Banks, Lenders & Investors Cash Flow & Forecasting Finance General Insolvency

Economic pressure is building for a storm in the coming years

stormy skyIt is a brave, or foolhardy, man or woman who would try to predict what will happen to the economy in 2017 especially in light of the various shocks that we experienced in the US and UK in 2016. But the trends as evidence of a building financial pressure are irrefutable.
An incoming, and potentially “protectionist” US president, who seems to favour diplomacy and policy announcement via Twitter, and the wholly avoidable but now irrevocable decision by the UK to leave the EU with the prospect of lengthy negotiations before the process is complete make for a cloudy and uncertain picture which adds more pressure and most likely brings forward the inevitable storm.
The trends and pressures that give clues have been covered for some time by Alasdair Macleod, Head of Research for Goldmoney, and are summarised in his nuanced and thoughtful Outlook for 2017 that actually looks further than the year ahead for the USA. And as the cliché goes “when the US sneezes, UK catches a cold” or worse “when US catches a cold, UK gets pneumonia”.
Investor over-confidence in expectation of a business-friendly pro-tax reducing regime, a shift from monetary to fiscal policy leading to a rise in budget deficits and rising inflation are among the signs he identifies.
At the same time, although all this is reminiscent of the 1970s when interest rates soared to as much as 13%, this time it is in a climate of massive debt leading to constraints on the Federal Reserve’s ability to increase interest rates for fear of precipitating a collapse in the economy.
“Next time, when a financial crisis occurs, the problems will be more widespread, encompassing bond markets, property, equities and governments themselves. It will be ebola compared with a flesh wound. There will be no option other than to rapidly expand the quantity of money on a global basis, with central banks buying up government debt, ultimately fuelling price inflation even further,” Macleod predicts, suggesting that tangible assets will be the only protection against devaluation of fiat currencies, although perhaps not as soon as 2017.

What is the position of the UK economy by comparison?

Given that for at least the last 20 years the management of the UK economy has been based on similar “neoliberal” principles to those in the US, in our view, the UK faces a similar cocktail of risks and there have already been some signs to reinforce this, though not yet at the level to indicate an established trend. Inflation and interest rates will eventually bite on the printing of ever more paper currency or more Quantitive Easing which both amount to the same devaluation of £Sterling incidentally to 1.55% of its value in 1969.
The Chancellor’s Autumn Statement included investment in digital and physical infrastructure – a shift to fiscal measures – and the Bank of England has continued to keep interest rates at their current low level.
On Wednesday, the British Bankers’ Association (BBA) revealed that in the 11 months from January to November 2016 the rate of saving had increased by 4.8%, climbing from £19.8 billion in 2015 to £32.4 billion in 2016 so far, suggesting that people are already anticipating predicted inflation and stagnating wages.
This week the FTSE 100 reached a new record high at 7,111.69, suggesting a level of investor confidence in equities, or is it more a lack of good quality stock available for safety?
We had already learned that inflation is expected to rise in 2017 and have also had a prediction from Nationwide that house prices are expected to stabilise rather than continue to climb ever upwards.
So, the likelihood is that the UK too is facing a “perfect storm” similar to Macleod’s analysis of the USA, with the same constraints on Government’s ability to act and a consequent devaluation of its fiat currency, bonds, equities and for home owners a decline in the value of their property by 20%.
The storm may not erupt in 2017 but the pressure is mounting so we advise businesses to be prepared and despite all this, we wish you a happy and prosperous New Year.

Accounting & Bookkeeping Banks, Lenders & Investors Cash Flow & Forecasting Finance Turnaround

Choosing to do business in $dollars, instead of £Sterling

currency exchange boardWhile there is uncertainty and volatility in currency exchange rates, as has been the case since June 2016 and the EU Referendum outcome, many UK businesses might find it more attractive to trade in another currency, especially if they are purchasing goods in another currency.
Since June the value of £Sterling has plummeted by some 15% against the $Dollar and around 12% against the €Euro, making imports, such as raw materials, goods and supplies to the UK more expensive, although it has been positive for those UK companies that trade overseas.
This month the US Federal Reserve increased interest rates by 0.25%, suggesting that there is more confidence in the US economy and in the strength of the $Dollar.

The business advantages of using another currency

It is plainly of no benefit to a UK business operating only in the UK to switch all its transactions to another currency, but the situation is different for exporters and those who pay for purchases in another currency.
For these businesses the decision to switch, most likely to $Dollars, is about taking a longer term view of risk and currency values.
Many businesses work in other currencies and the $Dollar is for many industries the standard currency, as well as the one used when doing business in the Far East.
Opting for trading in $Dollars is changing the way you think about your business, in particular about paying bills, where it might be advantageous to have a $Dollar currency account.
One question to ask is what currency is more suitable given that UK interest rates are driven by the desire to protect employment.  Are US interest rates more stable that the UK?  If the UK is keeping interest rates low to promote employment, on one level that is a measure of instability.
Interest rates have been held down for far longer than they should have been since the 2008 Financial crisis and we would go for trading in $Dollars rather than any other currency.  It is all about managing risk.
But there is a note of caution. The cost of commercial insurance policies for those using $Dollars tends to be much more expensive due to the assumption that a business is more likely to be exposed to US law and the prospect of litigation.
If you got this far, I thank you for reading my blogs and wish you a very happy New Year.

Banks, Lenders & Investors Finance General Turnaround

What is the purpose of a company?

company purpose and directionSomething to reflect on over the festive period is a debate we have been hearing more and more about recently, challenging the purpose of a company as a corporate entity.
It may seem obvious at first sight but there are actually several questions to be considered.
The assumption that companies exist to make money may appear to be self-evident, but for whom and for what purpose?
Is it simply for the benefit of its shareholders? But what about its other stakeholders?
What about employees, many of whom may have worked for the company for far longer than shareholders have held shares? Indeed, many employees may also expect the company to be able to pay their pension in the future.
Where also do lenders and creditors stand especially in the UK where their interests are paramount in insolvency proceedings?
The local community and environment are also becoming important stakeholders with ever more focus on corporate social responsibility, health and sustainability related legislation.
In the EU there has been some effort to harmonise company behaviour across different countries, such as in the Directive, Solvency II, which aims to unify a single EU insurance market and protect the public from bail-outs.

Do cultural differences affect the purpose of a company?

Despite attempts to harmonise legislation, there are cultural differences that are likely to prevail. For example, in Southern Europe much legislation is primarily for the benefit of employees.
Most regulators seem to focus predominantly on trying to prevent risk-taking, particularly by banks, which are essentially companies that primarily make their money out of risking capital.
In the UK, there has been a growing culture of shareholders taking money out and leaving companies leveraged to the hilt risking jobs, pensions and creditors.
Another reason behind the large number of new companies being formed is as an employment vehicle for their shareholder/directors. This might be sensible given the personal liabilities of being a sole trader versus the protection of the corporate veil. But was this intended?
It is understandable that ever more regulation imposes ever more responsibility and increasing personal liability on directors to discharge their duty to the various stakeholders of a company.
So what exactly is, or should, a company be for? and for whose benefit?

Business Development & Marketing Cash Flow & Forecasting General

Resetting the marketing budget for 2017

Ready for Tomorrow?Given the challenges many SMEs are likely to face in the coming year, the quiet period between Christmas and New Year is an opportune time to reflect on the state of a business and consider where next.
Once there is a clear view of the way ahead it is also important to revisit the business’ marketing, consider what has worked and what has not and reset the marketing budget at a realistic level of spending.
One thing to remember is that marketing is not an optional extra. If potential clients or customers do not know who you are and what services or goods you offer they are clearly not going to be converted to buying from you.
This is particularly important to remember when trading during difficult economic conditions, when it is generally not advisable to cut the marketing budget.

How much money is available to spend on marketing?

This involves having a clear idea of how secure the business’ income is and this will depend on whether it has long-term contracts with clients and customers or not.
It is also important to know how much money needs to be retained to cover overheads and other expenses.  For example, the business that has a 12-month contract with a supplier will need to ensure it has the money to fund the obligations, especially when it is prepaid.
Armed with this information and a careful analysis of the potential for increased demand for its services or goods a business will be in a better position to establish what cash may be available to spend on marketing, and what proportion of that it can afford to use for speculative marketing.

Limited duration versus enduring messages

While businesses might consider the cost and impact of promotion material and the medium for distribution, it is also worth considering how long a message lasts for.
Businesses should also monitor the cost and results of initiatives such as time and money spent on social media. Paid for advertising such as Google Adwords, Google’s Universal App Campaigns or Facebook advertising should be measured in terms of a return on the investment.
Much of this activity disappears from view very quickly in that the message put out today may be lost tomorrow – or even in a few seconds in the case of Twitter. However, that is not to say that there is no value to such marketing activity. With sustained effort it can be used to raise awareness of a business’ brand while not directly bringing results in terms of immediate sales. Such marketing therefore needs to support other initiatives.
On the other hand, spending on a printed membership journal or client leaflet, where information remains available for a long period could be seen as more durable marketing. However how many of these are used by clients to find your products or services? It could be argued that years ago online search engines replaced Yellow Pages and similar directories.
There is never an absolute guarantee of immediate results with any form of marketing since ultimately the choice to buy remains with the customer.  Equally, there is a value in both limited duration and enduring messages.
The important point is to know exactly what cash options a business has and to decide how best to apportion marketing budget to get the optimal return on the investment.

Cash Flow & Forecasting Finance General Turnaround

A look at the UK construction industry at the end of 2016

bricklaying in construction industryIn December 2015 KPMG was forecasting a “positive outlook” for the construction Industry for 2016, when Richard Threlfall, KPMG Head of Infrastructure, predicted steady growth and gradually improving margins.
He said: “2015 has been a particularly ghastly year for many Tier 1 firms, who have been knocked off-course by losses on legacy contracts signed too cheaply in order to maintain volume in the depth of recession……….
“Weak profitability in the industry won’t improve overnight, but we can expect to see steady growth in order books and gradually improving margins. For the supply chain, the outlook is really good.”
A year on, the statistics suggest that the industry, both Tier 1 and smaller construction SMEs, have experienced mixed fortunes.

Some key construction industry statistics and pressures

According to the Office for National Statistics (ONS) most recent findings published for October 2016 construction output had decreased by an estimated 0.6% compared with September 2016. All new work decreased by 0.9%, with the largest downward contribution coming from infrastructure. This was despite an upward revision in the figures for the third quarter (Q3, July to September).  Even repair and maintenance, traditionally the preserve of construction SMEs, had experienced no growth.
Nevertheless, it said, new orders remained at their highest level since 2009, immediately after the 2008 economic crash.
Similarly, according to a Guardian report in November, construction work for office space in central London had reached its highest level for eight years, up by more than 4% compared with the period before June’s EU Referendum.
Chris Lewis, head of occupier advisory at Deloitte Real Estate, said the figures showed the capital was resilient.
That may be true for commercial property in London, despite the post-Brexit uncertainty, but what about housing construction, especially outside the capital?
Despite the evidence of considerable demand, particularly for affordable and social housing, here too, ONS figures showed that output had dropped by an estimated 1.4% in Q3, despite a slight upward revision in the figures.
Housebuilder Redrow noted, however, that housing was still up 8.7% when compared with the same period in 2015 as private new housing increased by 10.8% but public new housing – a much smaller part of the sector – fell 3.1%.
Undoubtedly there are pressures on the construction industry not least the post-Brexit uncertainty and ongoing skills shortages.  The massive devaluation of £Sterling is also an issue, given that much building material has to be imported, particularly bricks, which are no longer produced in the UK and will therefore be more expensive.
The stagnation in the repairs and maintenance side can hardly be good news for smaller, local SMEs. It remains to be seen whether the announcements in the Chancellor’s Autumn Statement of increased spending of £1.1bn extra investment in English local transport networks, £220m to reduce traffic pinch points and of the promised £1.4bn for 40,000 extra affordable homes will be enough to ease the pressure on SME builders.

Business Development & Marketing General Insolvency

2016 review – an uneasy year for businesses

2016 reviewIt seems like a very long time since the then Chancellor, George Osborne, warned in January 2016 of a dangerous “cocktail of risks” facing the UK economy.
The British Chambers of Commerce (BCC) echoed this, citing volatile stock markets, plummeting commodity prices, a potential slowdown in China, a poor 2015 Christmas for retailers and uncertainty about the outcome of the referendum on the UK remaining in Europe.
March brought news of Tata Steel’s decision to sell off or close its UK steel operations, prompting fears for hundreds of jobs particularly in Port Talbot, Wales.  While by November Tata had announced it had agreed a deal with the various trades unions over Port Talbot, possibly safeguarding an estimated 8,000 jobs, the outcome is not yet 100% certain.
In April came news of yet another large retail collapse, this time BHS.
In the run-up to the June EU referendum there were signs of a marked slowdown in investment decisions, coupled with worries about skills shortages if restrictions should be imposed on overseas recruitment.
In June, of course, the outcome of the referendum was a majority in favour of leaving the EU and the first monthly Markit Purchase Managers’ Index (PMI) immediately thereafter showed that the UK economy had been shrinking at its fastest rate since 2009 with confidence in both manufacturing and services falling below the benchmark of 50.
The decision also precipitated a massive devaluation of £Sterling by 15% against the $Dollar and by 10% against the €Euro, which benefited exporters but was predicted to eventually feed through into higher prices for imports and increased inflation. In response, the Bank of England further reduced interest rates.
Another indication of slowing global economic growth came in September with the collapse of the South Korean company Hanjin Shipping, the world’s seventh largest container company.
However, on the whole business activity post-Referendum showed no marked signs of contraction and by November the monthly Markit PMI index was showing upward trends in activity in Construction and Services. But just this week the BCC was warning that the “business as usual” approach that had so far prevailed since was unlikely to last and that business optimism was “continuing to fall”.
At the same time, quarterly reports on business insolvencies have remained steady, showing only statistically insignificant increases.
Also in November Donald Trump won the US presidential campaign, prompting yet more concern and uncertainty, particularly about the impact on other economies, including the UK’s given his notably “protectionist” views as stated during the campaign.

What was 2016 like for SMEs?

The measures introduced in the 2015 Small Business, Enterprise and Employment Act started to come into force with April deadlines for UK companies to compile PSC (Persons with Significant Control) registers.  There were also changes to the taxation of income received from share dividends with the introduction of a new tax-free dividend personal allowance.
Pension Auto-enrolment continued and there was another potential worry for SMEs with the government’s proposals for businesses to file quarterly tax returns.
There was one bit of potentially good news in the April budget, when the threshold for business rate tax relief was increased to £15,000, which may be good news for small High Street retailers, once the outcome of September’s rates revaluations become clearer.
A change of regime in Government produced some recognition of the difficulties for SMEs with the new Chancellor, Philip Hammond’s Autumn Statement, promising extra investment in local transport and digital infrastructure as well as Rural Rate Relief being increased to 100%. But business costs are also mounting with increases in the national living wage, insurance premium tax and changes to NI rates.
The 2016 picture will not be complete, however, until the Christmas retail trading figures and the next set of quarterly insolvencies are revealed sometime in January 2017.

Finance General Turnaround

Is there a UK shortage of heating and building maintenance engineers?

advert for skilled labourTrying to book a good heating engineer when the domestic heating system goes wrong is a challenge and invariably involves a lengthy wait for an appointment.
The majority of such services at local level are supplied by independent SME traders, who invariably seem to be mature workers. Even Pimlico Plumbers are self-employed.
This would suggest that fewer people are coming into the industry and may indicate that there is a skills shortage. On the other hand, it might be that younger, qualified engineers are looking for direct employment with larger companies.

A closer look at the situation

Heating system breakdowns invariably happen in the depths of winter, often when the system is first switched on when the weather turns colder. In a climate like UK effective and prompt heating and maintenance services are essential.
How many domestic users remember to have the heating checked and the boiler serviced ahead of the onset of cold weather?   Even if they did think ahead there are still likely to be peaks and troughs in the demand for heating engineers since breakdown will be more common when a system is in intensive use.
The age factor may give us better clues as to whether there is a skills shortage in this sector.
Certainly, the Construction Industry has for several years been warning of shortages for all types of skilled and qualified engineers, and this has been used to account for the numbers of qualified engineering workers being recruited from Eastern Europe.
But there is more evidence available to support this claim.  The Building Engineering Services Association (BESA) commissioned research into the industry’s labour market, which was carried out by a Dr Mike Hammond, Director of Education and Research at Hammonds Enterprises Ltd. His findings were published in a BESA report ‘Future manpower and skills availability’ for its conference in late 2015 on the issue of skills shortages.
Dr Hammond’s findings predicted “massive” under supply in every sector apart from plumbing up to 2018, particularly in the heating and ventilation professions. He also suggested that many new entrants into the sector during and in the aftermath of the 2008 financial crisis had missed out on formal training.
However, we would argue that the problem has been building for much longer than that and in part originates in Government emphasis on and efforts to increase university graduate numbers, which had the effect of devaluing the more practical skills and qualifications.
The combination of factors has led to a “generation gap” of suitably qualified and experienced people. While the Chancellor’s Autumn Statement of 2015 announced a levy on large companies to pay for its new three million new Trailblazer apprenticeships, the levy is not due to even start being collected until April 2017.
Even if suitable apprenticeships were immediately available from then, factor in the time it will take to recruit suitable candidates as well as the length of training and it is likely to be several years before there is any noticeable narrowing of the skills generation gap.

Banks, Lenders & Investors Cash Flow & Forecasting Finance General Insolvency

UK Business winners and losers – is uncertainty to be the new normal?

businessman on uncertain road aheadThe numbers of cranes on a city’s skyline are often taken as an indication of the health and vibrancy of its economy.
Not only are cranes evidence of demand, money and resources but also of jobs, not just in construction but, eventually, for occupiers of the buildings.
Whether such observations hold true in the current economic circumstances is open to question.
The most recent Markit/CIPS monthly snapshot on construction for November, published on December 2, would seem to reinforce the impression of health showing construction activity expanding to an eight-month high, albeit purchasing managers are also reporting a steep increase in materials costs.
On the other hand, however, on November 22 it was reported that a large Manchester-based heavy machinery plant-hire group, Hewden, with 40 branches across the UK and a workforce of 750, had gone into administration. 251 people, many of them crane operators, were made redundant. The Guardian report said Hewden was owned by private equity firm Sun Capital Partners, which had warned in October that market uncertainty following the Brexit vote had adversely affected a number of large construction and investment projects.
Yesterday’s publication of the IHS Markit/CIPS purchasing managers’ index for the Service sector also showed a rise from 55.2 in November from 54.5 the previous month. But here, too, there was a note of caution from Chris Williamson, chief business economist at IHS: “Rising prices – often linked to the weaker pound – are a big concern, however, and suggest that inflation is set to lift higher.”
These examples illustrate how difficult it is for SMEs to assess what they might be facing in their economic future and how best to prepare for it.

Known knowns and known unknowns

There are a number of triggers that could affect what happens both to the UK, EU and US economies and there are plenty of question marks over all of them.
First and most obvious in the UK, as the Supreme Court hearing gets under way into whether parliament’s consent is needed to trigger Article 50, is the uncertainty over the start date, length and likely outcome of negotiations to leave the EU.
Equally it is unclear whether the lower value of £Sterling will encourage or discourage investment in the UK. However, the fluctuations in the Exchange Rate and their effect on £Sterling in relation to the $US and to the €Euro will doubtless continue.
Yesterday, £Sterling had risen against the €Euro following the Italian referendum on constitutional change, in which the Government was defeated. Where will this leave both the fragile banks in Europe’s third largest economy and also the EU economy?
Perhaps the biggest unknown is what will happen when President-elect Trump takes over in January 2017. How protectionist will he be? Will he follow through with fiscal stimulus, which is likely to lead to both inflation and a rise in interest rates and a shift from economic recovery to recession as happened in the UK’s Heath Government in the 1970s? This time with considerably higher personal debt there is less room for manoeuvre and in a much larger economy than when UK asked for an IMF bail-out.
Then there is the recent seeming resurgence of OPEC in controlling output and thereby the price of oil.
There are many uncontrollable factors in a globally interconnected economy that are likely to buffet any national economy and affect its businesses, regardless of Brexit and whether SMEs are trading locally or are exporters.
The omens are not good but inevitably for some SMEs the prospects may be fantastic and for others quite the opposite. What is sure, though, is that for the foreseeable future the uncertainty of unknown unknowns is the new normal.

Finance General Turnaround

It’s good business sense to show employees you care

Interestingly, despite the increase in businesses using models that rely on workers’ self-employment or zero hours contracts, we at K2 are regularly asked by businesses we are advising how they can engender loyalty among their key staff.
Assuming that employees are paid adequately, there is plenty of evidence that paying them more money is not in itself an appreciation of their loyalty or efforts.

If money is not the answer, then what is?

Christmas food hamperClearly, a business may try to use some kind of reward system to encourage employees to work even harder.
However, this will be futile where employees are already working as hard as they can, especially when their efforts may have been needed to save the business in difficult times.
Nevertheless, in an era of skills shortages, where a business has an effective, capable workforce it will want to keep those employees’ loyalty and to do this it makes sense to recognise their efforts in some way that is valued by the employee.
Christmas and the summer holiday periods are especially opportune times for showing employees some appreciation in a meaningful way.
A discretionary reward or bonus for performance can be powerful, especially at times when their expenditure may be higher than usual but the bonus need not be in cash.
A gift that recognises not only the employee but their family’s sacrifice if they have had to work longer than usual hours can work well. It could be a few hours off to allow people to prepare for Christmas or to allow a parent to attend their child’s nativity play.
How about a hamper containing seasonal treats that the family might not otherwise have and containing something appropriate for every member of the family?
Alternatively, food shopping vouchers before Christmas or a well-timed cash bonus in the cash-strapped month after Christmas, when the credit card bills begin to arrive, may be welcome, especially when many families are living pay cheque to pay cheque.
It takes a little ingenuity and thought, but showing employees that they are appreciated as individuals with other responsibilities beyond work can do wonders for their morale, their productivity and their loyalty.