Can the UK have a balanced economy?

A new YouGov poll of voters has discovered that at least 85% of them want to see a strong emphasis put on manufacturing by the next government believing that there will be greater economic security in a more balanced economy.

The British Chambers of Commerce (BCC) has also warned recently that the recovery could risk being stalled unless more is done to balance the economy away from a disproportionate reliance on consumer spending.

ONS figures show that manufacturing makes up just 10% of the UK economy despite chancellor George Osborne’s call for a “march of the makers” in the early days of the current coalition government.

But why are we surprised?  Industry, particularly but not only construction, regularly highlights difficulties in recruiting people with the right skills and this is the result of years of neglect.

Young people have not been encouraged to believe in, or aspire to careers using practical skills, in fact quite the opposite.

Inevitably, even if a shift of emphasis and a change of direction that encourages young people and others to value the training acquired through an apprenticeship or college as highly as a degree currently is, it will take some years before the skills imbalance can be corrected.

Then there is the question of whether manufacturing can ever compete in an export market that includes China, India and others, where production and wages costs are so much lower than in the UK.

And finally the question of funding where investors in particular for some years have disliked industries that tie up capital and have high fixed overheads, whether this is due to perceived risk or the long-term nature of such investments.

Is it already too late to revive an industrial base in the UK (or possibly England given today’s vote on Scottish Independence) and what kinds of goods can we manufacture in such a way as to be competitive?

The perils of a narrow focus and its effect on growth

There is always going to be a need for certain skills regardless of technological change yet somehow over the last couple of decades many trades have been ignored or forgotten in the push to get more young people into university.

As a result there is a significant shortage of many skilled tradesmen and women.

One example is the construction industry, both for new building and the maintenance of existing property. We all know there is an urgent need for more housing and that this is fueling a rise in property prices beyond the affordability levels.

For some time now, we have been hearing that local tradesmen such as, builders, plumbers, painters and decorators, are booked up for months ahead. Many jobs and postings on local social media forums ask for anyone prepared to work in the building industry.

This demand is similar for both small and large construction companies, most of which are growing but cannot recruit enough skilled people.

Despite economic recovery, we are in a position where past narrow thinking has led to the possibility that growth in construction risks being stifled by its inability to find enough skilled people to meet the demand. And if a domestic emergency arises with the plumbing this winter it may be a challenge to find someone to deal with it.

What other sectors do you know of that are experiencing similar problems and how are they addressing the skills-shortage problem?

No magic lantern, just commonsense

This week the successful online e-commerce company Alibaba will make a pitch to investors as it prepares to launch as a public company on the US stock market.

Jack Ma, the founder of the highly profitable 15 year-old company, issued a letter to investors along with the company’s prospectus. In it he described the company as an ecosystem with a long term vision.

The letter contained some striking points. One of them is that shareholders would effectively be third in order of importance in the company’s strategy.

In first place came customers, who for Alibaba are the small businesses using the platform to sell their products and the consumers who buy them. In second were employees. His reasoning is that to give customers what they need the company needs happy, diligent and satisfied employees. Without these two the company cannot fulfil its duty to create long-term value for its shareholders, which is why he put them in the third place.

In last weekend’s Sunday Telegraph Business Review I contributed an article on how small businesses need to prepare for growth and I believe there are lessons in Jack Ma’s letter from which SMEs can learn.

No business can grow unless it is providing what its customers need and, as Jack Ma says, that depends on committed employees. It ought to be commonsense.

These two aspects are central to demonstrating that a company is a viable prospect when it is seeking finance to grow as they will form a significant element for any pre-investment valuation.

If a company cannot demonstrate a demand for whatever it supplies how will it convince lenders that it will be able to repay the money it has borrowed or provide a sustainable return to investors?

I would welcome contributions from others who have similar stories that are aimed at reassuring investors before they part with their money.

Independent insolvency advice

An independent adviser can help a business’ directors by identifying what is essential to and special about their business and its future.

If a company is insolvent and its directors are considering their options then an independent adviser is vital, as we argued in articles in Business Review in today’s City A.M. and in last Sunday’s Telegraph.

Directors need someone who can assess whether and how their company can be saved, and whether it is via a turnaround or transformation. This is different from advice on what is in the bank’s best interests.

Also, as Tyrone Courtman, of PKF Cooper Parry, points out in the same article, directors need guidance from someone who is not subject to conflicting interests.

Do directors need their own independent advisor when a bank introduces its advisors?

See article page 8: Transforming Business Fortunes in Business Reporter

SME businesses need goals and a plan

As we noted in our last blog more than two thirds of the new jobs created since 2008 are people registering as self employed to set up in business for themselves.

There is as yet no information on why.  It could be that they felt they had no alternative after redundancy, especially if they were older people who calculated that the odds of finding another job were less than favourable. Some may have dreamt of becoming their own boss.  Some may have jumped before they were pushed.

A few will undoubtedly be people with a strong entrepreneurial streak and an innovative product or idea.

One thing all business coaches say is that to run your own business requires passion and commitment, market research, a business plan and sound financial management.

Any plan will include analysis of the market and assessing the competition, without which it is difficult to know if a business can succeed.

Once a plan has been produced, a focus on bringing in business and satisfying customers tends to involve doing more of what works and stopping doing what doesn’t. This needs constant vigilance and regular monitoring to make progress towards goals in the plan.

Revisiting the business plan is more like checking the map to make sure you will eventually get to where you are going. Sometimes when conditions change or opportunities arise you have to fundamentally change your goals and also your plans. There is no strict formula for a plan but having a goal and road map allows you to measure progress towards reaching your goals.

A survey of 1000 SMEs carried out by Bibby Financial Services recently found that one in four of SMEs cited increased competition as their greatest fear, yet all too many of them don’t have any goals and even fewer have analysed their market, let alone produced a plan.

One has to ask, how many of these new self employed businesses really had any idea what they were getting into?

Self employment – are we sowing the seeds of a catastrophe?

Self employment accounts for almost two thirds of the new jobs created in the UK since the 2008 financial crisis according to the Office for National Statistics (ONS).

Effectively these are micro businesses and many of the 4.6 million people in this category, according to the ONS, are older people, often offering “white collar” consulting and skilled services.

This may be keeping people off the unemployment register and the Government, naturally, attributes it to entrepreneurial spirit and more people wanting to be their own boss. It is also hoping that many of these micro businesses will grow and be significant providers of future new jobs.

However, there is some evidence that most micro business owners are working longer hours than employed staff, for lower remuneration and that many will have to continue working well beyond retirement age.

This development raises two important concerns. Firstly, how are these businesses being funded while the statistics indicate that banks and other finance providers are not lending to micro and small businesses? Are they depleting personal savings or growing consumer debt? And how will they fund retirement?

Secondly, if the earnings from self employment are lower than they for those in direct employment, notwithstanding the impact on the economy due to a reduction in spending, is this change in employment patterns sowing the seeds of a yet unforeseen catastrophe?

Europe – an uncertain export market for UK?

Several eminent economists have attacked the Eurozone’s post-2008 economic strategy and warned that it could blunder into depression.

During a recent gathering of Nobel prize-winning economists at Lake Constance, Germany, Prof Joe Stiglitz said austerity policies had been a “disastrous failure”, while Prof Peter Diamond said: “Historians are going to tar and feather Europe’s central bankers”.

With Germany’s economy slowing, growth in France stagnating, leading to a mass Government resignation at the weekend, and Italy and Cyprus also contracting this is not good news for the UK’s businesses.

Europe is traditionally the UK’s biggest export market and the current situation is not encouraging despite economic recovery and signs of growth in the UK.

In fact, they are facing a double whammy because £ Sterling is so strong at present making exports to Europe expensive and therefore impacting on both margins and sales. And, if, as has been suggested the European Central Bank embarks on printing more money (quantitative easing) to ease its own dire situation this will further impact on UK sales to Europe by making exported goods and services even more expensive for European customers.

There is a genuine concern that any UK export-led growth, especially to Europe, could be stifled by the high value of £ Sterling.

In this uncertain market businesses, as we have said before, will need to broaden their horizons and look for export opportunities elsewhere.

Has anyone any suggestions for a promising potential export market and also which UK sectors might benefit?

Risk taking? Fat chance

This week the independent UK body researching issues related to pay, The High Pay Centre, published its annual analysis of CEO pay to reveal they are now paid 143 times as much as their staff.

Meanwhile, the Telegraph business pages report that corporate giants and PE (Private Equity) firms have accumulated capital reserves amounting to £4.1 trillion.

At the same time earnings in the UK have fallen by 10-12% in real terms since 2008, according to the Bank of England, and the Fawcett Society has released findings after questioning 1000 low-paid women that indicate that the gap between men’s and women’s pay has widened for the first time in five years.

Is there any relationship between these facts?

Possibly. Despite reports that the UK economy has recovered from the 2008 Great Recession, business and economic commentators, among them the Daily Telegraph’s Allister Heath, are arguing that it is still not sufficiently dynamic.

Heath points to a combination of factors including that Government measures introduced to mitigate the recession’s effects have frozen parts of the economy so that people fear moving jobs, businesses are not investing and so-called zombie companies are being allowed to survive well past their effective life.

He argues that a little “creative destruction” is required to really get things moving and that economies need to be in a state of permanent revolution in order to be successful.

He may have a point, but while there is uncertainty about future direction of policy in the run-up to an election, not to mention so much unfinished bank and financial sector regulatory reform, an ongoing unease about the fairness and morality of the way our economic system is structured and currently operates and so much uncertainty about a possibly stagnating Eurozone ( the UK’s biggest export market) there are likely to continue to be more questions than answers and precious little appetite for risk taking of any sort. Those who have will hang on to what they have accumulated.

Why should CEOs put their own salaries at risk by taking risks for the benefit of apathetic shareholders?

Can there be morality and ethics in business?

Ever since the Great Recession began in 2008 there has been an understandable focus on the moral and ethical behaviour of banks and other financial institutions – or the lack of it.

However, there has been a wider discussion rumbling along since May, when a conference was held in London on so-called “inclusive capitalism” where discussions touched on the so-called social contract of common values that tacitly exists in the market , whether it is in finance, business or government.

This theme has since been taken up in comment pieces, including Anthony Hilton in the London E Standard, reflecting on the ways in which businesses can treat customers unfairly, without it being obvious, for example instead of a price increase the manufacturers change the shape of a package or reduce its size to sell less for the same price.

His question was whether the responsibility for such behaviour rested with a company’s board of directors, with its CEO or managers, or with regulators to ensure fair dealing.

More recently Lord Digby Jones weighed into the discussion, arguing that the relationship between government, businesses creating wealth and society was broken. He put forward the notion of a business covenant, like the military covenant, that might set out simply and clearly the obligations of a business to its customers and its community, and what business might expect from government as part of the covenant.

Covenants, while not legally binding involve a clear statement of intent as to how the parties should deal with each other.

Despite the caution “caveat emptor” an economy and society can only function effectively when consumers and clients trust the businesses that supply their goods and services.

While consumers also need to take some responsibility for their purchasing and financing decisions, inclusive capitalism relies on there being a level of confidence that customers will be treated in a moral and ethical manner by those institutions, financial and commercial, that supply them.

Director guarantees should mean cheaper borrowing

Financial institutions, especially banks dealing with small business loans, are often asked for loans by directors of companies that do not have insufficient assets. This places banks in a difficult position because they often want to help their clients but at the same time they can’t take risks with depositors’ money. The result is that banks frequently require directors to give a personal guarantee as security for money borrowed by the company.

If the business is subsequently unable to repay the guaranteed loan then the bank expects to rely on its guarantee. Accordingly guarantors are now asked to seek legal advice before signing a guarantee or at least confirm they have been advised to get advice before signing.
Directors should therefore be mindful of the obligations they may be taking on when seeking business finance and weigh up the pros and cons.

We are, however, aware of clients being told by bank managers that they would never expect to actually call upon the guarantee. This confuses the issue as it begs the question why take a guarantee. However most likely if a guarantee exists, it will normally always be called upon in the event of a default providing the director has sufficient personal assets.

While a bank relationship manager may be uncomfortable asking a client to sign a personal guarantee and often confuse their client by trying to reassure them, the bank’s in-house recovery team won’t have a problem if the a bad debt is passed to them.

Some commentators and many aggrieved directors have tried to turn this into an ethical or moral issue but it is straightforward. Banks need security and they should not be lending money at risk, at least not retail or commercial banks. In turn the reduced risk to the bank should attract a low cost of borrowing to the client.