Figure 7.02. Figure 7.02 Overall, only 10 percent of businesses sourced debt from fi nance companies. However, businesses in the Services to Agriculture, Forestry and Fishing, and Road Transport and Services to Transport industries held more outstanding debt with fi nance companies than businesses in other industries (27 percent and 23 percent, respectively). This seems to refl ect a higher proportion of businesses in these industries which requested debt fi nance from this source. All other sources of current debt were much less prevalent and, even when combined, accounted for only 10 percent of the overall total. 7.3 Type and amount of equity New Zealand businesses in the survey had $28,400 million worth of equity at the end of their last fi nancial year. Businesses with more than 20 employees had a signifi cantly higher average amount of equity than those with 20 or less employees, as shown in Table 7.02 below. Table 7.02 Current Equity Last fi nancial year Business size 1 5 employees 6 20 employees 21 100 employees 101 500 employees Overall Total equity amount $NZ (million) 8,884 7,320 7,614 4,582 28,400 Average equity amount $NZ 169,741 289,616 1,387,128 9,806,288 339,832 Figure 7.03 shows that just over half (52 percent) of the equity is in the form of paid in capital; however, businesses with between 21 and 100 employees have more equity in the form of accumulated retained earnings (46 percent) than paid in capital (38 percent). As may be expected, older businesses (more than 3 years old) had over twice the proportion of accumulated retained earnings than younger businesses. See Figure 7.04 below. 22
Figure 7.03 Figure 7.04 Businesses in the Property and Business Services industry recorded a much higher amount of total equity than businesses in other industries ($7,049 million). This industry was followed by the Manufacturing and Retail Trade industries on $5,849 and $3,886 million, respectively. The relationship between these equity fi gures and the number of businesses in each industry is detailed in Table 23 in the Statistical Tables section. A number of businesses reported reserves in the other category as a type of equity. Reserves were a notable contributor to these other types and accounted for 13 percent of equity across all businesses. Reserves are subdivisions of accumulated revenue or capital profits that accrue to the owners (shareholders) of the business. A common reserve is the asset revaluation reserve which represents the non-cash increase in the value of certain non-current assets (normally land and buildings). 23
7.4 Sources of paid in capital Three-quarters of the paid in capital in New Zealand businesses was provided by individuals principally in control of the business. The prevalence of this source decreased, however, as the size of the business increased. All other sources were much less common. Other individuals (from New Zealand and overseas) were a source of paid in capital for 7 percent of businesses. Friends and family, parent companies and venture capital funds (from New Zealand and overseas) each rated at 2 percent. A grouping of all other categories (including employees, other businesses from New Zealand or overseas and other sources) had a combined rating of 12 percent. Businesses in the Communications Services industry received 62 percent of their paid in capital from these other sources, well above the norm for this category. 7.5 Sale of accounts receivable The sale of accounts receivable, often known as factoring, occurs when one business buys another business s invoices at a discount and takes responsibility for collecting the payments due on them. This process brings cash to the business due from the customer, sooner than the terms of the invoice would normally allow. The survey found less than 1 percent of businesses sold their accounts receivable. This result may indicate that factoring is not a common business practice in New Zealand. It is a similar result to a Canadian study of Small and Medium-sized Enterprise (SME) finance, which found that in 2000 only 1 percent of SMEs used factoring as a fi nancial instrument. 6 However, factoring is more common in the European Union, where a 2001 study found that on average 11 percent of SMEs use factoring as a form of fi nance. 7 7.6 Debt ratio Sections 7.1 and 7.3 showed the relationships between total and average amounts of debt and equity and business size, which could be seen to relate to the numbers of small and large businesses in the economy. However, it is the comparison of the relative levels of debt and equity that provides the most useful insights into the fi nancial position of different businesses and can infl uence their success in making fi nance requests. The relative levels of debt and equity are measured in this report by the debt ratio. The debt ratio is calculated by dividing total debt by total assets (debt plus equity). A ratio of more than 1 indicates a business has more debt than assets, while ratios of less than 1 show that a business has more assets than debt. Ratios of greater than 0.50 indicate that assets are primarily fi nanced by debt, whereas ratios of less than 0.50 indicate assets are primarily fi nanced by equity. Ratios were calculated for every business that responded to the survey and then the mean and median ratios were compared. The mean ratio for businesses in the survey was 0.60, while the median ratio was 0.58. The ratio was relatively constant over all size and age groupings, but showed some variation across different industry groups, particularly the mean ratio as it is infl uenced more by outlying values. Examining the median ratio as being the most consistent measure, an overall ratio of 0.58 shows New Zealand businesses fi nance their assets more by debt than equity. It also shows that, overall, New Zealand businesses carry approximately $1.50 of debt for every $1 of equity. 6 Industry Canada (2003), Small and Medium-Sized Enterprise Financing in Canada, 31. 7 Exco Grant & Thornton survey of SMEs, 2001. 24
7.7 Investment in expansion Twenty-two percent of businesses invested in expansion during their last fi nancial year. Figure 7.05 shows that larger businesses were more likely to invest in expansion than smaller businesses. Forty-seven percent of businesses with 101 to 500 employees invested in expansion, whereas the proportion for businesses with 1 to 5 employees was 19 percent. Figure 7.05 Manufacturing industry businesses invested more in expansion than other industries with 30 percent of businesses in the industry investing in expansion totalling $987 million. The Education industry invested the lowest amount in dollar terms ($28 million). The lowest proportion was found in the Retail Trade industry, where only 15 percent of businesses invested in expansion. The average cost of expansion across all businesses was $49,000. In total, 65 percent of the investment in expansion was sourced from external fi nancing. There was some industry variation on this result with businesses in the Communications Services industry making more use of external sources to fi nance their expansion (91 percent). Most industries fi nanced half of their expansion cost or more externally, the exception being the Education industry, in which only 32 percent of expansion was fi nanced from external sources. Figure 7.06 shows how the proportion of expansion fi nanced externally varies across the different industry groups. 25
Figure 7.06 7.8 Total operating revenue New Zealand businesses in the survey had a total operating revenue (or income) of $95,689 million in their last fi nancial year. Businesses with 1 to 20 employees accounted for 54 percent of this total, due to the larger numbers of these size businesses in the New Zealand economy; however, larger businesses had higher average revenues than smaller ones, refl ecting the difference in scale between these fi rms. Businesses with 101 to 500 employees had average revenues of nearly $33 million, compared with $1.3 million for businesses with between 6 and 20 employees and $0.4 million for businesses in the 1 to 5 employee size group. Businesses over 3 years old accounted for the majority of total revenue (84 percent). The Retail Trade and Manufacturing industries accounted for just under half of total revenue, at 24 percent and 20 percent, respectively. They were followed by Wholesale Trade (15 percent) then the Construction and Property and Businesses Services industries (12 percent each). All other industries accounted for 5 percent or less individually. 7.9 Annual rate of turnover growth The Business Finance Survey asked respondents what they expected their business s annual rate of turnover growth to be for the next three fi nancial years. The majority of businesses (76 percent) expect positive growth, including 18 percent which anticipate growth in turnover of 11 percent or higher in the next three years. Smaller businesses were less optimistic about growth. Twenty-three percent of businesses with 20 or fewer employees expected zero or negative growth, compared with 14 percent of businesses with 21 or more employees. Expected turnover growth showed some variation across different industry groups, although overall 58 percent of businesses expected from 1 to 10 percent growth. Businesses in the Wholesale Trade and Property and Business Services industries were the most optimistic about their growth prospects, with 27 and 26 percent respectively expecting turnover growth of greater than 10 percent. Thirteen percent of businesses in the Manufacturing industry expected growth of more than 20 percent, almost twice the proportion over all industries (7 percent). Businesses in the Services to Agriculture, Forestry and Fishing industry were the least optimistic, with 36 percent expecting either zero or negative growth over the next three fi nancial years. This was followed by the Property and Business Services (30 percent) and Other industry groups (27 percent). The overall rating was 23 percent. The Property and Business Services industry showed the greatest volatility in its expected turnover growth. While it recorded the highest equal proportion of businesses expecting negative growth (12 percent), it also recorded the second highest proportion expecting greater than 10 percent growth (26 percent) plus the second highest result for businesses expecting greater than 20 percent growth (11 percent). 26
Overall results for expected turnover growth are shown in Figure 7.07 below. Figure 7.07 27
7.10 CHAPTER SUMMARY: CURRENT FINANCIAL STRUCTURE Business Finance in New Zealand 2004 Current Financial Structure Current Debt Current Equity Amounts Total $35,854 million $28,400 million Average $429,000 $340,000 Most used type Trade creditors/suppliers Paid in capital Proportion of total 25% 52% Most used source Banks Individuals in control of the business Proportion of total 32% 75% 4.6 Chapter Summary: Debt finance requested 5.5 Chapter Summary: Equity finance requested 6.3 Chapter Summary: Both debt and equity requested 7.10 Chapter Summary: Current financial structure 8.4 Chapter Summary: Security Median debt ratio 0.58 Investment in expansion Total $4,072 million Average $49,000 Proportion of cost financed externally 65% 9.6 Chapter Summary: Financing characteristics Operating revenue and expected turnover Total $95,690 million Average $1,100,000 Positive growth expected 76% of businesses 28