Relying on consumers for restored economic growth is madness

Moderate improvements in economic activity, upwardly revised growth forecasts for the rest of 2013 and now, Bank of England figures showing increased lending to small businesses in June are to be welcomed.

Certainly coupled with a few sporting triumphs and some hot, sunny days this has all been seen as good news by politicians and some media commentators.

But look a little more closely and actually many of the figures given are still well below pre-2008 levels. In the case of SME borrowing records only began in 2011 and lending has been falling since 2009. SME borrowing may have risen a little in June but compared with a year earlier according to the BoE it is still declining, by 3.3% on the same period last year. One monthly swallow does not make a summer.

Sensible businesses are still watching their cash flow, consumer debt may be falling but is still believed to be unsustainably high, yet everyone seems to be jumping on the optimism bandwagon. Most recently the EU’s Gfk/NOP indicator is suggesting that consumer sentiment will continue to pick up.

Haven’t we been here before?  As the Telegraph’s City AM editor Allister Heath pointed out a week or so back, lessons have not been learned if everyone is relying on credit-fuelled consumer-led growth via increased activity in the housing market and rising house prices, fuelled by the Help to Buy scheme.

Isn’t it also true that our economic difficulties are where they are precisely because of a house price bubble and too much credit pre-2008? Plainly there are still lessons not yet learned.

FREE Essential Business Owner Seminar

Come and hear Tony Groom speak at the FREE Essential Business Owner Seminar organised by Accounts 4 U Direct, local accountants in Watford on Thursday next week – Register at: http://www.eventbrite.co.uk/event/7373483287

The Essential Business Owner Seminar will be held:
On: Thursday 1st August – 09:30 – 12:30 hrs
At: The Mercure Hotel Watford (on the A41)

Tony is on a panel of speakers who are passionate about helping business owners.

You will learn about:

Tax Matters
– Tax Insights and Advice
– How you can pay just 10% tax – legally!
– Preparing now for a future disposal or sale of your business

Management Challenges
– Managing and retaining customers
– Crisis management – and where to turn for help
– Protecting yourself as a director – the do’s and don’ts
– Protecting your business from fraud

The Technology of Business
– Assessing your IT systems
– Managing your data
– Understanding ‘The Cloud! and how to make it work for your business. What is “The Cloud” all about, and how can small and medium sized business owners ensure that they are not left behind.

The seminar is completely Free of Charge and will provide you valuable insights and lessons that will add to the bottom line in your business.

Register now at: http://www.eventbrite.co.uk/event/7373483287

Involving employees can be crucial to successful company restructuring

It shouldn’t be rocket science to accept that giving employees a stake in their company’s future encourages commitment and efficiency.

The John Lewis Partnership, owners of John Lewis department stores and Waitrose, is perhaps the most famous example of a company that fully involves its employees in both decision-making and a share of its profits, and now Sports Direct has announced that its staff will receive bonuses following a record year for profits.

But what happens if a company gets into difficulties and needs restructuring to survive?

Often, the employees are the last to know and this can make turning around a company much more difficult.  While directors try to keep information to themselves employees will usually know that something is wrong and an atmosphere of uncertainty may only make things worse as key people start looking for other work and productivity drops even further.

While trades unions regularly suffer from a negative press we would argue that their involvement in negotiations during restructuring can have positive benefits, not only in consulting with workers about the way forward and keeping them informed, but also in negotiating agreements should shorter working hours or redundancies be necessary. To help reassure those concerned about trusting unions to keep turnaround plans confidential there exists a protocol confidentiality agreement that was developed by the TMA (Turnaround Management Association UK) in association with the TUC.

We would be interested to hear from anyone who has had experience of union involvement in turning around a failing company.

Learn to say “no”

Most of us love a bargain but it can be a false economy if the lower price means reduced quality.

From the business perspective it can be tempting to reduce prices in order to win orders when trading conditions are challenging.

I’m seeing a lot of businesses agreeing to cut their prices, but equally a lot of them are walking away.

Why are they walking away? Because they are not prepared to compromise their own business models by acquiescing to that kind of pressure, especially if they have confidence in the quality of their product or service and have done the research to pitch a fair price that gives value for money.

A good business will only take on work on terms and at prices it feels comfortable with.  A bad business will succumb to pressure.

It’s better to grow your margins than to grow your business, in my view.  What do others think?

Should Governments try to help businesses or leave us alone?

Governments are an easy target for blame when life is difficult for businesses.

The previous UK incumbents were accused of exacerbating the conditions that led to the 2008 global economic meltdown, while the current regime’s efforts to improve conditions for business have hardly won high praise.

No business can exist in a vacuum and all benefit from so-called “public goods” such as infrastructure and the education system, but recently John Timpson, chief executive of Timpson the family-run shoe chain, was quoted as saying that the best way government can help businesses is to leave them alone.

Certainly various government initiatives, such as stimulating bank lending to SMEs, have been a resounding failure.  For example, the Enterprise Finance Guarantee Scheme only pays out when the banks have exhausted all other forms of security, including directors’ personal guarantees. Not surprisingly the scheme has failed to attract many takers.

Calls for a review of business rates have fallen on deaf ears and tinkering with the planning regulations in a bid to help revive faltering High Streets has so far yielded no noticeable results. The new Help to Buy scheme designed to stimulate house building and revive the construction industry brought forth dire predictions of a potential new housing bubble.

It’s clear that these days few politicians have significant experience of the world outside of Westminster so is John Timpson right?  Tell us what you think.

Joined-up Thinking on Retail?

Everybody and his wife has an opinion on what should be done to revive the UK’s High Streets and retail.

They range from the defeatist “the High Street is dead” thanks to online shopping to the Portas Pilots that have given 27 towns in England approximately £100,000 each to try out new ideas.

We’ve had the pop-up shop idea, policy changes on planning, calls for a review and reduction of business rates and calls for the scrapping of town centre parking charges.

Now Bill Grimsey, former Chief Executive of Wickes has decided to do what he calls an alternative review of the High Street, after calling all of the above “tinkering at the margins”. He believes what’s needed is a complete solution encompassing health, education, housing and leisure as well as shopping.

K2 Business Rescue agrees.

People define the High Street in different ways but what’s really needed, we believe, are integrated communities that put less emphasis on shopping as a destination activity. 

For example it used to be the case in the City of London that there was nothing but acres of offices. There was nowhere one could pop out to buy a shirt, or a gift, or perhaps a few groceries. That has changed and it’s a principle that can be applied in High Streets around the country.

Stop press:  Latest to come from a review of Portas Pilots is a proposal to allow more empty shop to residential conversions in town centre side streets to stimulate footfall.  http://tinyurl.com/nj2knoy

Are We About to See a Rise in Insolvencies?

New research by the insolvency industry’s trade body, R3, has found that the number of zombie companies has gone down by just over 50,000 since November last year.

Zombies are defined as companies that are only paying off the interest on their debt.  However, R3 also found that more SMEs are now in distress as they struggle to negotiate new payment terms with lenders or to repay loans when they fall due.

As banks have been set new targets for improving their capital reserves they are unlikely to do anything other than improve their position.

However we at K2 believe they are also unlikely to pull the plug, so the march of the zombies will continue for some time.

As a result we are unlikely to see the number of insolvencies rise until interest rates are raised. Indeed any significant rise in interest could cause the carnage that normally follows a recession where it is in fact evidence that the economy is coming out of recession.

What’s your view? Are we about to see a rise in insolvencies?

How can private equity help to turn around a business?

When a private equity group buys out a struggling company they are often seen simply as injecting finance that only adds to the debt on the company’s balance sheet without substantially improving its performance.

Nevertheless, the PE’s objective is surely to achieve a higher return for fund members on their investment and a recent article in the Economist (June 22 2013 edition) highlighted how a US-based company, Clayton, Dublier & Rice, operates post buy-out to achieve this.

This company not only puts in money, it calls on its collection of expert former corporate bosses, as partners in the Private Equity fund,  to go into the company either as chairman or chief executive and drive the restructuring process forward.

In the UK, private equity firms don’t really do this, yet it makes sense to get in the experts and incentivise them in a way that encourages them to get closely involved in and improve on the company’s operation.

If an improvement in performance, and therefore in profits, is driven by someone with the expertise as well as a financial interest in the outcome the likelihood of a successful restructuring  is arguably greater than it would be if the only interest is financial.

Successful turnarounds need fresh ideas, knowledge and hands-on involvement that are unlikely to be generated by the company’s existing directors and managers, who will likely struggle without them.

Culture Shock

If all the recommendations in the Banking Commission’s long-awaited report on banking standards are implemented the banking industry will undergo a profound change in its operating culture.

We would argue that it is not only in banking and finance that a change in culture is long overdue following the 2008 credit crunch.

Businesses and consumers have already had to rethink the way they manage their finances. Businesses have been paying down debt and larger companies with comfortable capital reserves are not spending or investing. Consumers, too, are trying to repair their finances while coping with rising inflation and falling incomes.

Depending on which audience they are speaking to, however, Government seems to be wedded to austerity, sustainability or growth, as the solution to the UK’s economic ills.  

Every new monthly statistic is used to herald imminent recovery.  Most recently, new figures showing a 17% rise in mortgage lending in May 2013, compared to May 2012, will doubtless be seized on as evidence of success for schemes like Funding for Lending and the newer Help to Buy in stimulating home ownership.

Yet all the “experts” warn that without massive additional home building, they risk precipitating another housing bubble because the lack of affordable small homes will overinflate house prices.

With the homeless charity Shelter estimating that a first time buyer may have to spend 14 years raising the deposit to get on the property ladder, the chances are that consumers are already facing a massive culture change from home ownership to long-term renting, but without the tenancy protections that used to provide some security and continuity in living arrangements.

Is it time that politicians stopped grasping at short term electioneering straws and underwent their own cultural revolution to get real about economic life in the 21st Century?

Is Starting a Business in a Recession Wise or Foolish?

It is no secret that the Government is relying on SMEs to stimulate both the economic recovery and jobs.

Lord Young, senior adviser to the Prime Minister, is on record as saying that a recession may actually be a good time to start a small business on the grounds that wages are low, competition may have fallen by the wayside and premises, too, may also be cheaper to get.

That’s all well and good but there is more to starting a business than having a bright idea and the passion and motivation to get started.

There are a number of other factors to consider, especially where the business is something new and innovative and therefore unlikely to raise finance from currently risk-averse banks and investors.

A start-up must carry out research, identify potential customers, set sensible targets and put all of this into a business plan.  If it needs finance it should consider alternatives to the mainstream sources, whether these are friends and family, partnering with existing firms, seed funding, crowd funding or business angels and also investigate what grants and special concessions may be available that will help in the first year or two of trading.

A mentor or business guardian to help set the path and keep things on track can also make the difference between success and failure.  It’s impossible for a novice to do everything themselves without support and joining local business networks can also be a valuable source of advice and support.

If it is the kind of venture that can benefit from collaboration with other enterprises where there is a synergy, this is an option worth exploring since partnering with existing businesses in a market will help a start-up forge relationships with both a supply chain and  potential customers.

When money is tight, entrepreneurs should explore cash saving ideas such as offering equity, or future work, or future discounts, or other benefits in kind to any business that can provide them with useful services. Examples include introduction to customers, advice, market research, book keeping & accountancy, manufacturing prototypes, provision of office space, use of specialist or expensive equipment, and many more ideas that are only limited by the entrepreneur’s imagination.

Recession or not, starting up a business is all about doing all you can to weight the odds in your favour.