VUCA – protecting your business when nothing is predictable

VUCA uncertaintyVUCA is an acronym devised by the US military to describe an environment of Volatility, Uncertainty, Complexity, and Ambiguity.

But it doesn’t only apply to conflict zones. At the moment, and for the foreseeable future, it could equally well describe the climate in which business is operating.

For UK businesses the predominant uncertainty has been the situation, arguably since June 2016, when the country voted by a narrow margin to leave the EU. Since then, there have been three years of VUCA which won’t end tomorrow when we know the outcome of today’s General Election.

In the meantime, the UK economy has been sluggish, with the latest data from the ONS this week indicating that there had been almost no growth, a derisory 0.7%, in the third quarter of the year.

However, there are other influences that have combined to make uncertainty the new business norm, including a rise in nationalistic sentiment and population, trade wars between the US and China and also those between Japan and S Korea, all of which have led to a slowdown in the global economy.

Longer-term influences are the rapid pace of automation and AI development and, increasingly, worries about the future of the environment, which are influencing both consumer and investors in the direction of more ethical and responsible behaviour and decision-making.

Given the headwinds, VUCA is likely to get worse and will affect businesses for a long time to come.

Can businesses turn VUCA into a positive?

Despite its reference, VUCA offers terrific opportunities to entrepreneurs and adaptable businesses although exploiting them tends to be at the expense of those businesses, normally large ones, that rely on stability and predictability.

The website  vuca-world.org re-imagines the acronym as Vision, Understanding, Clarity and Adaptability and several business writers, among them Karen Martin and Sunnie Giles, both writing for Forbes, make the point that ultimately dealing with uncertainty is down to the creativity, agility and skill of people in an organisation.

Giles suggests that businesses need a change of mindset, so that they can react to fast-moving changes.

These include “moving from hierarchy to self-organisation”, “democratising information”, “speeding up interactions” and using “simple rules to make quick decisions, rather than perfect analyses.”

Of course, there will need to be effective and flexible leadership and a sound knowledge of the business situation at any point in time, which makes such things as management accounts and cash flow monitoring, as well as sound knowledge of customers’ changing behaviour and requirements even more crucial.

I would argue that it is often SMEs that are in the best position to deal with a VUCA climate as very often they are flatter organisations where there has to be a good deal of multi-tasking when the numbers of key employees are fewer than in larger, more hierarchical organisations.

Sector focus – changes in consumer spending and attitudes?

consumer spendingIt will be interesting to see the analysis of consumer spending once the Christmas and peak holiday buying season is over.

Data throughout the year has indicated that people are less willing to splash out on so-called “big ticket” items, whether online or on the High Street.

Whether this is being caused by a change in attitudes to consumption or to increasing worries about job security and income is not yet clear. Consumption assumes spending on basic needs and then discretionary spending on goods and services including leisure.

Influences on consumer spending

Clearly, consumers’ confidence in their current and future financial situations are a key driver in the willingness to spend at least in the short term.

It is influenced in part by the changing costs of expenditure on such things as housing, fuel, food, clothing and travel costs, which are monitored annually by the Consumer Price Index (CPI), where the weighted average of prices of a basket of consumer goods and services indicates the level of and changes to the rate of inflation in the economy.

This has left less for discretionary spending.

An indicator of spending on capital goods is this year’s fall in the purchases of new cars, attributed by the Society of Motor Manufacturers and Traders to weak business and consumer confidence, economic uncertainty and confusion over diesel and clean air zones.

There has also been a reduction in consumer spending on both the High Street and online which has contributed to the closures of High Street retailers, and reduced profits of online retailers such as Asos, whose profits were reportedly down 68% in the year up to October, altbough   Asos attributed this to IT problems in its warehouses.

A study by the card machine provider Paymentsense at the start of the year predicted that over half (56%) of UK consumers were planning or considering cutting their spending over the coming year by cutting back on purchases of goods like new clothes (31%), sweets, crisps, cake and chocolate (27%), and switching to less expensive toiletries (18%). This was closely followed by spending less on jewellery and holidays which require a flight (both 17%).

This is not surprising given that research by KPMG and the Recruitment and Employment Confederation (REC) showed that the number of permanent job appointments fell in November as growth in the demand for staff fell to a 10-year low.

Employment in the manufacturing sector also fell for the eighth month in a row and the pace of job losses was the steepest since September 2012 according to the latest IHS Markit/Cips monthly snapshot.

It would be interesting to see how many people (mainly women) have lost their jobs in the ongoing carnage in High Street Retail.

At the same time, the Office for National Statistics (ONS) has reported that average household financial debt had risen 9% to £9,400 in the two years to March 2018. The biennial study showed that personal loans accounted for £35bn of total household debts, £32bn is from student loans, £25bn is hire purchase, and £22bn is on credit cards, while the remainder includes £3bn of overdrafts. Much of this, it has been argued, is due to increased living costs, such as rent, council tax and other bills.

It is fairly certain, therefore, that worries about the future and job insecurity are influencing consumer spending currently.

Having said all this, however, the recent Black Friday sales saw an average 7% increase in sales compared to last year.

This could be seen as a change in consumer spending to waiting to buy until prices are, allegedly, reduced.

It will take more than a year to determine whether a longer-term change in consumer spending habits is taking place, however, there are other factors at play.

Concern for the environment and global warming have risen to the top of the agenda, in particular for younger consumers, which has encouraged people to think twice about buying fast fashion and disposable and other plastic items.

Buying second-hand has been re-branded as “pre-loved chic” and the demand for longer-lasting household products such as fridges, washing machines and the like has prompted the EU to regulate that manufactures must stock spare parts for ten years for such items.

Then there have been the movements encouraging people to buy from local independent retailers as well as the rise of local groups specialising in helping people to repair household items such as small kitchen appliances.

Guy Moreve, CMO of Paymentsense, said “…. our study reveals that instead of aspirational health or lifestyle goals many UK consumers are increasingly concerned about just keeping up as living costs climb more quickly than salaries.

“Another growing trend is ethical consumption, and over 2018 we saw increased awareness and attention to environmentally friendly lifestyle habits such as veganism and sustainable fashion. We feel that this coming year will see continued movement in this area, as more people adopt ethical attitudes.”

Time will tell whether the “shop till you drop” love affair is finally over and there is a sustained change in consumer spending.

Update – sacked Small Business Commissioner speaks out

Small Business Commissioner sacked - for telling the truth?The now-ex Small Business Commissioner, Paul Uppal, has accused the Government of thwarting attempts to help SMEs tackle the late payment scourge.

Mr Uppal has reportedly blamed Whitehall for pushing him out of a role which, he says, is under-resourced and ignored by government.

He said that his office was met with “radio silence” from civil servants and ministers over his approach to the job and that his budget was too small to tackle the “huge task” of getting big companies to pay small businesses on time.

He also revealed a little more detail about the reason for his sacking, which was “a disagreement over an alleged conflict of interest related to an unpaid, interim advisory role in another government-backed small business scheme”.

The Times, is the only national broadsheet to cover the story, although it has been picked up by the online publication smallbusiness.co.uk.

It seems that The Times is becoming the champion of SMEs, carrying another article on the same day about a poll from the Chartered Institute of Procurement & Supply (CIPS) that found that almost one in six businesses said most payments are settled late. Malcolm Harrison, chief executive of CIPS, said there was a “rotten culture” of late payment. The organisation has been calling for big businesses that are slow to settle invoices to be barred from public sector work.

Another poll out this week from Xero, the online accountancy platform, revealed that a quarter of small business owners believe their company will go bust within 5 years, with 54% warning that late payments posed a risk to their firm.

The FSB (Federation of Small Businesses) has repeatedly said that late payment is the cause of an estimated 50,000 small businesses go under each year because of “pernicious” late payment. This figure might be questioned given that there were 17,454 formal company insolvencies in 2018 however I accept a liberal interpretation to allow for sole traders and companies ceasing to trade.

Does the Government care about or understand the pressures on SMEs?

According to research from the Department for Business, Energy & Industrial Strategy, at the start of 2018 a massive 99.9% of the 5.7 million businesses in the UK are small or medium-size businesses (SMEs). Of these only 0.6% of businesses in the UK are classed at medium-sized businesses.

This arguably makes SMEs an essential contributor to the economy and the provision of jobs.

Yet there has been no word on the appointment of a replacement for Mr Uppal, since I reported in my blog on November 19 the Government’s statement: “An open recruitment campaign to appoint a new Small Business Commissioner will get started immediately.”

Allegedly Fiona Dickie, the Deputy Pubs Code Adjudicator, was to provide oversight in the Small Business Commissioner role until early November, pending the appointment of an interim commissioner.

However, there has been a deafening silence from her, the General Election notwithstanding.

It has to be asked why an unpaid, voluntary advisory role for Mr Uppal was deemed to be a conflict of interest with his official position?

I have asked previously and I repeat my question: has the Government been successfully lobbied by some large corporates to roll back this initiative? Was he becoming too successful?

December Key Indicator: Cars v Public Transport

public transport needs investmentEnvironmentalists advocate the use of public transport instead of cars as this will reduce carbon emissions and help combat climate change.

Achieving this is not only about changing people’s attitudes but will involve a significant shift in government strategy and investment to make public transport as convenient as cars.

This is an issue for urban and rural locations outside London, which has a relatively high usage of public transport and arguably offers an excellent network buses, tubes and trains that make it very convenient for the public.

Arguably, efforts to reduce car use in London have been helped by the introduction of the congestion charge and both the Low Emission and Ultra Low Emission Zones (LEZ). Indeed, other cities, such as Bristol, are said to be considering similar restrictions.

It is certainly the case that New Car Registrations have been falling drastically in the last two years.

According to figures published by Autoexpress, the UK’s new-car market suffered a significant decline in October 2019, with 6.7 per cent fewer registrations than in October 2018.

But I do not believe this is due to changing attitudes or any improvement of public transport infrastructure, but instead think it is down to the congestion of cars clogging up roads and falling consumer confidence as reflected by a drop in spending on capital items.

The Urban Transport Group research is claiming that significant shifts “are changing the face of transport and travel in city regions” as reported by Citymetric. As one example, it reports that more people now commute into central Birmingham by rail than car, with growth in rail use also appearing in other locations including Huddersfield (by 91 per cent), Coventry (by 143 per cent) and Newton-le- Willows (by 120 per cent).

However, the picture of changing travel patterns is much more mixed and nuanced than the above would suggest and one of the most comprehensive analysis of travel patterns is the annual Government publication, the National Travel Survey (NTS).

Its most recent annual report published in November and covering the year to the end of 2018 says: “The average number of yearly trips made by people living in England have increased each year from 2015 to 2018. The 986 trips people made on average in 2018 was the highest since 2009.”

However, it also finds that the increase is mostly accounted for by an increase in walking trips and also that between 2002 and 2018, average trips, distance and time have decreased. Cycling trips have also increased by 50% between 2002 and 2015, it finds.

It also finds that the proportion of households without a car has fallen from 48% in 1971 (based on the Census) to 24% in 2018 while the proportion of households with more than one car increased over this period, from 8% to 35%.

Nevertheless, as the report points out, the devil is in the detail, of which there is a great deal: “the many factors [for the change] might include changing demographic patterns, changing patterns of trips, and the impact of new technologies influencing the demand for travel, for example the increase in online social networking, the capability for home working and online shopping.

On public transport, however, the picture is mixed with an increase in rail trips and distances per person and a decrease in local bus use.

Surprisingly, commuting trips have also decreased in recent years which the survey suggests is due to workers travelling to work on fewer days per week, a growth in trip-chaining (where people combine two or more trips for differing purposes), a growth in the number of workers who do not have a fixed usual workplace and a growth in working from home, and part-time and self-employment.

Is it time to rethink public transport provision?

Both rail and bus transport were deregulated in the mid-1990s, leading to such services being contracted out to private providers.

Arguably, particularly with bus services, this has led to a massive decline in rural bus services because the provider companies are businesses and not interested in uneconomic, loss-making routes. As local authorities have been ever more cash strapped, many have had to reduce or cancel subsidised, loss-making rural routes, leaving rural dwellers and businesses with little option but to use their cars.

According to Better Transport, the campaigning group, “Since 2009, well over 3,000 local authority supported bus services have been cut or reduced”.

However, reasons given by respondents in the NTS for not using public transport more include:

  • Rising ticket prices;
  • Poor customer service;
  • Rush hour inconvenience;
  • Delays and unreliability.

Clearly, it is time to revisit public transport infrastructure if we are to reduce car usage and combat climate change.

Do High Street banks care about their customers?

High Street banks and trustHigh Street banks rely on providing a service to customers yet too often it seems that customers are the last thing banks care about.

Of course, banking is also a business and therefore subject to the pressures and responsibilities of any business to remain compliant and profitable.

However, I would argue that their existence is entirely down to the loyalty of their customers. Yet, customer loyalty is being stretched by the seemingly endless IT problems and closure of branches and ATMs that inconvenience customers, particularly SMEs in rural areas.

Most recently, TSB, encountered yet another IT failure, just a year after the mammoth meltdown which cost it an estimated £366m. To compound the distress for customers, it has just announced that it intends to close another 86 branches, cutting up to 400 jobs over the course of next year.

IT failures have not been confined to TSB, however, and in 2018, the Financial Conduct Authority (FCA), said the number of incidents reported to it had increased by 187% in the past year, 65% of which were from high street banks.

This has prompted a committee of MPs to call for faster action in resolving complaints and awarding compensation, along with more decisive regulatory action, calling the current situation unacceptable.

According to the consumer organisation Which? “Banks and building societies closed a total of 3,312 branches in between January 2015 and August 2019, with an average of 55 closing each month”.

Which? has been tracking the closures and its breakdown shows 1,094 for the RBS Group (NatWest, Royal Bank of Scotland and Ulster Bank) and 569 for the Lloyds Group (Lloyds Bank, Halifax and Bank of Scotland) while it estimates that Barclays has closed approaching 500, although the bank has declined to share figures with Which?

In addition, the organisation has found that 5,000 free-to-use ATMs had been lost between January 2018 and May 2019, the vast majority in rural and more deprived areas.

But it has not only been IT failures and branch closures that have arguably reduced trust in banking.

Only last month, Barclays announced its debit card holders would be able to deposit money but not withdraw cash from a post office counter from January 2020 as a cost saving measure to save £7 million. Following a huge outcry that situation was quickly reversed.

Nevertheless, it was an indication of the general attitudes of the traditional High Street banks given the number of branches and even ATMs that have been disappearing from villages and towns throughout the UK, on the tenuous argument that customers prefer to bank online. And despite the well-known unreliability of internet connections in such locations.

It all adds up to a massive headache for anyone who lives or works outside of a main city location.

So it is with some scepticism and a few hollow laughs that we note the latest Government initiative, a SME Financial Charter, to which, approximately 20 banks and financial service providers have signed up.

The charter is aimed to support SMEs through Brexit and signatories make five pledges:

  1.  We’re open for business and ready to lend;
  2.  We’ll help you prepare for Brexit and beyond;
  3.  We’ll support your application and signpost other options if needed;
  4.  We’ll treat you fairly at all times;
  5.  We’ll work with the government-owned British Business Bank to support SMEs.

The charter is voluntary and clearly limited in scope.

It would have been more to the point if it had been an ongoing pledge, not confined to helping SMEs with Brexit and its aftermath, and if it had been given some regulatory teeth to encourage High Street banks to offer a real service to SMEs and other customers.

 

Fair treatment of employees is a cornerstone for improving productivity

fair treatment equals improved productivityImproving productivity is a concern for all businesses but it is harder to achieve if employees do not believe they are receiving fair treatment.

As I have said in many previous blogs, a motivated workforce is more likely to go the extra mile if they feel valued as people, this means managers treating them with respect, listening to them, showing consideration to them, recognising their contribution, rewarding their contribution and protecting them from inappropriate behaviour by others at work. In summary treating them with respect and showing them that their effort is valued.

Recognition can simply be saying “thank you” for a job well done, it is not just about money.

However, money can become an issue when there is a clear disparity in pay. While discrimination is illegal and applies to any disparity of remuneration on grounds of gender, race, religion or ethnicity, this is not about legislating for staff motivation.

To be motivated staff need to feel they are treated equally which means people doing the same job expecting the same pay and other benefits albeit they will acknowledge any adjustment to pay scales based on valid reasons such as experience, length of service, sickness record, additional responsibilities or other factors. The key is that the reasons for any difference in pay are legal, explicit and understood by everyone.

Two years ago, in April 2017, the government made some efforts to address unequal pay treatment with the introduction of mandatory gender pay gap reporting (GPGR) for both the private and public sectors employing 250-plus people.

It then launched an inquiry into whether organisations should also be required to report on the pay differentials between people from different ethnic backgrounds, although as yet no decision has been reached largely, it is argued, because ethnicity is a very complex subject.

GPGR is regulated by the Equality and Human Rights Commission, and while it can take businesses to court for non-compliance and obtain an order to force them to, it has no enforcement powers beyond “naming and shaming” them.

So recent reports on the situation two years on are not encouraging reading.

The BBC cited figures from the ONS (Office for National Statistics) for the year to April 2019, saying that the gender pay gap for full-time workers rose to 8.9% – up from 8.6% the previous year.

Quoted in the article is TUC general secretary Frances O’Grady:  “Government must pick up the pace. It’s clear that publishing gender pay gaps isn’t enough on its own. Companies must also be legally required to explain how they’ll close them.”

Andy Haldane, a member of the Bank of England’s Monetary Policy Committee, has recently said that the GPGR obligation should be widened to include SMEs with 30 or more employees, something that was dismissed by FSB chairman Mike Cherry because there would be a number of practical difficulties in businesses with such small work forces.

The BoE (Bank of England) has also recently analysed its data and found that ethnic minorities in the UK earn around 10% less than white workers. Andy Haldane said the gap is “strikingly” persistent, having narrowed far less the than the pay disparity between genders over the past 25 years.

But fair treatment extends beyond disparities on pay.  It is also about such issues as bullying and harassment and again, recent findings show some concerns.

According to a CityAM report investigations by Business in the Community found that as many as a quarter of all ethnic minority employees at British businesses are having to put up with bullying and harassment, despite 97% of businesses having a zero tolerance policy to bullying and harassment.

A study by Equileap, which researches corporate gender equality, has found that almost six out of 10 global companies do not have an anti-sexual harassment policy.

Clearly, there is a long way to go before there is fair treatment for all workers, but if businesses want to survive and prosper in a difficult global and domestic economic climate, amid skills shortages and the uncertainties of Brexit, they would be well advised to put it much higher up their agenda than it seems many currently do.

After several high profile business failures – Is corporate governance robust enough?

corporate governance failuresand  penalties Research by a provider of audit, tax and consulting services has found that only 21% of board members think corporate governance is critical for a business to achieve success.

The findings by RSM also revealed that 96 per cent of company Board members it surveyed expected to see an increase in the number of criminal prosecutions of those senior executives and organisations implicated for poor risk management.

The issue of corporate governance has been under review by the FRC (Financial Reporting Council) for some time following high-profile collapses of businesses like BHS, Patisserie Valerie, Carillion and most recently Thomas Cook.

In its most recent annual report, the FRC found that that “audit quality is still not consistently reaching the necessary high standards expected”.

More than a year ago, a review of the FRC itself led by Sir John Kingman proposed the establishment of a new regulator, the Audit, Reporting and Governance Authority, but this was not acted upon by the Government before business was suspended pending the outcome of the forthcoming general election.

Concerns about corporate governance have also been raised by a Government committee, the business, energy and industrial strategy select committee which has called on ministers to move faster to reform the audit profession, strengthen corporate governance and curb executive pay.

Among its findings were that “too often, audit teams appear prepared to accept what management tells them rather than questioning its plausibility and drawing on specialists to form their own view”.

Corporate Governance refers to the way in which companies are governed and to what purpose. It identifies who has power and accountability, and who makes decisions. It is meant to take account of the interests of not only the business but its shareholders and stakeholders.

In July 2018, the FRC revised its corporate governance code, which was to apply to the accounting periods beginning on or after 1 January 2019.

According to the FRC the new code was designed to focus “on the application of the Principles [Code] and reporting on outcomes achieved. For the Code’s Provisions, companies should disclose how they have complied with these or provide an explanation appropriate to their individual circumstances.”

Clearly, more robust measures are going to be needed if the RSM research findings are any indication of the attitudes of business directors to the idea of responsible corporate governance.

Interestingly the IoD (Institute of Directors) yesterday launched what it called its manifesto for the next government to restore trust in corporate Britain. It included a proposal for a new Public Service Corporation to restore trust in the outsourcing sector, reforms to the regulation of auditors and replacing the FRC with a new, stronger Audit, Reporting and Governance Authority.

Changing corporate behaviour is a challenge, especially when it is so entrenched, but there is nothing like the threat of criminal proceedings to focus a board of directors given that in law they are collectively responsible for the decisions, behaviour and actions of any one director. The role of non-execs is key.

Small Business Commissioner Paul Uppal sacked– is this down to his success in holding large companies to account?

Small Business Commissioner sacked - for telling the truth?In a worrying development the Government has sacked Paul Uppal, the Small Business Commissioner, over what it called a “conflict of interest”.

Even more worryingly, the only news outlet to report on the development was The Times, on October 12.

It reports that “the business department felt his involvement in establishing a bank redress scheme was a conflict of interest”.

So far, apart from the report in The Times, there has been a deafening silence on this development.

Mr Uppal’s role as a mediator of payment disputes between small and large companies was established in 2016.

His dismissal came just a few days after the Government had announced that Mr Uppal’s role was to be expanded to having a seat on the Compliance Board of the Prompt Payment Code, which it was intending also to strengthen.

The Government said: “Fiona Dickie, the Deputy Pubs Code Adjudicator, will provide oversight in the Small Business Commissioner role until early November, pending the appointment of an interim commissioner.

“An open recruitment campaign to appoint a new Small Business Commissioner will get started immediately.”

Has the Small Business Commissioner been too successful?

It was announced in December 2018 that in the first year of the Commissioner’s existence unpaid invoices worth £2.1 million to small businesses across the UK have been recovered. Subsequently that amount had reached £3.5 million.

Mr Uppal also began the practice of naming and shaming those large businesses that were failing to meet the terms of the Prompt Payment Code and of actually removing some of them from its lists.

They included Holland & Barrett, Jordans & Ryvita, BHP Billiton, DHL and GKN, G4S, Bupa Insurance and Zurich Insurance.

Clearly, there is a need for government intervention on behalf of SMEs when payments are withheld by larger customers.

A study by FinTech firm Previse shows that small suppliers are paid an average of 30 days later than the largest firms. And a separate survey by Hitachi Capital Business Finance found the proportion of SMEs that were taking legal action chasing late payments from clients had grown from 31% to 40% over the past year with more than 60% of SMEs affected by late payments.

IPSE (Association of Independent Professionals and the Self-Employment) Deputy Director of Policy, Andy Chamberlain, said: ““Late payment is still the scourge of the self-employed. In fact, IPSE research has found the average freelancer spends 20 days a year chasing clients who have failed to pay them on time.”

Mike Cherry, the chairman of the FSB (Federation of Small Businesses), said: “We’ve made some genuine progress on the late payments front since the Small Business Commissioner first took office back in 2017…. This is a disappointing development, one that will put the brakes on our efforts to date.

He added: “The appointment process needs to be efficient and thorough  .. We can’t delay further action to tackle this crisis, especially in such an uncertain climate.”

Notwithstanding that we are in the run-up to a General Election, when all Government business is suspended there are a number of questions in need of answers on this situation and on the future of both the Small Business Commissioner and the Late Payment Code.

So, the question I would ask is has the Government been successfully lobbied by some large corporates to roll back this initiative. Was it becoming too successful?

Why was Mr Uppal sacked and was it really his involvement in establishing a bank redress scheme that was claimed to be a conflict of interest?

Have UK’s SMEs been consigned to limbo?

Withdrawal of credit insurance exposes suppliers to greater risks

credit insurance removal increases risk to suppliersWhile it is true that running a business is always challenging the withdrawal of credit insurance is adding to the cash flow pressure on supply chains and in particular on retailers.

Trade credit insurance protects suppliers by minimising the financial impact if a customer fails to pay for goods and services.

The withdrawal of credit insurance is normally based on a company’s credit rating that in turn is adjusted based on disclosed accounts, county court claims, statements by directors and adherence to payment terms as information that is increasingly being provided by suppliers.

For more than a year, the retail sector has been in the spotlight due to the high profile restructuring of several large chains and there would seem to be little sign of this abating, according to recent reports highlighting the latest move, by Paris-based insurer Euler Hermes, which reduced the credit cover it provides to Iceland’s suppliers over the summer.

Euler Hermes is not the only insurer to have taken steps to reduce its exposure. Atradius has also been following the same path, removing cover last year from Debenhams.

According to the most recent figures produced by the ABI (Association of British Insurers) in the first quarter of 2019 the number of insurance claims made so far by UK businesses facing bad debts had reached its highest level in ten years.

It said that there were 5,114 new trade credit insurance claims made, up 6% on the previous quarter and that the value of claims paid was £48 million, up £1 million on the previous quarter. The average payment was £9,000.

So, it is perhaps not surprising that insurers are continuing to take steps to mitigate their exposure as insolvencies continue to climb in the face of political and economic uncertainty.

But the inevitable consequence is that the risk is being pushed back to suppliers, who in turn are reducing the amount of credit they extend to their customers. This is impacting on suppliers and their ability to maintain sales volumes to bigger customers.

For many suppliers with weaker balance sheets or who depend on a few large customers this can leave them taking the credit risk and often means waiting longer for payment.

Should SME suppliers continue to supply a customer if credit insurance is withdrawn?

It is all very well to advise SMEs to ensure they have a broad spread of customers perhaps with no one representing more than ten percent of the sales ledger, but opportunities need to be grabbed and growth is often achieved by taking some risks. It is a brave company that forgoes the benefit of having large and profitable customers. Despite this it is imperative to avoid being caught up in a domino insolvency if a key customer fails.

Growing a business takes time, forethought, planning and access to capital, none of which is available in abundance in the current uncertain national and global economic climate.

So, is there any way suppliers can protect themselves?

One route is to start to demand payment upfront, which may mean re-negotiating supply agreements, although it is debatable whether customers will oblige, which could then force the supplier into seeking help from the Late Payments Commissioner.

Another route could be to protect at least some of their revenue by using factoring or invoice discounting services. Both services tend to offer non-recourse facilities as a form of insurance to protect against approved but unpaid invoices. While this route involves credit insurance the finance providers often share a level of risk by underwriting better credit terms since they also want to make their own profits.

It is understandable that insurers will want to protect themselves but their service is a market and they may take a level of risk to get your business.

However risk is managed, there is a need for a strong balance sheet and credit management to avoid the fallout when a customer fails to pay your bills.

 

Post-Christmas apocalypse for the retail sector?

retail, high street trading,As we head for its most crucial shopping period in the wake of Mothercare and Mamas & Papas collapsing into administration, I make no apologies for revisiting the UK’s retail sector.

Following last month’s Brexit Halloween deadline and with Black Friday, Cyber Monday and Christmas ahead of us retailers have reportedly stockpiled seasonal products earlier than usual but the consumer uncertainty remaining no one knows how much stock will remain unsold in the new year.

The Confederation of British Industry, the country’s leading business lobby group, said retailers’ stock levels compared with the volume of expected sales had risen to the highest point in October since it began compiling retail sales estimates in 1983.

This is against a backdrop of dramatically narrowing profit margins, falling consumer confidence and repeated demands for comprehensive reform of business rates falling on seemingly deaf Government ears.

A new report by the global professional services firm Alvarez & Marsal (A&M), in partnership with Retail Economics, has found that store-based profit margins for the top 150 UK.retailers have more than halved in less than a decade – dropping from 8.8 percent as seen in 2009/10 to 4.1 percent in 2017/18.

This, it says, is the result of increasing operating costs, inflexible lease structures and changing shopping habits. Yet, it concludes that there is still demand for the High Street physical retail experience “presenting opportunities for forward-thinking incumbents, entrepreneurs and investors. Those that collaborate with landlords and local authorities will be the big winners going into the next business cycle”.

But with a December 25th Quarter Day deadline for the payment of quarterly rents, cash flow is likely to be tight for many retailers who won’t get much support from landlords.

Indeed, headwinds are building up for retail landlords in the retail sector such as Intu, the shopping centre owner, which has warned that it will have to raise more money from shareholders.  It has said that its rental income has been battered by a wave of controversial retailer restructures, by such retailers as Monsoon and Arcadia, using CVAs (Company Voluntary Arrangements) to negotiate rent reductions.

In addition to rent, rates are also an ongoing problem for retailers. On October 30th the Treasury Committee, a cross-party group of MPs, called for an urgent review of the whole business rates system, saying that it was broken, having outpaced inflation for many years and grown as a share of business taxes, placing an unfair burden on bricks and mortar shops. Not only that, but, it also criticised a backlog of 16,000 appeals against business rate decisions and called for the government’s valuation office to be properly staffed.

This was only the latest in a seemingly endless series of calls for reform, that had come from such bodies as the FSB (Federation of Small Businesses), the British Retail Consortium and others throughout the year, with FSB chairman Mike Cherry warning of a very bleak winter ahead.

With consumer confidence currently at a six-year low according to research by YouGov and the Centre for Economics and Business Research Mr Cherry’s prediction isn’t a surprise.

With an estimated 85,000 jobs having already gone from the retail sector over the last year, and approaching 3,000 more coming after the latest retail closures how likely is it that consumers will rush out and spend during the festive season?

The likelihood of any Government action has, of course, receded into the distance given that politicians are now not sitting, but out on the campaign trail ahead of a General Election on December 12th.

Whether a new government can shift its focus away from the ongoing and ever more tedious Brexit saga and onto more pressing domestic concerns remains a very big question but the party manifestos focus on sectors other than the retail sector which doesn’t bode well for them in the short term.