Can care homes be viable businesses?

elderly people in art activity in care homeThe provision of residential care for the elderly when they are no longer able to live independently is understandably an emotive issue.

But it must be remembered that however compassionate care home owners may be, they are primarily running a business.

The UK care home sector is largely composed of SMEs, with a few large-scale providers. They are businesses increasingly beset by financial, employment and compliance problems that are making it difficult for them to survive.

Like all employers, they face the increases in costs to meet the National Living Wage and for NI contributions alongside difficulties in recruiting enough employees willing to work in a low-paid sector not to mention training them. Inevitably, they face other increasing costs, such as energy supplies and food bills, both of which are in any case likely to be higher given the additional needs of frail, elderly residents.

Compounding the recruitment problem is the eventual outcome of Brexit, particularly relating to recruitment of workers from the EU, who make up a large proportion of care workers.

Why is finance such a difficult issue for care homes?

To some extent viability for the SMEs in the care homes sector depends substantially on the rate paid for their services, whether by private customers or by local authorities. Essentially local authorities have been reducing the rate they pay to as little as £350 per person per week while private rates can be well above £750 per person per week. This would suggest that those care homes that focus on private customers are viable while those focused on local authorities are likely to struggle.

It doesn’t help that many care homes are old and were not originally designed for the job, having been converted from a residential property with the consequent burden of maintenance, compliance and upgrading costs.

Much of the funding for small care homes is based on the value of the property rather than the underlying business, which suggests that failure and repossession are inevitable.

On the other hand, larger care home chains have increasingly turned to venture capital for finance, but many of them also derive a proportion of their revenue from local authorities exposing them to possible insolvency.

In 2016 the accountancy firm Moore Stephens found that the number of care home providers going out of business had been increasing year on year fuelled by reductions in local authority fees and rising property costs.

The Local Government Association has calculated that the spending gap in social care is likely to reach £2.6 billion by 2020.

Also, a Manchester University study last year questioned the appropriateness and sustainability of the larger chains using venture capital and amassing substantial debt when revenue is largely from government. It warned that at least one private equity owned firm could run out of money by the end of the year.

The increase in levels of debt is such that a BBC Panorama investigation this week revealed that one in four of the country’s 2,500 care homes is at risk of insolvency.

It also revealed that private care companies have cancelled contracts with 95 councils because, as one company said, they cannot do what is being asked for the money available.

The situation has prompted not only the Care Quality Commission (CQC), the industry’s regulatory body, and Martin Green, the Chief Executive of Care England, which represents independent providers of care, to warn that the whole sector is “at a tipping point”.

So, unless the rates paid by local authorities increase dramatically it seems that the answer to our title question is a resounding “no”.

In a digital world how useful are business conferences?

speaker at conferenceIn today’s global economy it is possible to use digital technology to share information or for face-to-face conversations with colleagues or clients almost anywhere on the planet.

This can cut down dramatically on business overheads, improve efficiency and at the same time demonstrate corporate social responsibility for the planet and the environment by cutting down on the air miles.

Yet this does not seem to have diminished the appetite for business people, academics or politicians to congregate at a physical location to exchange ideas or learn more about a particular topic.

But is attending business conferences really necessary?

Small business owners are busy people and fitting in a few days away from the office or works can be a challenge but while the information gleaned from a topic-specific conference may be available in other ways there are other potential benefits that can be gained from the human interaction at a conference venue.

Live meetings can reveal other and perhaps better new ways of conducting a business and when the possibilities and benefits of collaboration, even with competitors, are becoming more apparent a conference offers a chance to interact with and form alliances with other businesses in your sector.

It may also offer opportunities for connection with new suppliers and discovering innovative new products and services.

No matter how knowledgeable an individual owner may be about their sector, running a business can be an isolating experience and it is easy to miss new trends or ideas when immersed in the day-to-day activities of an operation, so the conference may also provide a welcome opportunity to take time out for some strategic thinking.

A good example of this is the annual conference being held in Manchester tomorrow (March 22) for members of Pro-Manchester, an organisation for businesses in the Greater Manchester area and one that is likely to be a key influencer for the prospects of a Northern Powerhouse. This year’s topic is the Challenges of Digital Disruption, something that is likely to affect many businesses thanks to the activities of virtual companies like Uber, Google, Amazon and others.

It is helpful also to bounce ideas off other people in the same or similar fields to refine an idea and work out what may be practicable.

For regular conference attendees, there is also the possibility that over time they may come to be regarded as experts in their field, leading to gaining a reputation and to invitations to speak at subsequent events, all of which can add value to the business the attendee is in.

Conferences are great places for making connections, often in the so-called “coffee machine” or “hallway” conversation.

All of the above boils down to one invaluable benefit of the conference, aside from its stated purpose of gaining up to date information on a specific topic – and this is networking.

Post truth, fake news and business integrity

The Weekly Fake News Newspaper Convincing potential customers and clients that your business is both trustworthy and ethical, delivering what they want, and what you promise, has never been easy.

But it has become much harder in the “post truth” and fake news world, where cynicism has become the default position on any statement.

It is all too easy for politicians to dismiss any news report they dislike or see as critical as “fake” as seems to have been the default position in both the pre-Brexit referendum in the UK and in the recent US Presidential election.

Unfortunately, the repercussions have been far wider than those particular issues not least because there have also been a number of scandals in the business world, such as the behaviour of VW over the true level of CO2 emissions from various car models.

Not surprisingly any public pronouncement by anyone in politics or business is now often viewed with scepticism and cynicism.

There is a second factor that is making life more difficult for SMEs.

The age of Twitter, texting, instant messaging and social media in general have arguably resulted in shorter attention spans so that people, especially but not only the younger element, have neither the time nor the willingness to either read anything in depth or longer than a few lines.

Add to this the impatience for instant returns on any investment by shareholders and investors and it is clear that the challenges facing business are mounting up.

Yet businesses still need to survive and grow regardless of the above and of the uncertain climate that will prevail once the Government triggers the process of leaving the EU later this month and for the two years at least that the negotiations will take.

So what can SMEs do?

The most obvious approach is to keep calm and carry on. Continue with the marketing but perhaps shift the emphasis a little in ways that demonstrate that the staff and the business can be trusted, which is helped by not making exaggerated claims.

The genuine, ethical business, especially the smaller and well-known local SMEs, should counter scepticism by emphasising their history of good service with recommendations from actual customers and clients, even of their suppliers if appropriate.

Try blogging or providing downloadable fact sheets or examples to provide additional insights and information without expectation of reward in ways that reinforce integrity. Consider collaborating, even with competitors, but remember people tend to be measured by the company they keep. Many small initiatives can add up to a powerful message and be surprisingly productive for all involved.

Being open and honest about products and services, and providing a high quality and level of support helps build and maintain a reputation for integrity that takes years to establish and can be damaged quickly if standards slip without promptly addressing the problem.

While it may be fashionable to believe nothing anyone says, actions speak louder than words, but more importantly words and actions go hand in hand and should reinforce each other.

Why do the self-employed in SMEs earn less than their employed counterparts?

K2 Blog March 14 2017 self employed small businessmanOne of the main reasons why there was so much opposition to the proposal in last week’s Spring Budget to raise National Insurance (NI) payments for the self-employed was that they generally earn less than their counterparts in direct employment.

Not only that, but accepting that the primary purpose of NI is to contribute to the costs of unemployment benefits, sickness pay, holiday and maternity/paternity leave, those in self-employment are entitled to none of these. Therefore, the argument that the measure was aimed at introducing more fairness into NI contributions between the two groups was seen as disingenuous.

According to research from the Resolution Foundation published in October last year, the self-employed earn less than they did in 1994-95. At the same time, they now make up almost 5 million of the workforce and their numbers have risen by 45% since 2001-02.

The research also found that the proportion of self-employed business owners with their own staff had fallen.

Who are the self-employed?

To bring greater clarity to the discussion it is important to define the different types of self-employment.

Firstly, as businesses have sought to reduce their overheads on payroll they have seized the opportunities offered by zero-hours contracts and outsourcing work, which has relieved them of their responsibility for contributing to employees’ NI, leave entitlements and pensions.

Consequently, many of the self-employed are workers who cannot be distinguished from employees such as delivery drivers, taxi drivers, cleaners, builders and IT support workers, who might previously have been directly employed.

There is a second group of self-employed, those who have started their own businesses, whether as sole traders, running micro-businesses or larger and these belong to the category of SMEs. They can provide a range of goods and services from plumbing and heating to house renovation to website development to business consultancy. Some, but not all, may be budding entrepreneurs.

In some ways, it is irrelevant whether their employment status has come about by choice or compulsion as businesses have sought to reduce their payroll costs and obligations.

The main trigger, according to the Resolution Foundation, was the 2008 Financial Crash.  It led to an increase in the numbers of the self-employed, introducing more competition in the demand for their goods or services, leading to a decline in both hourly rates and the working hours available to them.

So, competition and the need to cover the costs that would otherwise be borne by employers may account for a proportion of the lower pay of the self-employed, but another consideration is that many are also responsible for the purchase, running and upkeep of any vehicles and equipment needed for their work. Not all of this may qualify as a tax-deductible business expense.  Not only this but they must cover the costs of administering their business such as maintaining accounts, filing tax returns and business insurance as well as covering professional, compliance and training costs.

Closing the NIC gap is not so fair after all.

Budget aftermath: will 2017 become a perfect retail storm?

purse decorated with UK flagThe growth of online retail and the rise of the “budget” food stores, like Aldi and Lidl, have been pressures on both large retail chains and smaller independent retailers for some years now.

But, clearly, a series of announcements from the larger chains in the first quarter of 2017 suggests that the pressure has turned up a notch or two.

This week, Budgens stores announced the closure of 34 branches with the loss of 800-plus jobs and, earlier in March, Sainsbury announced a restructure of staff jobs and hours, with the potential loss of 400 jobs.

In February, a shake-up in home estimation and fittings services as well as restaurant food preparation announced at John Lewis could lead to 400-plus redundancies with another 386 staff being re-deployed elsewhere. Waitrose also announced six store closures with 700 jobs at risk.

In January, it was Tesco that opened the New Year large retailer shake-ups with changes to its logistics and 1,000 redundancies.

So what are the additional pressures facing retail in general?

The British Retail Consortium has just published new figures showing a slowdown of 0.2% in sales, between December 2016 and February 2017, particularly in non-food sectors.

This should be set in the context of rising inflation as imports of food and raw materials become costlier due to the fall in the value of £Sterling after the EU Referendum. These are beginning to feed through into prices.

Consumer confidence is also reportedly lower and there is some speculation that many people purchased “big ticket” items such as white goods and cars in 2016 to keep ahead of anticipated price rises.

It may also be that the larger retailers with a massive acreage of physical buildings are also restructuring to take account of likely hefty increases in their business rate liabilities following the rate revaluation that comes into force this April.

What of the smaller retailers?

It has always been more difficult for the smaller independent retailers to compete on price so inflation may hit them hard.

Some will have benefited from exemption to paying business rates due to the rise in the level to £15,000 before payment kicks in and from revaluations reducing their rates, as has happened for some of the luckier ones.

Others, however, will have to find considerably more money to pay their rates before they even begin to make a profit.

There was some relief in yesterday’s budget, after intensive lobbying from various business organisations on the new business rates, in the form of £300m to local councils to use for a discretionary hardship fund for small businesses worst affected by the revaluation and a pledge that any business losing existing relief will not pay more than £50 a month.

But it is questionable how much difference this will make given the additional costs facing small retailers employing staff, who will in April face increases to the minimum/living wage, with the additional obligations of pension auto-enrolment.

With e-commerce operations paying considerably less in tax it looks like the inexorable march towards online retail operations and away from small independents on the High Street could continue.

Will the business wish list for tomorrow’s Spring Budget be fulfilled?

purse decorated with UK flag

There will be two budgets this year, one tomorrow and a second in the Autumn, after which there will only be Autumn budgets.

The signs are that the Chancellor, Philip Hammond, will be cautious. He has already said publicly that he wants to reserve some funds for the Government to use as a fall back to protect the economy after the completion of Brexit negotiations.

Leaving aside the pressing financial concerns about the future of the NHS, social care, education and welfare support, all of which are likely to be disappointed if hoping for extra cash, the Chancellor has already also indicated that there will be no easing of the austerity measures intended to reduce the Budget deficit.

Given all this the question is whether there will be any relief or even help for hard-pressed businesses, particularly SMEs, navigating uncertain times while they try to keep their companies surviving and thriving?

What would businesses like to see in the Spring Budget?

The issue raising the most concern has been the revision of business rates, due to come into force in April. Virtually every national body representing business has commented on this.

In some parts of the country small businesses will have benefited from the higher threshold for exemption but in difficult trading conditions, especially for small retailers, those whose rates have been increased will want to see some help beyond the phasing-in period that currently exists.

Following its annual conference on February 28th, reform of business rates is top of the British Chambers of Commerce (BCC) wish list. It would like to see the switch in how rates are adjusted for inflation from RPI (Retail Price Index) to CPI (Consumer Price Index) brought forward from 2020 to April 2017 and plant and machinery removed from property valuation.

The FSB (Federation of Small Business), too, has highlighted the business rates issue. Called by its national chairman, Mike Cherry, “The broken Business Rates system ..” he wants the Government to recognise the need for a “sensible, fair system for the 21st Century”.

In addition to a rethink on business rates, the Institute of Directors (IoD) wants to see all types of businesses recognised and a more level playing field created to allow for fair treatment of High Street and online business as well as a loosening of restrictions on the rules for various enterprise schemes from which SMEs can source investment funds.

For EEF, the manufacturers’ organisation, measures to boost productivity and pressing ahead with promised infrastructure improvements are high priorities. Enabling higher investment in R & D, skills development and manufacturing investment are a must, although it too mentions the need for reform of business rates.

For the CBI (Confederation of British Industry) it is all about ensuring stability for businesses during the process of exiting the EU. Its pre-budget letter urged the Government to ensure that it does not add to the “mounting burden of costs facing firms for just doing business”.

We shall report on the outcome and its impact on business shortly after the budget.

Patience is wearing thin as business starts to confront reality

signposts which way to confront reality

Business activity has effectively been just ticking over with investment at a low ebb since the outcome of the June 2016 referendum to leave the EU.Business dislikes uncertainty and tends to retreat into its shell when faced with no clear way forward, but sooner or later maintaining the status quo risks a slide into genteel decline, as we have mentioned before in previous blogs.

While the Government repeats its determination that by the end of March it will trigger Article 50 to start of the process of leaving the EU, the bill to approve it is still grinding its way through the houses of Parliament.

Planning ahead means confronting reality now rather than putting it off

Meanwhile, with still no clear idea of what the “red line” terms for negotiating trade agreements will be, business seems to be running out of patience.

In the last two weeks, there have been a number of indications of the way things are moving.

Brexit Secretary David Davis admitted that it was unlikely that there would be a noticeable reduction in immigration figures for several years after leaving the EU, openly acknowledging how much the UK economy depends on European and other nationals to work in certain sectors, noticeably farming, construction, engineering and the caring professions.

At the same time the Prime Minister’s continued prevarication about EU nationals’ residence rights has apparently been too much for some, and, according to a report in the Independent, some 100,000 EU citizens had left the UK in the three months post-referendum, while more recent figures showed that 40,000 fewer people had come here to work.

This has prompted restaurant owners to delay or abandon plans to open new restaurants, particularly in London, reports the British Hospitality Association, but also recruitment difficulties are being reported by farmers across East Anglia, Kent and the Midlands.

It is not only in hospitality and farming that patience is wearing thin. This week it has been reported that BMW is planning to produce the Electric Mini away from the UK, probably in Europe, and that an exodus of some businesses from one of the country’s most vibrant and pioneering company sectors, “fintech” or financial technology, was on the point of getting underway.

The CEO of PRRO Group, one of the fastest-growing fintech companies, Simon Black, pointed out that moving this kind of business and getting through all the required compliance and licensing processes was a complex six-month process.

Waiting until the outcomes of Brexit trade negotiations were known, a minimum of two years hence, before starting the move was therefore not a realistic option.

It is a safe bet that once some businesses start thinking this way, momentum will build up and others will join the exodus as they confront the reality of what they might lose by waiting.

While planning for UK to leave the EU is planning for the inevitable, planning for the future of the EU is another matter that should also be considered.

Is debt your master or your slave?

Debt mastery

Since the 2008 Great Financial Crash, and perhaps even before, we have had a peculiar attitude to debt.Most of the Western, developed economies have relied on debt to keep developing and growing, but that is hardly a sustainable way to carry on.If you think about it the whole notion of usury debt is unacceptable. Despite lenders being open and telling borrowers how much they are charging, whether 10% or 1,000% interest, does that make it acceptable?

And what about the fees: assessment fee, valuation fee, arrangement fee, introduction fee, securitisation fee, documentation fee, monitoring fee, review fee, default fee, termination fee, early termination fee.

Again, even if transparent, are they reasonable?Debt has been crucial to the survival of the current economic model. Central banks make $trillions from debt using zero interest rate policies and purchasing corporate debt, as the European Central Bank (ECB) has been doing in order to keep the post-crash economic show on the road.

Are we living in a Through the Looking Glass post-capitalist world?

Is all this just adding more fuel to the fire? Is keeping inflation artificially low for so long merely extending a creeping market in zombie companies, even zombie countries?

Originally, zero rate policies were seen as a temporary measure post 2008 to stave off a global recession but was the objective really saving jobs or saving the banks?

At the time the argument was that the banks were “too big to fail” and if not helped the consequences for all of us would be dire.

Eight years on and nothing much seems to have changed. Governments are still buying bank debts and how does this relate to the bonuses paid to professional executives and bankers?

There have been few prosecutions over the speculation and risks that were taken and there is not much evidence that the culture of institutional fraud does not still prevail.

While some debt is deemed acceptable, a lot of debt is not. The appetite for investment in the businesses that we need to support to sustain our economy is not there due to the distortions of the market that have arisen from flawed policies aimed at preserving bankrupt countries, banks and businesses. The stock market too is being driven by the whole issue of where to go to put money in a safe place.

So businesses remain starved of investment funds for their medium and longer term growth, productivity remains below what it should be and the public goods, such as education, remain starved of funds to produce the skilled workforce that will be needed for the future.

But the banks, the rent seekers and the professional executives protect their interests and stay safe.

Feel free to disagree.

Is Creative Destruction being stifled by risk aversion?

Breaking the wall K2 Partners Business Blog

In his 1942 work, Capitalism, Socialism and Democracy, the economist Joseph Schumpeter introduced the idea of Creative Destruction as an essential ingredient for sustaining long-term economic growth.

In a nutshell, it is the entrepreneur and his or her innovation that acts as a brake on, or actually destroys, established companies, thus protecting an economy’s health by allowing new companies and ideas to rise.

Schumpeter’s thesis was that while healthy capitalism is about constant change, inevitably the drive for maximum productive performance, if successful, will tend to kill competition and thus the system contains the seeds of its own destruction. Therefore, the entrepreneur and innovation are essential to capitalism’s healthy survival.

Managing capitalism in a global marketplace

Over time, ever since the Great Depression of the 1930s both political action and economic theory, have been evolving, prompted in part by the distressing consequences to many individuals when things “go wrong” in countries’ economies.

So, for example, Keynes’ solution to the Depression was that governments should step in with deficit financing, stimulating projects that could be started quickly to provide people with work and pay, which would stimulate economic activity and be paid off by increased tax payments. Equally governments, such as in the US, moved to regulate excessive risk-taking and speculation in the financial sectors to prevent a recurrence.

Gradually Governments took more responsibility for people’s welfare, in health, education and for stimulating employment. This has contributed to a shift in the balance of power from the employer to the worker.

A failure to manage the resulting imbalances and the consequences for national economies eventually led to disenchantment with the mixed economy and a return to completely unregulated free market capitalism, aka Neoliberalism, as promoted by Margaret Thatcher in the UK and by Ronald Reagan in the US.

After the 2008 Financial crash and the difficulty countries have had in recovering the question in the mature economies of the 21st Century, therefore, is what place capitalism has in our current and future society, especially in a now-global marketplace.

The businessman is no longer an entrepreneur or hero

Businesses constantly complain about the time absorbed and constraints imposed by “Government red tape”.  But we would argue regulation has moved further from things like Health and Safety regulation and employment protection into trying to regulate in a way that prevents risk.

Consequently, businesses are focusing on dealing with red tape and bureaucracy rather than on doing things, or getting out and selling. Dealing with red tape is disproportionately expensive in time and money for the SME compared with the larger companies and therefore inhibits their capacity for growth. Even in the larger companies there has been a rise in the professional manager whose chief aim is to look for safe returns and short term decision-making that protects her/his bonus and job. There is a lot of dysfunctional activity going on but not the kind that encourages risk taking.

Is state legislation helping businesses or compounding this problem?

It is only human to want to prevent further toxic economic shocks to people’s economic stability and wellbeing but if Schumpeter is right unless the correct balance is stuck it could well lead to the demise of capitalism.

It might be an unpalatable fact but knowledge is best gained by experimenting and learning from failure. The quicker and more failure, the quicker and greater success.

BCC Annual Conference 2017 to ponder the future for UK business

Breaking the wall K2 Partners Business Blog

The pre-Brexit challenges facing UK SMEs, which predominantly focused on uncertainty about their future, have been compounded by further uncertainty about their future once the country has left the EU.

No business is happy with uncertainty when it needs to make decisions about investment, growth and employment. But that, unfortunately, is the current situation and likely to remain so for some time yet.

Businesses face the challenge of making decisions about where their future markets are likely to be and whether they should invest in growth or not. Another worry is not knowing what the terms of any deals might be in the future and how this might affect arrangements already made.

So, at the moment, many UK businesses are stuck in a spiral of genteel decline; they are making profits but not investing in their future, neither in people nor in equipment, new markets nor product development.

Already, employers are struggling to recruit the people they need, according to a survey of 1000 employers, released last week by the Chartered Institute of Personnel Development and the Adecco Group. The numbers of EU nationals coming into the country to work has been slowing and employers fear that some existing EU employees are considering returning to their home countries or working elsewhere.  Manufacturing, healthcare, retail and hospitality have been among the worst hit, the survey found.

Without investment in the latest technology and in research and development the danger is that UK businesses will lose their competitive edge in fields where they are currently leading.

What businesses will want to hear

The British Chambers of Commerce (BCC) annual conference is at the QEII Conference Centre in Westminster on February 28 and there are three topics for debate. These are:

  • Growing Business in the Regions and Nations
  • Brexit: Turning Uncertainty into Opportunity
  • Keeping the UK Competitive – vision 2030

While businesses from SMEs to larger corporates will be keen to hear more on the priorities in the Brexit negotiations, given that the deadline for triggering Article 50 is not until the end of March there is unlikely to be much information on this.

The chronic and long-standing imbalance between London and the rest of the country is also likely to be a significant concern to the BCC membership, who are present in every county throughout the country, and they will want reassurance from BCC National that their concerns will be represented and their voices heard.

Skills shortages, training, and perhaps what will happen about business’ ability to recruit from within the EU and elsewhere may well be high on the wish list as part of the discussion in the final debate of the afternoon on UK competitiveness.