The outlook for SMEs in 2018

outlook for SMEs in 2018As ever at this time of year, businesses are considering what the future holds for them in the coming year.

Save some outspoken Brexiteers, most “pundits” suggest the signs are not good.

The Chartered Management Institute (CMI) surveyed 1,000 managers across private, public and charitable sectors and found that optimism had steadily reduced from 63% in 2014 to 57% today with approaching one in four saying they were pessimistic about the coming 12 months. This at least is in positive territory but most such surveys reveal an optimistic bias.

The Institute of Chartered Accountants for England and Wales (ICAEW) based its predictions on the economy’s performance from October to December 2017.  On this basis, the organisation predicts GDP growth rising from 1.5% to 1.6% in 2018, with the weaker £Sterling post Brexit referendum continuing to help exporters.

However, the ICAEW warns that investment will remain weak amid the continuing uncertainty about the outcome of the Brexit negotiations, with the prospect of there being no deal adding to uncertainty and business risks.

The Confederation of British Industry (CBI) has also focused on Brexit uncertainty, calling for greater clarity, especially over the transition period, by the end of the first quarter of 2018.

CBI Director General Carolyn Fairbairn also said transforming the UK’s skills base and its infrastructure should be the highest priority for the coming year, particularly as the country continues to lose overseas workers and to attract fewer while the Brexit uncertainty remains.

So, what prospects does 2018 hold for SMEs?

It should be said that prediction is notoriously difficult because it cannot allow for the unexpected, which may be positive rather than negative.

This is why the Office for National Statistics (ONS) regularly revises its quarterly figures for some time even after a period has ended and it can be some time before the actual figures are revealed.

It is also the case that even in the most difficult of times, there will be opportunities as well as drawbacks. Especially for SMEs who are less exposed to macroeconomics than to entrepreneurial zeal.

SMEs are able to be more agile in responding to a potential or unexpected opportunity in a way that larger organisations cannot because the latter’s systems and hierarchies tend to be less flexible. This gives SMEs an edge in an uncertain and rapidly changing world.

I would argue that if an SME has robust monitoring systems in place for regularly reviewing its performance and revising both marketing and business plans in the light of new information, as suggested in my last blog on January 2, it is better placed to take advantage of opportunities as they develop.

So while the overall picture might appear bleak, SMEs can become the real powerhouse of the UK economy. They need to quickly and constantly weed out any parts of their operation that become a drag on the business and maintain tight control over cash flow, but now is a time to invest in the future, in both people and equipment to increase sales and improve quality and productivity

Clients and their business are out there, it is simply a matter of getting them to buy from you. Despite the pundits, the prospects for agile SMEs are good.

Annual review of your business and setting of growth plans?

growth plans?The festive break allows time for you to reflect on your business and review its performance over the previous year. It is also an opportunity to consider your growth plans for the coming year.

The discipline of writing down your plans and setting of budgets needs to be underpinned by measuring and monitoring performance as the basis for future planning.

The level of your review, whether strategic or tactical, will be defined by your objectives which might be for little change or dramatic transformation.

While the level of detail and research will differ, whatever the objectives the key information needed for a review are.

  • Last year’s plan and last year’s actual figures, details of your order book and future order prospects an up to date balance sheet.
  • Consideration of the different parts of your business that have been non-productive and those that act as a drain on resources that might be discontinued and those that have growth potential and should be the focus for the future. While this might seem subjective, it should be supported by evidence from historical figures and an observation of trends. Ideally it should involve market research before making any big decisions about major investment or a change of direction.
  • Consideration also should be given to resources available, options for growth, and this can be done by analysing your business’ strengths, weaknesses, opportunities and threats and preparing a SWOT matrix. The key is to use this as the basis of a ‘so what’ assessment of how to exploit strengths and opportunities and what to do about weaknesses and threats.
  • Consideration of your products and markets to identify those that yield the best margins, those that are good for cash flow and those that might require attention, whether increased margins, revised terms or cutting.

Your review should provide you with a clear picture of the business’ current situation and be used as the basis of future plans.

Setting of growth plans

Plans should be based on clear goals and objectives which need to be written down and agreed upon by everyone involved so there is no ambiguity about what is expected and so that they can be measured. A useful test of each goal is that they are ‘SMART’ where each should be based on the following criteria: Specific, Measurable, Attainable, Realistic, Timely.

While business plans might be prepared, all too many sit on the shelf unread for another year. Instead it is often more useful to use the review and SMART goals to produce financial forecasts of profit and loss, cash flow and ideally balance sheet. The more detail the better as they can be used for setting detailed budgets for expenditure and detailed sales by market or product. The detailed expenditure lines in a forecast can be used as key drivers of business performance whether investment in people, in marketing or in equipment. An example is to identify and have a separate line in the forecast for all the various marketing initiatives so that the results of each initiative can be measured and used as the basis for adjusting the marketing plan.

Detailed sales lines can be used to support the SMART goals so that performance can be measured against achieving targets.

The layout of the monthly management accounts should reflect the same line items as set out in the forecast so that once a detailed forecast has been set, such as for monthly sales and expenditure, it can be used to compare with the management accounts as a means of monitoring performance. In this way adjustments to the plan can be made where necessary.

Lenders are jeopardising businesses with their short-term thinking

It is often argued that banks’ and lenders’ impatience gets in the way of attempts to restructure and turn around businesses that might otherwise have a chance of survival.

This short-term thinking means that they are wary about agreeing to the use of Company Voluntary Arrangements (CVAs) to allow for the survival of insolvent businesses in a way that will benefit them as well as other stakeholders.

lenders short term thinkingClearly, banks and some creditors are dubious about the merits of CVAs, as in the current case of UK Toys R Us, whose creditors are due to vote on a proposed CVA this coming Thursday, December 21. If approved 26 stores will be closed and up to 800 employees made redundant. The rest of the business, however, will be saved and all creditors will be better off.

The Toys R Us situation is complex, and questions are being asked about the state of its pension fund, in particular by the Government’s Pensions Protection Fund (PPF) who are threatening to reject it, unless the company pays £9 million into the company pension fund. This might raise questions about preference, but I am sure the lawyers will deal with that. There are also questions about the tripling the remuneration for 2014 to 2016 for its former boss and an alleged waiver of loans to a company in the British Virgin Islands.

The other side of the argument is that CVAs allow businesses to implement plans for restructuring their finances and reorganising their operations to become viable without pressure from creditors. In turn CVAs result in fewer business collapsing and the preservation of more jobs.

This was the argument put by both the EU and the UK in 2016 in proposing the introduction of a three-month moratorium to allow insolvent companies to put together plans for restructuring as part of a review of current insolvency arrangements.

A similar argument was put earlier this month by Harold Tillman, former British Fashion Council chairman, when he called for US Chapter 11-style laws to give companies some breathing space.

The question is, would such protection result in both struggling and Zombie companies being restructured in a way that will benefit the economy?

What are the qualities and role of a leader in times of business crisis?

It is a rare business that will never face a crisis and it is estimated on average this is likely to happen every four or five years.

Aside from unexpected events, such as natural disasters, a crisis be anything from a financial problem to a massive data hack, to potential reputational damage arising from inept handling of customers or stakeholders or even a product liability issue.

Effective handling of the crisis situation is crucial to the company’s reputation and in some instances to its very survival.

While those affected by the crisis will most likely look to to directors and managers for guidance, they are unlikely to be effective without leadership and clear messages from their CEO personally.

How should leaders manage a business crisis?

eadership in a business crisisWhile it is important to have appropriate systems and procedures in place for crisis management leaders can only be effective if there is a clear strategy based on a careful assessment of the situation. Often this requires scenario planning well ahead of any crisis so that early action can be taken.

The directors and managers will not be speaking with a unified voice unless they are given clear direction by their CEO.

The CEO should set the tone, and this may include acknowledging that mistakes have been made along with clear guidance on what statements can be made publicly about what the business is doing to address the situation.

So, the first step is for the CEO to ensure that the directors and managers are delivering the right message.

To do this, a crisis management team is needed, one with situation specific skills to deal with the crisis and with the communication skills to get the CEO’s messages out to all stakeholders.

Empathy without emotion will help deal with those affected when people are scared and key people need to be involved so that decisions are made and implemented while at the same time acknowledging the fear and pain among those who are affected.

The CEO should remain positive and reassuring, dampening any understandable urge to resolve the situation immediately, which is not always possible. The steps that need to be taken should be understood and wherever possible communicated to all those affected as well as to those responsible for dealing with the crisis.

An effective leader needs to be both self-aware and have a large measure of self-control.

They will need to demonstrate an understanding of others’ feelings while at the same time remaining clear-headed and focused on dealing with the crisis. This will mean fostering teamwork to minimise conflicts among crisis team members, internal staff and external stakeholders and ensure everyone stays on track during the process of handling and overcoming the crisis.

The objectives of any crisis management project are normally to minimise disruption and minimise reputational damage with the aim of restoring normal operations as quickly as possible. However all too often a focus on minimising costs and apportioning blame gets in the way and leads to a consequential fall out and a long-term damage to reputation.

Leaders take tough decisions which sometimes will need investment of time and money in resolving a crisis rather than running scared themselves.

SMEs – don’t make a difficult situation worse by ignoring HMRC letters

ignoring HMRC lettersWhen SME owners know they are having cash flow problems and will not be able to pay VAT, PAYE, corporation or other tax bills the temptation is to ignore communications from HMRC.

This will only make the situation worse, especially because HMRC (HM Revenue and Customs) are becoming much more proactive with businesses whose payments are overdue, as we reported in September.

Even where a business knows it will be unable to pay, it is always better to let HMRC know, the earlier the better. HMRC is supportive of those who contact them early and a business may be able to negotiate a Time to Pay (TTP) arrangement which involves a payment plan for clearing the arrears.

One thing is certain, though, ignoring the situation will only escalate HMRC action and could, at worst, result in the business being closed down.

What action can you expect from HMRC if you don’t react?

There is a full list of the consequences of inaction on this Government website

In essence, HMRC has powers to collect the money you owe, either by taking possession of the business’ goods and selling them (called variously distraint, walking possession or seizure), or by using a debt collection agency, or by taking you to court to get judgment, or at worst by serving winding-up petition to close down your company.

If things get to this stage, it is also likely to compound your debt problem because there are fees that are charged for each process. It will cost you a fee of £75 for the issue of an enforcement notice, £235 or 7.5% of the main debt above £1,500 and £110, or 7.5% of any goods above £1,500 that are seized whether or not you subsequently pay or they are sold at auction.

If the business has not already asked for advice from a turnaround, restructuring or insolvency advisor it is imperative to do so now.  The advisor will be very familiar with the processes the business is now facing and will investigate the state of the business thoroughly to establish whether all or part of it is viable, will advise on the next steps and help you through any ensuing negotiations.  It is important to remember that a turnaround advisor is on your side.

You are likely to receive a letter from HMRC giving you notice their intention whether to enforce by distraint or issue a winding-up petition. This normally gives you just five days’ notice and the opportunity to communicate with HMRC before you receive a visit from an enforcement officer or the winding-up petition.

HMRC Enforcement officers have the power to seize and remove goods or take walking possession to control goods, rather like those of a High Court Sheriff with a writ. The enforcement officers have the right of peaceful entry and once on your premises may remove goods owned by the company. If there is no public access to your premises or if they are not invited in by you then they may apply to court for forced entry.

Any goods that are subject to a finance agreement, and therefore the business does not own them, cannot be removed but generally the company will have to produce finance or ownership paperwork to support claims that the goods are not owned and therefore cannot be removed.

One thing is certain, ignoring the situation is not an option

The basics of Time to Pay for businesses struggling to pay their taxes

negotiating Time to PayTime to Pay (TTP) is a scheme run by HM Revenue and Customs (HMRC) to help businesses struggling to pay their VAT, PAYE, corporation or other tax bills.

It was first introduced in 2008 after the global financial crisis as a measure to help businesses experiencing cash flow issues as a result of customers extending their invoice payment times.

Not every business is eligible for the scheme and the first step is for a business advisor to thoroughly review the business and to help prepare a realistic forecast that allows for the TTP payments.

This is because HMRC will want evidence that the business can keep to an agreed payment schedule as well as pay all future tax liabilities on time.

Once a business is aware that it cannot pay a tax liability, it ought to contact HMRC early, if only to ask for time to prepare a forecast.

When speaking with HMRC you should be a director and know your VAT or PAYE or 10-digit UTR reference number so they can identify you and your business.

Be prepared to answer questions when applying, including:

* the amount of all HMRC liabilities due and how much you want to reschedule;

* the reasons why you are unable to pay;

* what you’ve done to try to get the money to pay the bill;

* how much you can pay immediately and how long you may need to pay the rest;

* your bank account details.

You are also likely to be asked to give details of income and expenditure, assets, such as savings and investments and what actions you are taking to ensure you will pay future tax liabilities on time.

The level of detail a business will have to provide is dependent on the level of the debt – below £100,000, from £100,000 to £1 million and for more than £1 million.

HMRC will also consider whether the business is one that cannot pay, or one that will not pay. They do this by looking at your history of payments, both in the applying business, personally and other businesses you are involved with.

This guidance is largely based on that given to HMRC officers and is a useful insight into how they assess TTP proposals.

TTP arrangements, once agreed, usually involve making monthly payments by direct debit over a period of less than one year. While payments from a personal credit card have been demanded and taken in the past, they should no longer be demanded from 13 January 2018.

Essentially a TTP should be regarded as a last chance where any late payment of the agreed amounts or of future taxes is a default of the agreement and most likely will result in immediate enforcement by HMRC or a winding-up petition.

The emphasis in turnaround should be on saving a struggling SME

turnaround advisors are like rescue dogsIt is surely preferable to try to turn around and restructure a business than allow it to fail, with the consequent financial and human cost to the business, to employees and to creditors.

This has been acknowledged by both the European Commission (EC) and the UK Government, both of which produced proposals last year that included a 90-day moratorium staying creditors’ action and extending the duty of essential suppliers to continue supplying the troubled business.

In both cases, the aim was to re-balance insolvency proceedings towards turnaround and rescue, while acknowledging the interests of creditors.

Yet, according to the findings of an independent review commissioned by the Financial Conduct Authority (FCA) into the behaviour of the Global Restructuring Group (GRG), the treatment of SME clients referred to GRG by its owner, Royal Bank of Scotland (RBS) hardly followed best turnaround practice.

The FCA’s interim report published at the end of October this year highlighted a number of GRG failures.

Turnaround should be a clear and detailed process for achieving a viable business

The review found that in its training material GRG had clearly recognised the need for careful assessment of a business’ viability based on a wide-ranging investigation, followed by immediate recovery action where it was deemed unviable.

If it had been judged potentially viable, GRG should support a turnaround plan, that was considered, documented and as far as practicable addressed the SME’s underlying issues.

However, in practice, the review found “frequent failures to pay appropriate attention to turnaround considerations.”

These included not carrying out adequate viability assessments and failing to implement and document viable and sustainable turnaround options for the medium and longer term, instead focusing on short term measures such as rescheduling the credit facilities on revised terms.

Nor, said the report, did GRG make adequate use of the broad range of turnaround tools or consider the impact of RBS’ actions in pressing for payment and withdrawing working capital facilities.

In short, GRG’s commercial objectives were prioritised at the expense of turnaround objectives, placing a disproportionate weight on pricing and debt reduction rather than the SME’s longer-term viability.

Some RBS SME transfers to GRG were too late for turnaround assistance, more than one in ten of those sampled were transferred directly to the GRG recoveries unit.

The inescapable conclusion was that RBS’ and GRG’s commercial considerations took priority over any serious efforts at turnaround.

The report, however did not address who should help everyone, the bank as well as the struggling SME it was dealing with. Most banks’ or their insolvency advisers’ review of a struggling SME owner’s ‘turnaround’ plans are likely to include that they are not viable. The underlying causal factors are rarely addressed with proposals for fundamental change in the SME’s plans. And forecasting such plans is something very few have done. Specialist turnaround help is needed as very few bankers, insolvency practitioners and SME managers have ever actually managed a business with the objective of turning it round.

The primary objective of the turnaround advisor and the turnaround process must be, and generally is, to help a struggling business to survive. This normally means initiating fundamental change to achieve a viable business model that can survive in the future, not just get through its immediate crisis.

This is achieved by a careful, detailed and systematic review of every aspect of the business to identify those aspects that are viable, and those that are not and to then come up with a workable plan that will not only save the business but will encourage creditor support, increasing the chances that, if patient, they will in time get their money back.

How often should SMEs review business contracts?

review business contractsIn times of economic uncertainty, a careful business will regularly scrutinise its cash flow to ensure there are no hidden surprises.

When, as currently, costs rise profits decline unless sales prices, purchase costs and other expenditure are adjusted, and most businesses do this regularly by referring to their profit and loss figures in the accounts.

However, monitoring the management accounts does not keep an eye on the underlying obligations such as those for asset finance, service agreements or outsourced processes with both suppliers and customers where a review of these can identify scope for saving money.

Examples of cost savings following a review of contractual obligations include a recent client that was paying for computers on lease finance many years after the computers had been scrapped. The agreement provided for a three month notice that could have been terminated four years earlier. Another is the standard BT charge of £16.99 per month applied to business numbers to cover listing in their directory. It’s in the small print and very few clients seem to have spotted it.

Another good reason for a review of business contracts is that so many are old and out of date. An example is the agreement with suppliers. This is likely to have been struck as part of a credit application some years ago. An example is another client who had supply agreements with the major building materials suppliers including one with Travis Perkins that was fifteen years old. It was part of a credit application for as £10,000 facility and included personal guarantees given by the directors at the time. It was still in place despite all the directors having left and the facility being increased to £150,000.

So it makes sense to regularly review its business contracts.

Obstacles to changing business contracts

Having conducted a review of the contracts and identified any that are no longer fit for purpose, it may be necessary to seek expert advice and certainly to check the fine print as many contracts contain fees for early termination in the detail. Terminating leases is a particular area that needs advice.

While many agreements can simply be terminated against the contractual notice terms, others may require negotiation.

Even if terms for termination are reached it may be that help with drawing up a watertight and acceptable settlement agreement may be necessary. On the other hand, if agreement cannot be reached, this is where a specialist is needed.

Given the lack of legal experience and constraints on time in most businesses, reviewing contracts tends to be a low priority such that this should be done either as part of a formal annual review or it should be outsourced to advisers. As part of any review a company diary should be updated to flag any notice dates, termination dates and any specific agreements that might need a more frequent review.

What is not in doubt is that contracts should be reviewed regularly.

What is the purpose of a staff appraisal?

appraisal?For many businesses the usually-annual staff appraisal is seen as an opportunity for managers to review an employee’s performance, provide feedback on areas for improvement, agree trading needs, set targets for the coming year and address any problems that may have arisen in their behaviour.

As a result, too often employees view the annual appraisal with dread.  It depends heavily on their relationship with their manager and his or her ability to be objective.

Yet the appraisal can be of benefit to both employee and business if structured and handled in the right way.

Ideally, it will be seen as a constructive opportunity for an exchange their views, not simply as a tool for management to assess and, if necessary, improve the employee’s performance.

The constituents of a constructive appraisal

There needs to be a culture of trust and openness in the business and ideally, managers who are appropriately skilled, for example in asking good questions and active listening.

Ideally employees should be receptive, prepared to align with business objectives, learn and take responsibility for their performance.

The appraisal is an opportunity to recognise achievements and find out about an individual’s career objectives. It should recognise their achievements and be a genuine two-way conversation.

It should cover the whole period under review not just recent or isolated events and the result should be an agreed set of actions.

By the same token, it should also offer the employee an opportunity to feed back suggestions for improvement in company processes, ideas for the future development of the business and to highlight any processes that are clearly not working.

Set out and document clear appraisal objectives and purpose

The appraisal purpose, structure and process should be clearly defined and written down so that all parties are clear about what to expect. The aims, frequency and process should be clearly and simply outlined in the staff handbook.

It is helpful for both parties to have done some preparation for the meeting, ideally both should attend having completed the same questionnaire but from their own perspective. The completed documents can be compared and provide a framework for the meeting and its outcomes.

An appraisal is hardly likely to be seen as a constructive opportunity to all involved unless it is seen as a fair process. This could include appraisals always being carried out in the presence of a neutral third party, usually someone from the HR department or from the company to which HR is outsourced, whichever is applicable.

It should be clear that the business has made every effort to eliminate the danger of bias in an appraisal, perhaps because there is a clash of personalities between a manager and an employee.

Far too often the structure of an appraisal is seen as an occasion to be dreaded when properly defined and constructed it can be an opportunity for both individuals and the business to move forward.

I believe that appraisals should always be carried out by the employee’s line manager since their role is normally one of pastoral leadership. While there are many types of leadership, managers should consciously develop their own skills and style with the aim of getting the best out of their team. The appraisal is an opportunity to reinforce the relationship and improve everyone’s performance.