Which way on the EU for SMEs?

Within days of the UK election results the advantages and disadvantages of EU membership are already being discussed by businesses.

While many businesses have signalled that “Brexit” would be a bad thing for them and for the UK economy given that the EU is our largest trading partner, some have begun to disagree.

Chief among them are the chief executive of JCB, Graeme Macdonald, who is quoted in the Guardian this week as saying that the UK is far too important a trading nation to be simply pushed to one side. Is he right or is this hubris?

Previously the newly-appointed Business Secretary Sajid Javid and the newly-appointed commercial secretary to the treasury Jim O’Neill, the former chairman of Goldman Sachs Asset Management, have both opined that the UK has nothing to fear from leaving the EU.

O’Neill, in fairness, has also said that staying in the EU would be preferable but he is also a believer in the opportunities that will be available to UK businesses from the BRICs (Brazil, Russia, India and China).

While it may be OK for JCB who already sell outside Europe, what does all this mean for the UK’s SMEs? For the time being, it’s likely to mean continued uncertainty when planning their future, not least because of the scarcity of funding for overseas marketing or for the R&D necessary to compete in international markets.

Much has also been made of the burden of Euro red tape holding back SMEs, though rarely is there any detail on what this means. Presumably it includes employment, Health and Safety and banking regulation.

What does Red Tape mean to your business and what would make life easier?

Can Private Equity solve the funding gap?

The equity funding gap remains a huge problem for SMEs.

There seem to be two gaps. The first is for businesses raising between £500,000 and £2 million of equity where below this threshold there is a healthy market of Angel and Crowd investors for businesses to approach, but for some reason

Private Equity is focusing on much larger investments, normally above £2m.

The second gap is for businesses wishing to invest in R&D or marketing where it seems that Private Equity finance has become more like debt finance, focusing mainly on profitable businesses.

So if you had, say, a chain of five restaurants with a proven business model you would have no shortage of funds for the next five. If, on the other hand, you wanted to grow from one to two or three you would have a problem.

Despite the rhetoric from Government, banks and many others about the need to support SMEs if economic growth is to be restored to pre-2008 crisis levels, the incentives aren’t working.

With appropriate government incentives, we believe that PE firms could be encouraged to fund the equity gap.

Now the election is out of the way, what are your business priorities?

Before the election last week, the main business worries were the lack of orders due to uncertainty, and the lack of finance for small businesses.

Almost as soon as the results were in, John Longworth, the Director General of the British Chambers of Commerce, among others was calling for “bold, ambitious” action from the newly-formed government.

His open letter to the Government asked for an emphasis on growth, not austerity and on measures to help businesses to export.

Meanwhile, the Daily Telegraph’s Matthew Lynn identified four business priorities that the government needs to address with some dispatch to help businesses and economic growth.

They are reducing both capital gains and top rate income tax, actually delivering on promises to remove red tape (partly by renegotiating some of the EU regulations affecting businesses), helping entrepreneurs by exempting them from some employment and capital gains regulations for their first five years in business and by recognising that the property market is broken.

While the election has introduced a level of certainty, the uncertainty about an in/out EU referendum remains and time will tell if government initiatives stimulate investment since the EU regulations on banks will discourage risky lending which for most UK banks means lending to SMEs.

We invite you to tell us what measures would most help your business to grow, and also what you think the Government should do to support them.

Creditors are losing their appetite for formal insolvencies

The decline in the numbers of formal insolvencies suggests that creditors are realising that they don’t actually solve the problem.

Creditors’ reduced appetite for pulling down companies is directly related to whether or not they are going to get the money they are owed. In many cases insolvent companies have been shown to have very few unencumbered assets available, meaning that there is no money left to pay creditors.

This is a positive for the insolvent company in that it means there is likely to be more scope for restructuring.

Logic would suggest that if creditors are willing to be more patient and to accept a consensual restructuring proposal, they are likely to get a better outcome than via formal insolvency.

Consensual restructuring is a pragmatic approach and relies on reaching agreement to ensure future supply as well as reassuring creditors, who are often key suppliers.

Reaching agreement for new terms and implementing the plan can be difficult when trust has broken down which is why independent third party executives such as company doctors can be valuable.

We would welcome your comments on the viability of consensual restructuring and the reasons for the decline in insolvencies.

How should a business handle employee absenteeism?

“Our employees are our greatest asset” or “we value our staff” are often said but rarely is any investment in people included in budgets or forecasts.

When staff related problems are identified dealing with the issues, and the causes, can be time consuming and sometimes costly.

The problems are normally exacerbated when the early indicators are ignored.

Employee absenteeism is a good example. It is a complex issue and requires understanding of the causes.  However, the issue should be covered in the company’s handbook so that everyone knows where they stand.

Persistent lateness or absenteeism can be a sign that the person is undergoing some form of stress and this requires understanding from the employer rather than disciplinary action.

Some may be quietly trying to deal with family issues, or an illness.

A change to the tasks an employee has been asked to perform may have triggered a subconscious lack of confidence in their ability to perform which manifests as persistent lateness.

Or it may simply be that a persistently late employee is disorganised and not leaving home early enough to arrive on time.

Whatever the root cause, if the employer demonstrates a concern to get at the root causes before taking appropriate action, rather than moving straight to disciplinary action, the result will be a workforce that understands that it is valued and will therefore be motivated to work better and harder.

Betrayed trust – a lesson for all SMEs

Like the public’s trust in politicians, the consumers’ trust in a wide range of businesses has plummeted.

They include energy suppliers, banks, insurance companies, mobile phone companies and the big supermarkets. All have been guilty of marketing complex offers for products, purporting to be better value, in such a way that consumers cannot with any confidence compare them.

Betrayed trust has led to a marked change in buying behaviour such that people no longer stick with one supplier.

The most noticeable moves have been in the grocery retail sector, where companies like Aldi and Lidl have seen their profits rise by up to 10% and one of the biggest casualties has been Tesco, whose behaviour towards both suppliers and customers has been exposed as less than honourable.

Generally, consumers will assess the value and affordability of a higher-priced product compared with a cheaper one and will buy whichever suits them, but only if they feel they are getting value for money.

It is a mistake to believe consumers can be bamboozled by alleged bargains that then turn out not to be. It is also a mistake to insult their intelligence.

Giving fair value, good service and a reputation for being trustworthy are valuable assets for any business’ reputation. There is a lesson and an opportunity here for SMEs, who can often demonstrate these qualities in a way that the bigger organisations cannot.

The key ingredient is trust.

How do you demonstrate trustworthiness to your customers?

Election uncertainty puts business activity on hold

There is no doubt that there is a lull in business activity ahead of the UK election which I believe is due to uncertainty about the outcome.

But the outcome itself is unlikely to deliver the certainty needed for businesses to make plans for the future. Rather than certainty, the psephologists are predicting we are a long way from having a majority government and we may be entering uncharted political territory.

At the moment, there is little prospect of even a coalition forming a government with a clear majority. This is somewhat alarming for business as the party leaders have ruled out possible alliances. The likelihood is that no party will be able to survive a full five-year term.

Britain is still a novice when it comes to coalitions. This is a shame as experience in those countries that have had them for some time has shown that they can be a good thing. One big advantage of coalitions is that they provide scope for parties to reverse some of their election promises, which all too often are made to solicit votes, despite whether or not they can be afforded.

From the business perspective, in a country where government by coalition is accepted and understood, a strong coalition can be a desirable outcome as business needs both stability and extreme policies being tempered by coalition partners.

It will take a while before Britain reaches that point, so the uncertainty is likely to continue and in that environment many business will continue to struggle as there is little to justify attempts to grow in an uncertain environment.

Are there positives hidden in the UK’s decline in productivity?

There has been much worry about the UK’s continued weak productivity and the fact that it continued to decline in the last three months of 2014.

While this continues to be a concern in terms of UK business competitiveness globally Daily Telegraph Business columnist Allister Heath last week suggested that “at least some of the UK’s productivity shortfall was a good thing”.

Why? Because the UK’s success in reducing the numbers of unemployed has distorted the picture, somewhat exaggerating the productivity problem. His argument is that large numbers of those now back in work were “low productivity workers” and that this has dragged down the average productivity per worker.

He also argues that more needs to be done to improve productivity by improving the skills of these workers with vocational training and education.

Further, he argues, to improve productivity requires dramatic improvement in the UK’s infrastructure, not by increasing government capital spending on such projects as the HS2 rail projects but by encouraging private sector investment.

Certainly the UK needs to increase capacity, to improve efficiency and to grow its export markets.

“We need to unleash the forces of entrepreneurship and competition on all kinds of capital projects, from transport to energy”, he says.

Do you agree with him?

Will the grocery code adjudicator be able to help SME suppliers?

Many supermarkets are now stocking local food products from SME suppliers.

This can be both a blessing and a curse to SMEs, especially if an SME becomes dependent upon one large customer where UK supermarkets have a reputation for holding SME suppliers to ransom resulting in many SMEs being left insolvent due to harsh treatment by a supermarket.

The terms, conditions and costs including promotion related fees imposed on suppliers by supermarkets have often been regarded as unfair to suppliers, which has resulted in the introduction of the Grocery Code.

It has taken more than a decade from the Code’s introduction in 2001 to the appointment of an adjudicator in 2013 and then a few more years to early this month, April 2015, to give her the powers to impose a financial penalty on offenders.

The Code only applies to the “big 10” supermarkets (Tesco, Co-op, Sainsbury’s, Marks and Spencer, Asda, Lidl, Morrisons, Aldi, Waitrose and Iceland).

It only covers the demands on suppliers to fund promotion related fees predominantly, over-ordering at promotional price, forcing suppliers to make unjustified payments to a retailer for consumer complaints, ensuring that stores only de-list suppliers for purely genuine commercial reasons, and that they give reasonable notice of and opportunity to discuss delisting with their Code Compliance Officer.

This leaves plenty of scope for more games by supermarkets and raises the question as to whether the Code’s principles can be applied in practice.

In an interview with trade magazine Supply Management in March, Christine Tacon, the grocery code adjudicator, said: “I need reasonable suspicion of a breach. Lots of anecdotes aren’t enough for me to say “I have reasonable suspicion”, and I can be taken to a judicial review if I launch an investigation without sufficient evidence.”

The Code’s tiny department will only be able to conduct up to four investigations a year and the maximum fine of 1% of annual profit will be a last resort.

It looks as though suppliers will need to collaborate with each other if complaints against a supermarket are ever to be investigated and it is likely to be a long time before any examples are made that will force a change of behaviour by supermarkets towards their suppliers.

SMEs should continue to be wary.

What’s the point of a business plan?

Business gurus will insist that a SME has no credibility or chance of success without a proper business plan.

There’s no prospect of raising finance without one, even, these days via crowd funding.

But many small business owners struggle with the concept of setting targets for revenue, growth or increased turnover in one, three or even five years time, especially given the volatility of local, national and export markets since 2008.

It can feel like crystal ball gazing or fantasy. Who knows what may happen next?

But what most forget is that a plan isn’t set in stone. It needs to be re-visited regularly and should be adjusted as conditions change.

Most business advisers would advise flexibility and regular reviews of performance so that goals and decisions about spending can be adjusted accordingly.

As part of a flexible business plan, nowadays an essential ingredient is the cash flow forecast.

This can then be used to spend more or less depending on the availability of cash and the return on it being invested such as on growth and marketing initiatives, or on efficiency and cost reduction measures.

For businesses to successfully survive the economic uncertainties that look as though they may be with us for some more years they will need to plan for multiple outcomes regardless of what is planned.

So yes, a business plan is still an essential map through uncharted waters as long as it is looked at regularly and adjusted when necessary.