With so much uncertainty still hanging over the economic recovery it is tempting and prudent for SMEs to continue to watch their cash flow and keep a tight rein on spending.
However, there may be some instances where this could be a false economy that will inhibit a future productivity gain.
We have been seeing businesses that are still holding back on upgrading their IT systems or software.
Businesses use IT to make life easier and more efficient and while it makes no sense to try to keep pace with constant IT innovation, equally it can be counter-productive to hold on too long to the point where a system is either very slow or no longer fit for purpose.
A good example is switching to online bookkeeping. This is a case where changing to an online bookkeeping system rather than using an old-fashioned manual method or even a computer package is likely to save both time and money. Not only can the online system be shared with key people or outsourced to a bookkeeper but it can be monitored by your accountant, saving on the time and costs as well as offering scope for improving the quality of reports.
Perhaps you can suggest other examples of processes that could help SMEs to boost productivity?
It has been calculated that women in full-time employment earn 15.7% less than men.
Indeed, maternity leave and taking time out to bring up children can do serious damage to a woman’s career and lifetime earning potential. However, is it realistic for women to expect to go back into work at the same level as their peers who continued with their careers after a period of child rearing?
And what happens when a woman has sacrificed a high powered job or put her career on hold to rear children if her marriage breaks down? Sadly, divorce court financial settlements in such cases are rarely equitable and often do not take the sacrifices into account.
What advice should we give to our daughters? Share the parenting role more equitably? Avoid taking time out for parenting? Insist on a pre-nuptial agreement? Start her own business?
We hear a lot from the unions about a squeeze on incomes for the blue collar workers they represent but there is another, large group of people who have suffered a much bigger drop in income.
Many middle management positions have gone altogether since the 2008 Great Recession began and older people, especially, who were made redundant from these positions have found it difficult to find other jobs.
According to research by the Resolution Foundation the loss of these middle management posts has contributed to a fall in real wages.
Many of these former managers have turned to self employment, setting up as consultants or outsourcing their skills to companies as needed and this has led to an estimated 20% reduction in their income although I believe the reduction is much greater.
The consequences of this are still to come. While initially many have been cushioned by redundancy pay, reclaims from their bank due to mis-sold income protection and other insurance products, and low interest rates sooner or later the money will run out.
Having lost out on their occupational pensions, how many of these newly self employed are able to put money aside for their pensions? How many will be able to repay their mortgages, let alone service them when interest rates rise?
Eventually we will face a serious Welfare payments crisis as more people reach retirement age without adequate provisions, not to mention that there will need to be a substantial correction to house prices, which are over-valued by up to 30% in our view.
Banks can provide “negligent advice” to customers without being held liable.
The outcome of a recent court case has effectively sent a message to banks that mis-selling of products is not illegal.
Crestsign Ltd, a small, family owned business, had challenged Natwest and RBS in court over alleged mis-selling.
The company refinanced its debts in 2008 for five years with a loan that provided for variable rate after two years. At the same time the banks recommended a 10-year interest rate swap that provided for a fixed rate of 5.65% for the ten years. When seeking to refinance again in 2011, the break costs were £600,000.
The banks denied that they owed a duty of care and claimed that any advice was limited to ensuring information given was ‘not misleading’
While the judge, Tim Kerr QC had expressed considerable reservations about the banks’ “negligent” behaviour relating to giving advice and recommendations on the swap product, in fact and in law the wording in the documents supplied to the customer exempted the banks from liability.
SMEs should beware.
Firstly, before agreeing to buy any product they should take independent advice.
Secondly, they should remember that the sale of products by a bank is likely to benefit the bank.
Thirdly, the small print is normally there to avoid liability by whoever drafts it.
And finally, relationship managers are very rarely decision makers.
An increase in insolvencies used to be a reliable signal that the economy was coming out of recession.
Six years after the Great Recession in 2008 we are being told that our economies are growing, the recession is over, SMEs are reporting increasing orders yet there is still no sign of an increase in insolvencies.
So what is going on?
The reason that insolvencies rise in an upturn is because two things happen.
Firstly companies start to get an increase in orders, but unless they manage their cash flow carefully, or have adequate reserves of capital they risk overtrading – essentially not being able to fund the growth.
Secondly, secured creditors generally only call in loans when they think there is a fair chance of recovering their money, therefore during an upturn and in particular when the secured assets increase in value.
The consequence is that when creditors start to demand their money back and a company is overtrading it can’t realistically pay off the loan – the result is insolvency.
So in our view, the recession is not yet over, markets remain jittery, confidence is still uncertain and asset values are falling, hence fewer insolvencies.
Have we simply papered over the cracks?
With all the uncertainty and market volatility in recent weeks should SMEs still focus on cash so that new opportunities and growth can be funded without over-trading (running out of cash)?
It seems that although many small businesses are reporting increases in orders, they are being cautious about taking risks.
Generally as an economy comes out of recession and orders start to pick up there’s a risk of over-trading, especially where a business has insufficient capital reserves to fund the period between order and payment.
This explains the well-documented rise in insolvencies that characterises the start of an economic recovery. We haven’t seen a rise in insolvencies yet and the feedback from SMEs has been that they are not yet convinced of a stable recovery.
We believe SMEs are taking a realistic view in welcoming increased business, deciding to make hay while the sun shines, but not yet pursuing aggressive growth strategies.
What is your view?
For some time now small businesses have been encouraged to look outside Europe for markets for their goods and services.
Indeed research by UPS found that UK SMEs have been outperforming those in Europe in developing their exports beyond the EU and increasing their turnover.
While the bulk of UK exports are still to the EU, 54% of UK SMEs had exported to other English speaking countries, such as the USA, Canada, Australia and New Zealand.
One could argue that SMEs should be looking even further afield. But how realistic is all this as a recipe for recovery and growth?
Markets across the world are increasingly jittery. There is doubt about whether the Bank of England will now raise interest rates this side of the forthcoming election for fear of destabilising UK recovery.
The 2008 Great Recession was a massive shock to the global economic system and the fear that it caused is nowhere near abated. There is even talk of another major financial meltdown looming in the next couple of years.
The IMF has been sending out dire warnings about global growth for 2015 because of the Eurozone’s ongoing failure to recover.
It is becoming ever clearer that the global financial system is now so interconnected that what happens in one part of the world has an impact on economies, wherever they are on the planet.
What price increasing exports in this atmosphere?
When considering capital reorganisation as part of restructuring a business it is normal to inform HMRC that holdings are being changed and request clearance.
No money is changing hands in this situation but even so it seems that the accountants and tax advisors are becoming reluctant to advise companies on their capital reorganisation.
Rightly or wrongly accountants are concerned about their own liability given the perception that HMRC’s stance is to assume the purpose of reorganisation is tax avoidance and that any notification may lead to a demand for tax payments in advance, regardless of whether there is any money being made from the restructure.
This is often complicated by the purchase of debt at a discount as part of a financial restructuring alongside the capital reorganisation.
So as restructuring advisors, we are finding that some accountants we approach for advice on Revenue clearance don’t want to get involved for fear of being sued.
Has anyone else come across this?
Since 2010 there has been a justifiable concern about the demise of the High Street.
This was fuelled by some big chains collapsing due to a reduction in consumer spending, a changing focus towards ‘value for money’ and the growth of shopping online or ‘out of town’.
But it’s not turning out quite like that. It seems we do still like the sociability of the High Street and the opportunity to browse and actually see and touch merchandise.
Amazon has recently announced plans to open its first actual store in New York, expected to be modelled on the lines of Argos, and surviving retailers have become more agile in adapting to what consumers want, so we now have click and collect.
Shopping patterns have changed to limit “brand loyalty” to one supermarket, hence Tesco withdrawing planning applications and selling land it had earmarked for more large stores.
There are also some signs that fewer people are doing a weekly “big shop”. There are noticeably more smaller High Street branches of the big four superstores, but also the rise of the budget stores like Aldi and Lidl because we also like value for money.
Smaller independent retailers are also proliferating according to research from the Local Data Company and the British Retail Consortium. They include e-cigarette shops, barbers, independent cafes and restaurants, clothes, crafts and gift shops.
It looks like the High Street is changing in character but we think it is a long way from being written off yet.
What do you think?
How would you define a relationship?
For most of us, it would most likely include some form of personal interaction and some clear mutual benefits for those involved.
On this basis, it seems that the banks still don’t get it. While they might talk about wanting a relationship with their customers, we’re hearing that it is still a one-way deal.
At the top level, bank CEOs and senior executives appear to have accepted the need for change, but the message does not appear to have filtered down to middle management. There may be more local managers tasked with taking care of SME customers, but when each has a case load in the hundreds and in some cases thousands, how can they hope to build any meaningful understanding of their customers’ needs?
While the marketing language may have changed it seems the behaviour hasn’t. SME customers are still being treated as ‘cannon fodder’ to whom ‘products’ are sold by a computer.
It seems banks still need to embrace the need for change – or are we speaking to the wrong customers?