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.

Why HMV may just survive while other high street retailers crash and burn

Despite the continuing carnage on the High Street there are glimmers of hope emerging from the restructuring process currently being carried out on the music store HMV.

Why? Well as with any business restructuring the first step is to carry out a review which includes a thorough look at the accounts to identify any areas where savings can be made, the most obvious in this case being loss-making stores, onerous rental agreements and  the employment roll.

Already the closure of 66 loss-making stores has been announced, plus a further 37 this week, and also administrators Deloitte have noted that landlords have been generally “flexible and supportive” during the ongoing efforts to restructure the business.

Most significant, however, may be the recent announcement that trading agreements for the supply of new stock have been signed with the majority of HMV’s suppliers, something that is generally unusual when a company is in difficulties.

It is clear that HMV’s business model needs to change to take account of the shift in consumer behaviour and deal with intense competition for the sale of music, DVDs and games from online suppliers, digital downloads and also from supermarkets.

HMV however has support from a record industry, particularly the independent labels, which is keen to maintain a High Street presence and can learn from other retailers that justify their High Street presence by providing consumers with a retail experience rather than just a place to purchase goods.

Artists, too, have expressed support with Elton John suggesting holding live gigs in the stores.

The secret is in the details. Customers have been quoted as saying they valued the opportunity to browse, to talk to knowledgeable experts when they are searching for unusual and niche items and to have a sample listen to tracks before they buy. With appropriate staff training, these could provide a USP for the retail arm of the business to highlight.

All this illustrates that a thorough business restructuring involves attention to detail and identifying those aspects that make it special or unique and that may just help it to survive by returning focus to core strengths that may have been lost sight of over time.

Insolvency does not have to be the end of your business

When an SME encounters cash flow difficulties and cannot pay its bills many owners assume that their business is bust and should close.

It does not have to be the case. If the core of the business of a company is offering a genuinely useful and saleable product or service, it can normally be saved.

A detailed look at cash flow and accounts is the first step in the process of turning around a struggling business although this needs the help of a business doctor plus commitment, realism and honesty on the part of its owners.

The business doctor will help to identify the profitable activities that should be saved and also has a number of techniques in the toolbox to help deal with the pressing debts that impact on cash flow.

An increasingly useful tool provides a way of dealing with debt by reaching agreement with creditors to repay all or part of the debt in an affordable way that allows the business to focus on building its strengths for the future.

This is a Company Voluntary Arrangement also referred to as a CVA.  The CVA is a binding, formal agreement that is agreed with creditors but needs the help of a business doctor or turnaround adviser. To find out more, K2 Business Rescue has published a useful guide to the steps that need to be taken: K2 CVA Guide 2013. A copy along with other useful guides is available as a free download via the Resources section on the K2 website.

Frozen panic could become a self-fulfilling prophecy

The latest quarterly survey carried out by the insurance giant Zurich found that 16% of the British small and medium-sized businesses (SMEs) surveyed considered themselves at high risk of going out of business within the next year due to financial pressures.

Those perceiving themselves to be most at risk were SMEs in the Retail (21%), Construction (37%) and IT (24%) sectors. In all three the fear of going out of business had risen since the last Zurich quarterly survey.

However, it must be stressed that the survey is a record of the perceptions of SMEs.

More important, perhaps, is that almost 100% of them are not getting any help in dealing with their problems. Despite the latest government lending scheme, Funding for Lending, the banks continue to shun the SME sector as the Federation of Small Businesses (FSB) repeatedly highlights.

Just as important, is that most of them are not seeking help in dealing with their problems. Despite the perceived concerns of SMEs, they are not speaking to business advisers who remain quiet. Indeed insolvencies are at their lowest level for 30 years.

But again, perception plays a part but the insolvency statistics are a matter of fact.

Firstly there is the common view among SMEs that if they can’t see a solution then how can an “outsider”. Secondly, too often SMEs don’t know where to go for help and thirdly, they assume that it will cost them money they can’t afford to get help.

The danger is that the fear of going out of business then becomes a self-fulfilling prophecy, when with the help of a business doctor or turnaround advisor owners could save the business that has taken them years of hard work to build. Just a free consultation may be all that is needed, and most business doctors will provide some free support. It’s good business for all concerned.

 

A revolution in business culture?

Are the super rich at the World Economic Forum in Davos “morally and intellectually bankrupt” as opined by Will Hutton in last Sunday’s Observer? He argues that many of them generate excessive profits by squeezing employees’ wages. More tenuous is his view that this lack of wealth redistribution is restricting economies that would otherwise trade out of recession if employees had more to spend. 

However Mr Hutton does have a point: “Reality will out. Everyone knows by now, even in Davos, that there can be no return to the world before 2008, relying as it did on abundant supplies of cheap credit. Equally, we need our economies to grow with real, sustainable growth, as opposed to an artificially stimulated variety….. Real growth can only be achieved by the economic empowerment of ordinary men and women, by promoting individuals to become capitalists, to want to be owners who will bear the pain, and also share the spoils.”

He suggests: “It is a wonderful opportunity for enlightened business leaders, politicians, trade unions and indeed all of us to reimagine the role of people in western societies. One of the reasons it has been easy to reduce the power of people in the Anglo-Saxon world is through fear, fear of change. This has preserved the status quo and kept incumbent leaders in power.”

Those with long memories will recall the militant opposition of the British trade union movement to co-determination – that is, putting workers on company boards – in the 1970s: stupid. 

Yet Britain, and the West for that matter, needs a way of relating labour to capital. We need to engage employees by encouraging ownership and sharing the benefits of their efforts. It seems an impossible ask. We need employee representatives, union negotiators and business leaders to become leaders of change. Not confrontational or militant style negotiation of change, take it or leave it, one out, all out but strategic leaders who can negotiate reward for productive effort – to argue for a share of the spoils when they are genuinely there, but acknowledge that it might involve sharing pain to get there. They should be able to cut deals and support firms when jobs are at risk, but also make sure the deals are fair for all stakeholders when the business is turned round. 

Hutton argues: “One way forward is co-determination, putting employee representatives on company boards. Another would be to revisit the ideas of Nobel prize winner Professor James Meade and organise compensation so that a firm’s profits are equitably shared between workers, management and shareholders.” 

Whether or not Davos is intellectually bankrupt, the ideology it champions will ultimately seek to preserve the interests of its delegates rather than promoting those of employees. Capitalism certainly requires intellectual challengers, social movements and union leaders to take risks and reimagine their role. 

The best time to negotiate a good deal for workers is when their employer really does need their support, when they are in a financial crisis and need to restructure to survive.