Starting and running a business in New Zealand can seem like an appealing idea due to its strong economy, good governance, and ease of doing business.
However, once you dig beneath the surface, it becomes clear that operating a business here comes with significant costs. These expenses can make it challenging for entrepreneurs to not only get their businesses off the ground but to sustain them over time. So, what makes running a business in New Zealand so expensive?
Is it any wonder that around 60% of all small businesses fail within the first two years? So, why exactly is operating a business in NZ so expensive? And is there anything you can do to combat high costs? Read on to find out!
High Costs of Compliance
New Zealand is renowned for its stringent regulations and compliance requirements, which, while ensuring fair and safe business practices, often come at a steep price for business owners. Whether it’s meeting health and safety standards, paying for legal advice, or ensuring adherence to employment laws, compliance costs can accumulate quickly.
For example, the Health and Safety at Work Act 2015 places a significant responsibility on employers to ensure safe working environments. While this is crucial for employee welfare, it often requires ongoing investment in safety equipment, training, and compliance monitoring. Similarly, employment regulations such as providing fair wages and holiday pay increase operating expenses.
Employment laws are very tough in NZ and this puts extra pressure on employers to spend more to make sure they remain compliant, and avoid potential disputes or legal proceedings.
Limited Access to Talent and Higher Wages
New Zealand’s relatively small population of around five million people means there is often a limited pool of skilled workers. This scarcity can drive up wages, particularly in sectors where expertise is in high demand, such as tech and trades. For small business owners, the increased competition for talent often forces them to offer higher salaries and attractive benefits packages to attract and retain staff.
Furthermore, immigration policies can make it challenging for businesses to source overseas talent, adding to the pressure of finding the right employees locally. When labour is scarce, businesses may need to invest in training and development, further driving up costs.
Cost of Living and Rental Prices
New Zealand’s high cost of living, particularly in cities like Auckland, Tauranga, Christchurch, Dunedin and Wellington, directly impacts business owners. Commercial real estate and office rental prices are steep, and for businesses that require a physical presence, this becomes a substantial part of their monthly expenses.
Even for those businesses that don’t need office space, running a business from home isn’t always cost-effective either. Utility costs like electricity, water, and internet can be higher compared to other countries, and living expenses like housing and transportation indirectly affect how much businesses have to pay their employees to provide a competitive wage.
And let’s not get started on grocery prices, who of us doesn’t cry a little on the inside every time we go to the supermarket, even low-cost suppliers like PaknSave.
Supply Chain and Import Costs
Being geographically isolated means that many products, raw materials, and equipment need to be imported into New Zealand. Shipping and logistics costs add a considerable burden to the operating expenses of businesses that rely on imported goods. This is particularly true for industries like manufacturing, construction, and retail. Delays in shipping due to New Zealand’s location can also disrupt supply chains and lead to additional costs.
The COVID-19 pandemic highlighted just how vulnerable New Zealand businesses are to global supply chain disruptions, with many companies experiencing delays and increased costs in obtaining materials and goods from overseas suppliers.
Taxes and Government Fees
While New Zealand’s tax system is relatively straightforward compared to other countries, taxes can still add up quickly for business owners. Income tax, GST (goods and services tax), and various local levies can all eat into profits. Furthermore, businesses are required to pay ACC (Accident Compensation Corporation) levies, which fund New Zealand’s accident insurance scheme. While this system is beneficial in providing compensation for work-related injuries, it represents an additional financial obligation for business owners.
Moreover, any business employing staff has to account for the cost of KiwiSaver, New Zealand’s retirement savings scheme. While KiwiSaver is a great benefit for employees, the employer contributions can quickly add to payroll costs.
Limited Economies of Scale
New Zealand’s relatively small market means that businesses struggle to achieve economies of scale in the same way they might in larger countries. Without a large local customer base, businesses must often charge higher prices to cover their costs, making their goods and services more expensive for consumers and limiting growth potential.
Additionally, exporting to larger markets, while a potential solution, comes with its own set of challenges and costs, such as international marketing, compliance with overseas regulations, and shipping.
Technology and Digital Infrastructure
While New Zealand has made significant strides in digital connectivity, particularly with the roll-out of high-speed broadband, the cost of technology infrastructure can still be high for businesses. Cloud services, software subscriptions, cybersecurity measures, and IT support can all add up, especially for small businesses that rely on technology to streamline their operations.
What can you do about high running costs?
Running a business in New Zealand presents a unique set of challenges that contribute to its high cost. From compliance and wage pressures to supply chain disruptions and limited economies of scale, business owners need to be strategic in managing these expenses. Despite these hurdles, New Zealand’s strong entrepreneurial culture and stable economic environment mean that businesses with a well-thought-out plan can still thrive. However, understanding and preparing for the high costs is essential for long-term success.
Here are some suggestions to consider if you would like to reduce your business costs:
- Track all expenses – Yes, even those morning coffees. Know exactly what your outgoings are because as they say you can’t manage what you’re not measuring.
- Track your time – I know you’re thinking but my time is free. No it isn’t – you could be out working a job with that time. Actually, this is one of the biggest mistakes most business owners make. Don’t fall into the trap of working for nothing.
- Think carefully before taking on debt – Servicing a debt can quickly become a heavy burden for a business especially when you’re going through lean times. Avoid debt, especially for depreciating assets or a risky venture.
- Don’t hire early on – Until you know your business is a sure thing, avoid hiring. Instead use contractors or 3rd party services.
- Regularly check for cheaper alternatives – Set time aside to review all your ongoing costs and investigate cheaper alternatives. Maybe you’re paying too much for your website and email services?
- Go digital – Still printing invoices? Manually taking bookings? Review your current business processes to see if there’s a cheaper, digital alternative, like taking bookings or sales enquiries through an affordable business website. Feel free to contact us for some free advice on smart ways to reduce your website costs.
- Focus on ROI – ROI, or Return on Investment, normally relates to what you get for investing, such as a term deposit at the bank, but you can also apply it to expenses. Some costs are unavoidable, like tax and compliance, but others are optional, and some offer little value to improving your business’ profitability.
- Get tax help – Yes, tax is compulsory, despite what your dodgy neighbour might be suggesting, but you can get some qualified advice and plan your tax to make sure you are benefiting from all the provisions made to assist NZ businesses.
By taking a proactive approach to your business costs, you can improve the chances that your new business will beat the odds and be successful even in a tough economy like NZ.