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Accounting & Bookkeeping Cash Flow & Forecasting Finance General Turnaround

Are we facing recession in 2019 and is it time to redefine growth?

the effects of a recession can be devastatingThere is no doubt that uncertainty and pessimism are dominating predictions for both global and national economies at the start of the year.
The question is whether this uncertainty will develop into full-blown recession
The official definition of a recession in Investopedia is “a significant decline in economic activity that goes on for more than a few months. It is visible in industrial production, employment, real income and wholesale-retail trade. The technical indicator of a recession is two consecutive quarters of negative economic growth as measured by a country’s gross domestic product (GDP).”
The whole definition is based on the definition of GDP and what is continuous economic growth. While implied, there is little about living standards, getting people out of poverty or growth of employment.
By many measures there are worrying signs of a slowdown. However as noted by the IMF (International Monetary Fund) at this month’s Davos meeting of the WEF (World Economic Forum) a recession is by no means certain.
The IMF predicted global growth of 3.5% in 2019. In October, it forecast 3.7% and for the UK, growth of about 1.5% this year and next, but it also says there is substantial uncertainty around the figures, given uncertainty over the Brexit outcome and ongoing trade wars particularly between China and the USA.

Are there pointers towards recession in the UK?

In some sectors, notably retail, house price growth and motor manufacturing, the trend has been inexorably downwards.  Consumers, too, have been reining in both their borrowing and their spending.
However, while stresses in the economy may be building, they are not at a critical point yet. In manufacturing as a whole, the IHS Markit/ CIPS UK Manufacturing PMI increased to 54.2 in December 2018 from an upwardly revised 53.6 in November.
Employment, another critical recession indicator, is also at an all-time high. But with businesses already announcing job cuts or moves to Europe ii there is no Brexit deal, and an estimated 70,000 retail jobs lost in the past year it will be interesting to see how the employment figures hold up over the coming year.

How will a switch to sustainability impact on traditional measures for recession?

The urgency of tackling climate change has never been greater, nor the time shorter, and there is increasing awareness that economic models based on perpetual growth, especially in those countries reliant on consumer spending, are going to have to be replaced by models that embrace sustainability.
It is possible, therefore, that the idea of recession as defined at the top of this article, will carry significantly less weight in any sustainability model.
The question is whether we need to think more radically to find a new and more appropriate definition of an economy’s health and success rather than using some theoretical construct if we do move to improve the future for everyone.

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Banks, Lenders & Investors Business Development & Marketing Cash Flow & Forecasting Finance

Our monthly look at the global macroeconomic climate

The global macroeconomic climate under the spotlight in DavosIt’s January so that means it’s time for the annual gathering of the “great and the good” at the World Economic Forum in Davos.
This year, by contrast to January 2018, there is more than a tinge of gloom about the proceedings from which both US President Donald Trump and UK Prime Minister Theresa May will be missing due to more pressing issues at their respective homes.
So far, there have been two stand-out revelations about the global macroeconomic climate, neither of them encouraging.
According to a survey carried out by PwC “Pessimism among chief executives has risen sharply in the past 12 months as the leaders of the world’s biggest companies have taken fright”, a sixfold increase since January 2018. Their concerns have been largely attributed to increasing protectionism, or nationalism as some would have it, notably in Turkey, Poland, Italy and the USA and to the deteriorating relationship between the USA and China as a result of the ongoing trade war instigated by Trump.
The IMF (International Monetary Fund), too, has issued a warning of escalating tensions, not only from the aforementioned trade war, but also because of the ongoing indecision, indignation and intransigence that is besetting all participants in the still inconclusive negotiations for UK leaving the EU, aka Brexit.
Brexit concerns are clearly having an impact on the UK economy, which the ONS (Office for National Statistics) revealed has been stagnant for the last three months of 2018. Both the manufacturing and pharmaceutical industries performed particularly poorly and there has been a marked reduction in export demand.
Arguably, however, there are also repercussions elsewhere, some economic, some political.
Germany has experienced slowing growth, Italy’s financial markets remain unsettled by the now-resolved argument over its budget, which planned increased spending. China’s growth, too, has slowed markedly.
Indeed, there are signs of weakness in the European economy with the prospect of a recession and likely need for the European Central Bank to give more support for some countries.
Arguably, the UK’s dogged determination to leave the EU Is contributing to EU’s problems and strengthening populist/ nationalist demands that are also undermining the global economy.
Then there is the increasing urgency to tackle both climate change and the vast income inequalities that exist in many developed and developing economies.
All in all it looks like the global macroeconomic climate at the start of 2019 is for the time being decidedly stormy.

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Business Development & Marketing General Interim Management & Executive Support

How do businesses develop managers to become good leaders?

good leaders helping othersAmbitious people often aspire to becoming senior managers in their organisations and some achieve their goal, but how much thought is given to whether they will be good leaders?
Training is essential for many professions but in many businesses, it is often the case that people are promoted into management jobs because they were good at something else.
While the individual may have been a top performer in their role, it is rarely asked whether that makes them capable of managing other people performing those roles.
Unfortunately, the skills required to manage people well are often a completely different to the skills needed to get on the job ladder and show promise early in a career.
Good leaders need both people skills and strategic sense. They need to be well-organised, know how to prioritise without micro-managing, know how to recruit and motivate the right people and how to handle difficult conversations and decisions.

A two-day management training course is not enough

Business profitability is dependent on management for setting goals, planning and implementation. Getting support for achieving the goals and implementing the plans involves people skills, to engage and communicate with others and motivate them in pursuit of the productivity they assume.
Such people skills are rare and not innate to even the most skilled operator in their chosen field.  They have to be learned, developed and practiced, ideally without causing too much damage although mistakes will be inevitable.
Often, managers are thrown in at the deep end with little support and even where there is some acknowledgement that training is needed two-day management training courses are not enough.
Business culture is also a major factor when developing leaders. Given that mistakes will be made, a blame culture will discourage initiative or even decision making so embracing mistakes as an opportunity for learning is imperative. It might however be right not to tolerate making the same mistake more than once.
Therefore, if a business wants good leaders it needs to create the right culture and invest time and effort into helping develop leadership skills.
There are any number of leaders who have published details of their daily schedule, which invariably includes everything from getting up before dawn, fitting in some exercise or yoga, a healthy, energising breakfast drink, to detailing precisely the time it should take for every activity in the diary for that working day as well as extra-curricular time spent on worthy activities “giving something back”.
What is often missing is how they developed their people skills and allocate time for ongoing personal leadership development, for reflection on their own performance, for learning and crucially time spent learning from others whether role models, senior managers, colleagues or subordinates,
Good leaders, in my opinion, need training and practice with ongoing support and mentoring long after taking up their first role as a leader. This will be painful as it involves acknowledging mistakes and feedback on how effectively they have managed situations.
Like most rewarding achievements, effort and pain will reap the benefits of success so long as achieving goals, self-awareness and awareness of others are incorporated into the skill set. This is not for everyone.

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Business Development & Marketing Cash Flow & Forecasting General

Have you reviewed your marketing strategy?

time for a marketing strategy reviewConditions and circumstances in business constantly change so it is necessary to regularly review all your various activities and certainly do so at least once a year.
The New Year is an ideal time to do this, and in particular to revisit your marketing strategy, especially in the light of the confusion and uncertainty that has surrounded the business climate during the ongoing indecision about the way forward on leaving the EU.
There is some evidence that SMEs have been holding off on investment decisions and in searching for new business in the light of this and there is also the temptation to hold back on marketing expenditure.
However, the general advice is that you should not scale back on marketing during an economic downturn or when there is uncertainty. The argument is that even if your business is a well-known name if it disappears from view existing and potential customers may conclude that you have gone out of business.
If anything, this might be a good time to beef up your marketing strategy, thus sending out the signal that you have confidence in your business and its future.

One size does not fit all in marketing strategy

Marketers are always keen to encourage clients into engaging activities in whatever the newest tactic is but this can be a waste of money as well as diluting your message if all your competitors are jumping on the same bandwagon.
Retaining existing customers should be a key component of any strategy, not just finding new ones especially when there is a lot of change in your market. Indeed a downturn can be a huge opportunity if your competitors are not focussed on retaining their customers.
Marketing is not just about promotion and selling but also involves having products and services that customers want, distributing them in a way that makes it easy for them to find and buy, and setting a price they are happy to pay that leaves you with sufficient profit to justify the effort.
If you set up your marketing strategy having first identified your ideal customers and created profiles for them as well as identifying where they are most likely to be active, you will already have a key element of your marketing strategy in place.
You should also have a clear idea, if you regularly check the metrics, (results of activity) where your efforts have gained the most traction, whether this is visits to your website and how long visitors stay there, or whether it is the interaction you have gained on social media platforms, or the viewings and engagement of email marketing.
Equally, you should have an idea of what promotion activity works best, such as adverts, articles, leaflets, blogs, videos, or emails as examples.
Often businesses believe that they must take up the latest promotion idea, whether it is appropriate to them or not, as was the case with videos, resulting in a plethora of frankly dull “talking heads” that eventually turn off viewers.
The best marketing strategy has clear goals, whether to get your business name recognised, to sell products and services, build a trustworthy reputation or to position yourself as an expert in your field.
How you achieve this will depend on your type of business, whether B2B or B2C, the platforms you engage on and how well-produced your promotion materials are.
Most importantly all marketing should put the customer and their concerns first and create a rapport that convinces them that you do truly understand their needs.

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Business Development & Marketing Finance General

Climate change is an opportunity for SMEs

climate change effectsIn December 2018 the world’s leading scientists warned that there were only 12 years to get climate change under control with warming kept to a maximum of 1.5C or there would be significantly greater risks of drought, floods, extreme heat and poverty for hundreds of millions of people.
Such warnings often seem to fall on deaf ears, when it comes to economists and businesses, and even some politicians, notably US President Donald Trump, who has denied that climate change is a serious issue.
However, at December’s UN Climate Change summit in Katowice, Poland, the message seems to have struck home with some of the world’s largest investors, including pension funds, insurers and asset managers, who issued a Global Investment Statement warning that without urgent action there could be a financial crisis several times worse than the one in 2008. They demanded urgent cuts in carbon emissions and the phasing out of all coal burning.
All this may seem a long way from the day to day concerns of SMEs and larger businesses, especially amid the current worries of Brexit, the latest ONS (Office for National Statistics) figures for UK economic growth was near-stagnant in the last six months of the year and amid warnings from the World Bank that the Global Economy, too, was facing significant problems in 2019.
This theme was picked up in an article by the economist Ken Rogoff in the Guardian where he outlined the main risks which included a significant slowdown in China, “a rise in global long-term real interest rates and a crescendo of populist economic policies that undermine the credibility of central bank independence, resulting in higher interest rates on “safe” advanced-country government bonds.
The elephant in the room in both World Bank warnings and in Rogoff’s analysis is the assumption that there can be perpetual growth and that it is essential to both global and national economic health.
This ignores the fact that the earth has finite resources and that sooner or later they will run out.

Small is beautiful, sustainable growth and the benefits for SMEs

Clearly, there needs to be a change in thinking on many levels and we may be seeing the first signs, for example in consumer behaviour, which resulted in significantly lower spending in the run-up to Christmas.
This has been variously attributed in the UK to worries over jobs and Brexit, and to rising costs of such basics as energy supplies and local taxes.
A related influence on spending, however, has been the growing awareness among consumers of the environmental impact of goods they buy. Customers increasingly demand that goods be made from recycled, sustainable or natural materials and that their repackaging and transport-related impacts are minimal.
This underlying change is perhaps also exemplified by the woes of the motor manufacturing industry where sales of new cars and in particular diesel engines have been plummeting for more than a year.
While this tends to be attributed to uncertainty about the future of diesel-powered vehicles or rising raw materials costs given the low value of £Sterling, is it also possible that people are beginning to think harder about their need for and use of cars in the context of climate change? Equally, are people beginning to question the wisdom of constantly updating their wardrobes and their pursuit of the latest new “thing”?
In recent weeks there have been several interesting and thought-provoking articles in Wired, an online publication focusing on all things technological. They include one in November on Carbon Capture technology, which was greeted enthusiastically ten years ago, but whose development has struggled for funding since because although feasible, developing the technology for it to be useful at scale is difficult and it is hard for governments to justify the upfront costs.
In another article in January, there was a discussion of the potential for using AI (Artificial Intelligence) to help in the more efficient use of energy by predicting the demand peaks and troughs and adjusting supply accordingly in order to meet sustainable development goals.
Perhaps the most interesting article of all was by Bernice Lee on the theme of “small is beautiful”, an idea first proposed in 1973, by EF Schumacher. It was largely ignored by big businesses wedded to economies of scale as defined by Adam Smith, in a model that argued that scale and the division of labour lowers costs and increases efficiency.
However, Lee argues that the downsides of Smith’s model are more obvious today in that many traditional business giants have kept real wages low despite soaring profits and have benefited from offshoring, opaque supply chains and the short-termism of investors.
Big businesses also suffer from an inability to change their business models quickly or to be agile in meeting changing circumstances, not least those relating to climate change.
She argues that SMEs, on the other hand, have the advantage of agility, especially given the growth of such things as AI, cloud computing, of outsourcing back-office functions.
As a result, SMEs can be more creative, more innovative and are increasingly attracting the notice of larger businesses.  Therefore, there is more potential for SMEs to grow but also to lead the way to a more sustainable form of economic growth that does less damage to planet Earth.

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Accounting & Bookkeeping Banks, Lenders & Investors Cash Flow & Forecasting Factoring, Invoice Discounting & Asset Finance Finance

January sector focus: Fintech

using Fintech to make purchase in shopFintech is used describe new technology that seeks to improve and automate the delivery and use of financial services.
Originally the term was applied simply to technology employed at the back-end systems of established financial institutions.
Over time, however, the Fintech definition has been expanded to include any technological innovation in — and automation of — the financial sector, including advances in financial literacy, advice and education, as well as streamlining of wealth management, lending and borrowing, retail banking, fundraising, money transfers/payments, investment management, asset management and some would now also include crypto currencies such as Bitcoin and their administration.
Fintech is also sometimes described as disruptive technology, in that many Fintech start-ups are designed to provide financial services in non-traditional ways, such as by offering online shoppers to secure immediate, short-term loans for purchases, bypassing their credit cards or by offering online and App-only services that bypass traditional lenders.
While traditional lenders and finance providers have tried to adopt some of the Fintech innovations, they begin with burdensome overheads and cannot generally compete unless they embrace the need to fundamentally change their existing thinking, processes, decision-making, and overall corporate structure. This is not something most managers can cope with.
There is now a vast array of Fintech categories of which the following are just a few examples:
B2C for consumer banking activities such as arranging loans and providing customer credit facilities,
B2B for small business clients (as above)
B2B for small businesses for activities such as taking payments, credit management and managing debtor ledgers
B2C for consumers for activities such as contactless payment and payment by mobile phone, online banking, applying for financial services such as a mortgage or loan, online shopping payments and many more.

Fintech as a part of the UK economy

In 2017 at the first ever International Fintech conference argued that the UK was the leader in this sector with a competitive advantage in the provision of Fintech services due to its sophisticated financial community and the growth of technology hubs like Silicon Fen in Cambridge and Silicon Roundabout in London.
The phenomenon was described as being an essential aspect of the UK vision for “an outward-looking, Global Britain” which would not only provide a high skilled, high wage economy but would attract the best talent from all over the world.
At that time, according to Treasury figures, the industry was worth £7 billion to the UK economy and employed an estimated 60,000 people.
It has been calculated that there are almost three times as many UK banking and payments companies now than there were in 2005 while the rest of the world has seen theirs fall by around one-fifth on average.
In May 2018, Technation reported their research in an article in Information Age that the UK’s tech sector, of which Fintech is a part, was expanding 2.6 times faster than the rest of the UK economy, with Fintech start-ups located not only in London but throughout the UK.
The Technation analysis also looked at the impact of Brexit on the sector, finding that by and large tech firms were undaunted by the prospects of leaving the EU.
However, Financierworldwide, provided a more sober analysis, identifying some of the potential challenges to Fintech.
These included future freedom of movement of labour and the absence of sufficient numbers of skilled tech workers available in the UK, the loss of the ease of the passporting of services to other EU markets and consequently the decision Fintech companies may face of whether to relocate to other countries in Europe, at least in the short term. Among the cities expected to be most likely to benefit from welcoming such moves are Dublin, Paris and Berlin.
There is also the worry that the loss of passporting rights after Brexit would deter the currently high levels of investment in UK Fintech.
Finally, regardless of Brexit, if Fintech is to thrive, after a year of seemingly frequent banking technology meltdowns, not to mention hacking scandals, there needs to be much more robust and secure protection against fraud and data protection. To achieve this we at K2 have invested in Tricerion as the future of login security. Check it out at www.tricerion.com.
 

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Banks, Lenders & Investors Business Development & Marketing General Turnaround

New Year, new start – a good time for some SME forward planning

SME forward planning problem solverThe end of last year was a time that most businesses would prefer to forget given the continuing uncertainty after the Government postponed a parliamentary vote on the Brexit withdrawal bill.
Members of both the BCC (British Chamber of Commerce) and FSB (Federation of Small Businesses) were reportedly “horrified” by this development and it is unlikely that many will have been impressed by subsequent reported Government contingency planning for the UK leaving the EU with no deal.
The eventual outcome is so difficult to predict that much business planning is on hold. This is supported by research by the BoE (Bank of England) who canvassed 369 companies about their pre-Brexit planning and found that the majority had made no changes to their business plans for the coming year.
However, this is a new year and hopefully the December shambles may have a positive side if it stimulates more SMEs to realise the need for planning.
The New Year is in any case a time when it is traditional for SMEs to refresh their business and marketing plans and while the uncertainty over the future has to be acknowledged, especially for those SMEs involved in Europe-wide, just in time supply chains, I would argue that this is a perfect time to accentuate the positive and focus on innovative thinking in SME forward planning. I would also argue that the world won’t collapse whatever the outcome and while most SMEs will be affected by Brexit, there will still be business to do.

Accentuate the positive in SME forward planning

It is often said that there are opportunities in the most negative of situations if only you look for them.
In December, the BCC issued a Brexit Business Checklist, which local Chambers have issued to their members as a downloadable PDF.
The checklist covers all the aspects that a business needs to consider in preparation for March 2019, but while it is prompted by the current uncertain situation it is also a comprehensive guide to all those aspects of a business that should be a part of SME forward planning at the start of the year.
It includes future staffing needs, issues with cross-border trade, including potential border delays and tariffs, taxation (particularly VAT), intellectual property, reviewing existing contracts, regulatory issues (such as GDPR) and competition.
So, for example, if business growth is part of your business plan and you know you may need more staff, perhaps rather than put off plans because you are uncertain about whether suitable people will be available when you need them, think about whether you can introduce systems such as automation or AI to work smarter rather than relying on finding more people.
Alternatively, how about taking on apprentices and training them for your needs.  While reliance on short-term labour can provide flexibility and help deliver short-term profits, well trained and reliable employees are valuable when building a business that has a future.
Similarly, when reviewing contracts can you find suppliers of locally-sourced components or raw materials that do not depend on cross-border supply chains?  Could you source supplies from outside the EU? Could you modify essential ingredients in your products that make you less reliant on overseas supplies?
UK businesses have historically been some of the most inventive in the world. Perhaps the ongoing political shambles will provide the stimulus for them to return to the forefront of innovation.

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

January Key Indicator – exchange rates and their impact on SMEs

exchange rates are no longer measured by goldThe exchange rate is the value of a country’s currency against those of others and the factors affecting this are many, especially in a volatile political climate, both globally and locally.
Among the influences are the interest rates set by central banks, inflation, a nation’s gross domestic product and trade balance, its debt and to a significant extent, the behaviour of politicians and governments towards both their own and competing economies.
Significant fluctuations in exchange rates, as has been seen over the last couple of years, then start to affect the confidence of investors, currency traders and businesses, increasing the volatility of currency values and stock exchanges.
Two obvious examples have been the plummeting value of £Sterling since June 2016, when the UK voted to leave the EU, despite occasional upticks as the negotiations over the withdrawal agreement dragged on.
Similarly, the engagement of the US President, Donald Trump, in imposing tariffs and instigating trade wars with other competing economies, particularly China, has arguably had a negative impact on both the value of the US Dollar and the performance of its own stock market.
Economic recovery, particularly in the UK and USA, has, in any case been sluggish in the decade since the 2008 global economic meltdown, which prompted central banks to set interest at very low rates in an attempt to protect their countries’ economies by stimulating investment and business activity.

A little history on exchange rates and currency values

Until the early 1930s, countries’ currencies were valued against the value of gold – the gold standard.
The quantity of gold held by a country determined the value of its currency and under the gold standard trade between countries was settled using physical gold. So, nations with trade surpluses accumulated gold as payment for their exports. Conversely, nations with trade deficits saw their gold reserves decline, as gold flowed out of those nations as payment for their imports.
The UK abandoned the gold standard in 1931 and the US in 1933, moving instead to the current fiat system, where currency values fluctuate dynamically against other currencies on the foreign-exchange markets. Fiat money is the currency that a government has declared to be legal tender, setting it as the standard for debt repayment. Essentially its value is based on market perception.
It has been argued that moving off an actual physical commodity like gold has made currency values and therefore exchange rates more vulnerable to manipulation by politicians and central banks, and therefore created a more volatile and vulnerable economic climate. This is where the market’s interpretation of politicians and central bankers is fundamental to currency values.

The effect of exchange rates on business

It is not only exporting businesses that are affected by exchange rates and currency values.
A good recent example has been the benefits to some UK SMEs, particularly in the service and hospitality industries, which during the summer of 2018 experienced something of a boom in tourism from a combination of a long season of good weather and the decline in the value of £Sterling making it cheaper for foreign tourists to visit the UK.
On the other hand, even small local SMEs whose businesses depend on selling goods and services where parts, components, food ingredients or raw materials come from overseas saw their costs rising because £Sterling’s buying power had been reduced in comparison with currencies in other countries.

Can SMEs protect their businesses from exchange rate fluctuations?

It can be harder for SMEs to protect themselves than it is for larger businesses, but the essentials for any business survival and growth are based on managing their costs and expenditure with strict and careful attention to cash flow which is best achieved by close scrutiny of monthly, or more frequent, management accounts.
If it is at all possible to manage cash flow in a way that a business can create a contingency reserve this will provide some measure of protection to a downturn in the exchange rate.
For those that have to source supplies from overseas, hedging against cost increases due to exchange rates can be done by negotiating a forward contract in your own currency based on a set price with the supplier or at least fixing the price with purchase of a forward exchange rate. This may mean missing out on future changes in the exchange rate that might benefit the SME buyer, but will provide some degree of certainty when planning ahead.
Another option may be to include clauses in your contracts which allow you to renegotiate prices should the exchange rate change significantly within an agreed period of time.
Wherever possible try to avoid the transaction fees charged by banks for making international payments. Some money transfer specialists offer an alternative, FCA regulated, service in a free multi-currency account that lets businesses hold over 40 currencies, and switch between them using the mid-market exchange rates to make payments.
While the risks of fluctuating exchange rates can be greater for SMEs with fewer reserves to fall back on planning and good communication can help to mitigate at least some of the risks.