The receptionist is paid. The consultant is paid. The rent has gone out. The software provider has taken its monthly fee without needing to send a reminder.
The boss looks at what remains and decides to wait another month.
I have seen versions of this in the accounts of small businesses. There is work being done. Clients come through the door. Staff are busy. From outside, the firm looks established. Inside, the director's income depends on which invoices are paid before the next payroll run.
Some directors make a great deal of money. I am writing about the ones who do not, despite running a real business with staff and clients. I cannot tell you from the accounts I have seen how common that position is across New Zealand. I can tell you what it looks like when it happens.
We talk about starting firms, celebrating growth and collecting the tax they owe. We spend less time asking whether a business that employs people is producing a living for the person carrying the risk.
Let me put numbers to one possible example. These are illustrative assumptions, not a survey of consultancy firms or a quotation for premises in every city.
Suppose a small advisory firm in Auckland or Wellington has a director, one mid-level consultant and a receptionist who also runs the office administration and the firm's social media marketing. It rents an office with somewhere decent to meet clients. The consultant has two degrees, some professional experience and a student loan. They earn $96,000 a year; the receptionist and office administrator earns $60,000. Their combined gross salaries cost $13,000 a month. Assume the office, utilities and ordinary amenities cost $4,000 a month, and insurance, software and other running costs, including an allowance for ACC, another $1,200. If both staff qualify for employer KiwiSaver contributions at the usual 3.5 per cent rate, that adds about $455 a month.
The total is approximately $18,655 a month, before the director receives anything. Financing costs, unexpected expenses and the cost of acquiring new work could add more.
The receptionist does not usually issue invoices. They answer the phone, arrange meetings, obtain documents, follow up unpaid invoices and manage social media to help bring in enquiries. That work has commercial value, even if it does not appear on a timesheet. The consultant brings qualifications and experience; their student loan is a reminder that gross salary is not spare cash. Both employees have to be paid whether the client pays today, next month or never.
Now suppose the consultant bills 120 hours in a month at $150 an hour, excluding GST. That produces $18,000 in invoices. On paper, it falls $655 short of our assumed monthly costs. A few billable hours from the director would close that narrow gap—if every invoice is paid promptly. It would still leave the director without an income.
That is where many neat calculations stop, just before the interesting part.
An invoice will not pay Friday's wages
Imagine that, in a particular month, the firm receives cash equal to only 85 per cent of the consultant's $18,000 in billings. That is $15,300 received against $18,655 in costs: a $3,355 shortfall. The 85 per cent is an illustration of timing and collection risk, not an industry benchmark. Some of the unpaid invoices may arrive later. Payroll will not.
If the director also needs $5,000 from the business that month and can earn and collect $150 for each hour personally billed, the total gap becomes $8,355. That requires about 56 additional collected hours. If the director charges a higher rate, fewer hours are required. If a client disputes the bill or takes two months to pay, more cash must be found from somewhere else.
The director might use savings, an overdraft or personal credit. They may simply go without income. Several months can turn an apparently respectable business into one living on borrowed time.
I use the word cash deliberately. An income statement can show revenue that has not yet been received. A balance sheet can show receivables that are slow to turn into money, alongside loans that have kept the bank account alive. Neither is a substitute for looking at what came in, what went out and what the owner took home. A profitable year on paper can still contain months in which someone has to find the wages by Friday.
This is also why it is misleading to speak loosely of a monthly cost “plus GST”. Staff wages do not acquire GST because the firm is registered. A registered business generally accounts for GST on taxable sales and may claim eligible GST on business purchases. Those amounts need to be tracked, but they should not be pasted across the entire payroll figure. The fee of $150 in this example is stated excluding GST throughout.
Busy is not the same as healthy
The 120 billed hours require enough suitable work, clients willing to pay the rate and bills that are actually sent. Paid annual holidays and sick leave reduce billable time while salary continues. The director has to find the next job before the present one finishes.
In a small firm, the director may be its salesperson, senior adviser, complaints department and emergency cover. Time spent securing future clients cannot automatically be billed today. A full diary can conceal a future shortage of work, just as a full list of debtors can conceal a shortage of cash.
For some advisory firms, the office is part of that calculation. Clients want to meet a person and see a functioning business before discussing a sensitive matter. Some capable consultants work from home; others serve clients for whom an office matters. My example assumes the latter. Giving up the premises does not answer whether the firm's chosen model earns enough.
The other pressure is price. A consultancy with steady clients from overseas or specialist work may be able to charge well and plan ahead. A firm competing for irregular local work may not. Raising a rate in a spreadsheet is easy. Finding clients willing to pay it is the business problem.
Nor should the argument be twisted into a complaint that the receptionist earns too much. The person at the front desk also runs the office and works on marketing; they have agreed wages and should receive them. The consultant brings qualifications and experience, and has their own obligations to meet. The point is that the person who hired them, signed the lease and stands behind the business can end the month earning less than either employee. Sometimes the boss earns nothing at all.
There is no virtue in keeping an unviable business alive indefinitely. Some firms need a different price, fewer fixed costs, a stronger client base or an honest decision to close. But we should be able to discuss those choices without pretending every struggling director is incompetent or every apparently busy firm is sound.
What should the conversation be?
First, we need to ask better questions of a business than whether turnover has risen. What proportion of its work is billed? How much of that billing is collected, and when? What does the director actually receive after staff and suppliers are paid? How much working capital is available when a client pays late or a staff member is away? Those questions reveal the difference between growth and a longer wait for the owner's pay.
Second, anyone designing or discussing support for small firms should pay attention to the time between work and payment. Easier access to borrowing can bridge a temporary gap. It cannot repair a model that routinely charges too little or collects too slowly. Prompt payment, workable contract terms, realistic pricing and sound cash forecasting may matter more than another speech about entrepreneurial spirit.
Third, we should understand what happens when the gap reaches the tax account. By then, the business may have paid staff and rent while the director tells themselves next month's receipts will catch up. In my work, I see how expensive that assumption can become. Tax obligations do not disappear because the owner has paid themselves last. Waiting until the arrears have grown is rarely a plan.
The point is neither to excuse unpaid tax nor to ask the public to subsidise every lease and payroll. It is to look honestly at the businesses we say we want to retain and grow. An owner can employ two people, serve real clients and still be financing the enterprise with their own unpaid labour. If we ignore that, we will mistake activity for health until the bills finally expose the difference.
The receptionist gets paid on Friday. They should. The question is whether the business can also pay its boss—and still be there next Friday.