Two steps forward and one step back is the new normal

“It seems that every time an upward trend in sales volumes seems to be emerge it’s quickly snuffed out. While disappointing, trades data are a reminder that despite some positive upward indicators, the ongoing squeeze on incomes means there’s a limit to how quickly growth can pick up”.

This reported comment from Simon Wells, HSBC’s chief UK economist, in the London E. Standard may seem to be a statement of the obvious but it bears repeating in a world where every tiny short term uptick is seized on as evidence of recovery from the global economic crisis.

Irrespective of who is to blame we should remember that high price inflation and minimal salary inflation plus the current uncertainty about employment have meant a real squeeze on incomes. Both businesses and consumers remain focused on paying down debt.

While confidence might rise this can only translate into a rise in credit and in people’s ability to service debts.

We are also in the midst of a global economic rebalancing that is shifting power and influence away from the so-called developed world to other economic centres and this is likely to take a long time to stabilise.

Every business, and not only the retail sector, that is looking at restructuring for growth needs to bear all this in mind whether it is considering developing exports or its home market.  It will be about focus on the longer term, about real innovation, about providing value for money and about close attention to customer service to achieve success and growth.

Is blaming the weather for a downturn in High Street trade a red herring?

With the somewhat slow and tentative arrival of Spring have come the by now regular comments blaming the weather for the struggles of High Street retailers.

But there are signs that the High Street might not be dead quite yet and that actually the weather is only a small part of the picture.

Research from analysts Kantar recently has revealed that 70% of us still like to try a product before we buy despite the boom in online shopping and that even with the rise of online shopping 90% of retail spending last year had taken place in actual shops and stores.

While trading conditions are difficult in the continuing economic crisis it may be that what is going on is actually a restructuring process between online, out of town malls and the High Street. 

Recently Tesco has cancelled some plans to build larger retail outlets but in common with other large supermarkets continues to develop smaller drop-in stores both in town centres and suburban local shopping areas. Some formerly online only stores are also moving into physical stores in a process called “showrooming”.  They include the Kingfisher-owned Screwfix, furniture store Oak Furniture Land and SimplyBe, owned by online fashion group JD Williams.

Small independents are also said to have a place on the High Street but as a specialist in turnaround and restructuring I would want to look at their business plans, costs and potential cash flow before recommending that they go ahead.

What would help most of all, however, would be for the Government to finally get the point that Business Rates, last revised at the height of the pre-crisis boom and now at an artificially high rate, which increased again in April, are no longer either justifiable or affordable for SMEs like the independent retailers.

According to Graham Ruddick of the Daily Telegraph, even the Policy Exchange, which is said to have close ties to senior Conservatives, is recommending freezing business rates for two years until they can be thoroughly reviewed. http://tinyurl.com/pxm2c2y

In our view a review and revision downward is urgent. Freezing them will only allow the Government to avoid having to consider revaluations and reductions in the hubristic hope that growth will return to pre credit-crunch “normal”.

When will businesses invest in the future?

It is hardly a closely-guarded secret that the UK’s largest companies are holding onto a large pile of cash, estimated to be more than £300 billion.

While the Government is expecting recovery from the 2008 economic crisis to come from the private sector, the latter remains focused on minimising tax bills and maximising short term rewards to shareholders and CEOs, while avoiding risky investment at all costs.

One of the major complaints among businesses at all levels is that they are finding it hard to recruit the skilled and educated people they need. At the same time investment in research and development is dwindling.

There can be no future reward without taking some risks and thinking for the longer term but businesses also have to recognise that their activities are also made possible because of the benefits they derive from a combination of the physical infrastructure and education system, the so-called public goods that are often taken for granted.

Perhaps it is about time that businesses realised that if they want to grow and develop and if they want a supply of educated people, they need to take some responsibility by unlocking some of their capital to support innovative new enterprises, to invest in Research and Development in our universities and in their own companies and to help the existing and future workforce to acquire the skills companies say are in short supply.

This may require a degree of restructuring of companies’ own operations and at the very least restructuring their current short term, risk-averse thinking to enable investment over a longer period.

While the Government is considering closing the loopholes that make tax avoidance possible it could perhaps also consider a tax on unused capital sitting on company balance sheets to stimulate some investment in the economic future of UK Plc.

UK Business Growth

There are indications of consumer confidence in the UK. One the sale of new cars where during the first three months of 2013 the sale of new cars in UK was up 7.4%, while elsewhere in Europe they were down in Germany 12.9%,  France 15.6%, Italy 13%, Spain 11.5% and Cyprus 41.6%. In March alone new car sales in UK were 394,806, against 281,184 in Germany, 165,829 in France, 132,020 in Italy and 72,677 in Spain.

This would suggest that we in UK are emerging from a long-term malaise if not depression while it would appear that Europe remains mired in a torpor with declining confidence.

So where is the engine for business growth? the above evidence would suggest it won’t be Europe which some eminent economists such as Professor Nick Crafts at Warwick University argue will be approximately 1% a year until 2030.

I don’t believe we want it to be driven by consumer confidence due to property inflation as this will become another bubble.

We need industrial, manufacturing, service and professional businesses that add value and we need export sales. These require investment in developing ideas, training people, building capacity and marketing them.

I would urge everyone to get this message across to every politician you come across as we need policies that stimulate and justify investment in such businesses.

As for the increase in car sales, how many UK manufacturers are benefiting from the new sales? The lack of a UK car industry is down to short-sighted and weak politicians who supported fundamentally flawed restructuring plans like the Phoenix Four’s failed attempt to save Rover.

Are we brewing another bubble?

Profits are up at Currys, PC World and Asda.  Outgoing Bank of England Governor Sir Mervyn King has revised upwards the bank’s growth forecast for the year and the CBI too is a bit more optimistic about “more balanced growth” in the economy.

Add to this, results from the Royal Institute of Chartered Surveyors’ latest survey showing that house buying enquiries had reached their highest level for three years and in April the Ernst & Young ITEM Club predicting a pick up in the housing market activity to almost pre-2007 levels.

Some would argue that Chancellor Osborne’s Funding for Lending and Help to Buy schemes are finally helping potential home buyers but let’s not get carried away here.

Was it not unwise lending on housing that led to the unsustainable property bubble that precipitated the 2008 economic meltdown?

Despite the unseasonably chilly May are these reliable signs of green shoots?

Or are we collectively clutching at short term straws?

We should remember that banks are still weighted down by illiquid assets such as commercial property, investors continue to seek short term gain rather than investing in the longer term future and politicians think only in career terms of keeping their seats in the next election.

Clutching at short term straws will not fix our economic problems. Investing in the longer term, in promising new companies, in support for R & D to keep our knowledge economy competitive overseas and investing in a sensible education and business support policy that provides the skilled workers for the future through apprenticeships just might give the economy a fighting chance.

In the meantime while it’s a bit early for SMEs to shift their focus away from managing cash flow it might be appropriate to revisit the business plan and model to identify any changes that should be made to prepare to take advantage of growth should it materialise.

Politics and banking – an unholy alliance

Politicians remain wedded to the importance of the financial sector to the UK economy despite the ongoing aftermath of the 2008 financial crisis

So the taxpayer bailed out “too big to fail” banks and is now being treated to the misery of an austerity drive unprecedented since the last World War.

Now in the aftermath of the Co-op bank pulling out of plans to buy more than 600 Lloyds branches and the resultant downgrading the Co-op bank to so-called “junk” status ratings agency Moody, it seems there never was much likelihood of the deal being finalised.

The trusty old Co-op is, it seems, no different from other over-exposed bigger banks.  It has suffered from defaults on loans acquired by its purchase of the Britannia Building Society in 2009 leading to a loss of £674m in 2012.

All of which has led BBC Business Editor Robert Peston to ask why the now-defunct FSA did not block the Co-op’s sizeable expansion plans and why Chancellor Osborne was so supportive of the proposal. http://tinyurl.com/bm4sx7n

It would seem that the FSA set the Co-op high capital targets but, according to one of Peston’s innumerable inside sources, that it did not feel it could block a proposal that had so much parliamentary support.

Apparently MPs’ love Mutuals and the Treasury hoped that the Co-op would provide competition to the big banks.

Politicians’ relying on hope and sentiment does not bode well for any rigorous effort to regulate the banks and prevent another crisis or to the likelihood of any meaningful support for those SMEs fighting to survive in a challenging market.

Short term thinking is wrecking the UK’s future

As if risk averse lenders were not problem enough UK businesses have long complained that there is too much short term thinking stifling any chance of recovery.

Increasingly we have career politicians with little or no experience of business or life outside Westminster and with little incentive to think beyond the next election, so we get tinkering with taxes and regulation on businesses without a long term strategic vision.

The financial Industry, too, is more concerned with short term rewards (dividends, gains and bonuses) than in long term investments in industries that make stuff or have innovative ideas.

Shareholders and investors have been focused on short term dividends or income rather than investing in the longer term.

We need to encourage money to be invested in the right places and for the long haul.

It seems, some are beginning to agree. At a conference in London on Friday, May 10, called Transforming Finance, academics, campaigners and financiers will gather to develop ways for building a better banking system. http://tinyurl.com/cxnvyyr

Among them will be Catherine Howarth, CE of Share Action, a lobby group which will be emphasising the point about the need to think over the longer term.

Business realism – or not?

Last week we asked whether the extension of the Funding for Lending scheme by the Bank of England was a case of excessive spin.

This week the BoE seems to be reverting to realism.  The Telegraph business pages today (May 2) quote Paul Tucker, the Bank’s deputy governor for financial stability, as saying that the revised FLS scheme was not a “silver bullet”.

However, ever the optimist, Mr Tucker is still expecting FLS Mark 2 to have some effect on lending to SMEs within six months and arguing that there was reason to hope that the economy was on the mend.

Perhaps the worthy gentlemen at the BoE should get out more – and talk to the SMEs on the ground.

We are hearing nothing from SMEs to suggest that they are any more confident about borrowing and they remain focused on paying down existing debt and managing cash flow.

We remain underwhelmed about the potential for FLS to stimulate growth any time soon.

If it doesn’t work the first time do it again only bigger

Funding for Lending has not stimulated bank lending to SMEs so what does the Bank of England do? That’s right, they’re extending the scheme, offering the banks loans at just 0.75% with no limits on how much the banks can borrow – but only if they lend more than they are receiving in repayments from customers.

And the formula applied by the Government makes it almost impossible for the banks to be able to fulfil the lending obligations. For the full details see the BBC’s blog by Robert Peston http://tinyurl.com/c38w4rp

All this has been announced at a time when the banks are also required to focus on recapitalising to even greater levels and when despite such initiatives SMEs are not borrowing, but instead are focused on controlling cash flow and paying down debt and are generally as risk averse as the banks.

So is the BoE missing the point or is the Funding for Lending scheme nothing more than excessive spin?

Which leads one to speculate whether Spinmeister Alastair Campbell is back in action behind the scenes.

HMRC is getting tougher on SMEs with unpaid VAT

SMEs have been bearing the brunt of HMRC taking a much harder approach to unpaid VAT bills, according to a report in Sunday’s Financial Times. http://tinyurl.com/d88d3w2

Its seizure of assets (distraint) doubled in 2012 to 4,746 cases compared to 2,401 cases in 2011. Almost 95% of all HMRC use of distraint have involved SMEs.

HMRC appears to have also been limiting access to the Time to Pay arrangement to help struggling businesses to catch up on overdue payments.

This tighter approach has been variously described as unwelcome, inflexible and aggressive.

Now more than ever unpaid VAT or tax is not a situation to ignore in the hope that it will go away.

It is at times like these when the help and support of a Business Guardian experienced in negotiation with HMRC and in turnaround and restructuring could make all the difference to a small company’s survival.