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Accounting & Bookkeeping Banks, Lenders & Investors Cash Flow & Forecasting Finance General

Has the Coronavirus lockdown exposed the weaknesses of many business models?

business models weaknesses exposedRobust business models should be based on a clear proposition with a plan for profitable activity.
Each model is essentially a road map of how money will flow from activity.
Business models are a financial expression of the company’s business plan in a way that summarises the strategy, funding, organisation and processes used to achieve objectives.
Given that unforeseen roadblocks and successes will occur, business models should be reviewed regularly and adapted depending on new circumstances and new information.
Tools for refining the model are also useful, such as a SWOT analysis to identify Strengths, and Opportunities to be exploited and Threats and Weaknesses to be avoided.
While arguably, few businesses and especially SMEs, will have had plans to cope with the coronavirus pandemic, it has affected most businesses in ways that were not foreseen. The lockdown has also exposed how little resilience they may have built into their business models to protect from such a crisis.
To a large extent, the situation has exposed a lack of financial resilience but it has also highlighted a lack of character among leaders. The behaviour of leaders in particular will be remembered by those who deal with them, whether employees or other stakeholders.
It is alarming how many directors have been paralysed by the situation and not taken calls or failed to answer with awkward questions, often hiding from the fact that their problems will not go away.
While leaders may not know the answers, they should be visible, they should be looking for the answers and telling everyone what they are doing to find them.
The government is a good example of leaders trying to communicate, I leave it you to decide whether or not their messages are believable or they are doing a good job of leading in a crisis.
James Ball, writing in the Guardian, provides an excellent illustration of two examples of flawed business models, Uber and Deliveroo. At a time when it might be expected that their services would be more in demand than ever as people are required to stay at home and preserve social distancing, he points out that they are not structured to make a profit, but instead rely heavily on growing rapidly, not growing sustainably.
“This is the entire venture capital model,” he says. “….This is a whole business model based on optimism. Without that optimism, and the accompanying free-flowing money to power through astronomical losses, the entire system breaks down.” Indeed, this reinforces my view that the Silicon Valley approach to venture capital has parallels with a giant Ponzi scheme by using new investors’ money to provide returns to early backers.
Will Hutton also looks at business models and considers how the economy might recover from the lockdown in a more sustainable way: “equity investment: the venture capital and private equity industries must transmute themselves from their default role as predators and asset-sweaters to long-term, patient investors”.
I believe the short-term, profit-driven motives of early investors looking for a return before their investment makes a profit is a flaw in most companies’ business models and has contributed to the weaknesses that have been exposed by the measures that have been needed to contain the pandemic.
Some might say ‘buyer beware’ in a world where animal spirits and greed drive behaviour but this argument exposes a lack of character among leaders who should show courage and moral fibre.
Perhaps it is time for a bit more moderation and longer-term thinking in the construction of business models for the future.

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Accounting & Bookkeeping Cash Flow & Forecasting Finance Insolvency Rescue, Restructuring & Recovery

Get expert help with cash flow management in a crisis

cash flow crisisIn the current pandemic situation, many businesses deemed non-essential have been forced to temporarily close for a lockdown period and it is clear that many SMEs will have serious cash flow problems when they resume trading.
Unfortunately, the cash flow problem won’t go away even though for the moment it is easy to ignore it by holing up at home.
While it is true to say that all businesses should have plans for dealing with emergencies and reserves for cash flow problems, it is unprecedented to have to deal with a period of no income and it is becoming clear that many SMEs – and larger businesses – do not have sufficient cash reserves to survive a lengthy lockdown.
Many are telling me that they paid their staff wages for the first month in anticipation of furlough support arriving in time to fund a second month but they are concerned about the Government’s promised CJRS (Coronavirus Job Retention Scheme) arriving in time to pay April wages. As for paying other liabilities such as rent, finance and fixed overheads many of these are being ignored since most SMEs rely on income to pay bills.
It is easy to be wise after the event but, as I have said in my blogs over many years, it is crucial for a business to pay attention to its cash flow and to build up reserves to cushion it from sudden shocks. And yes, as an aside, I do hate factoring and invoice discounting since these only help fund growth and no business can guarantee growth such that in a decline they often starve a business of cash.
While the current situation is unprecedented and it is no surprise that you as a SME owner may be very frightened, it is unlikely that you are in the best position to think clearly about the steps you need to take if cash is running out.
In March, the website Small Business said¨” many small businesses could be forced to make difficult decisions in the coming weeks. Depending on their financial position, some small businesses could start to experience cash flow difficulties very quickly …”
Among its tips for dealing with cash flow crises it advises that you should prepare a cash flow report before seeking financial help such as a time to pay arrangement.
It is helpful to get expert advice to deal with your situation and in particular helping produce the information needed to raise finance and for negotiating with finance companies, HMRC and other creditors.
Crisis management when a company is in financial difficulties is about quelling the understandable panic so that you can manage cash flow and take a long, hard look at the financial and operating options for survival and ensuring the business is viable. This is why objective expert help is so important.
As I said in my blog in February this year: “The most likely immediate priority in managing a liquidity crisis is reducing costs while maximising income.
“So, the first step in managing cash is to construct a 13-week cash flow forecast to help identify risks and actions that can be taken to reduce them. It should include income from sales and other receipts and outgoings, both to ongoing obligations such as rent wages and finance and to creditors.”
It is easy to say with hindsight that SMEs should have built up cash reserves when times were less challenging but you are where you are and calling on an expert to help you with cash flow management will give you a better insight into how you might be able to keep your business afloat.
You can find out more about the government financial help available in my free downloadable guide.
https://www.onlineturnaroundguru.com/support-for-smes-struggling-to-deal-with-coronavirus-pandemic
 

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Accounting & Bookkeeping Cash Flow & Forecasting Finance General Turnaround

To Pay or Not to Pay Quarter Day Rent & Business Rates – the latest

Quarter Day RentAs if the pressure and worries SMEs are facing due to the Coronavirus pandemic were not enough, yesterday (Wednesday) was when Quarter Day Rent was due to be paid.
For many, it was also a payment date for business rates although the government has suspended these for a year.
While SMEs may be eligible for suspending the payment of business rates as announced by the Chancellor in his first set of measures to help businesses survive the pandemic, little had so far been said about rent.
However, yesterday, the Government published details of three months’ protection for businesses from eviction for failure to pay rent. While is included in the emergency powers legislation that is due to be given Royal Assent today but we are still awaiting confirmation. There more details here.
Some businesses had already declared their intention to miss paying their Quarter Day Rent, like, for example Burger King, whose CEO Alasdair Murdoch announced on Tuesday that the company would not be paying the rent due on its UK restaurants this week.
According to the BBC, it seems that “Banks have been told [by the government] to be supportive as long as landlords act responsibly.”
It also reported that the government has said shops will not forfeit leases if they do not pay but will have to pay arrears in the future.
This may be the case, but many smaller SMEs have been unsure about what they are supposed to do given the latest set of restrictions enforcing the closure of non-essential businesses and the virtual lockdown of the population. Presumably more details will emerge once the emergency powers legislation has been published.
For many withholding rent may be necessary but there are consequences and you should speak with your landlord since the pain needs to be shared between both of you if you are both to survive. If however you are being pressurised by your landlord, there are a number of surveyors who specialise in negotiating rent reductions. It is wort remembering that your landlord won’t be finding a new tenant in the near future.
Meanwhile, the suspension of business rates is helpful as will be the grants to smaller SMEs.
On top of this bank branches are closing, there are two hour waits on hold in telephone queues and most systems seem to be overloaded.
It is admittedly a massive task to roll out so many measures to help and support SMEs but if you are a business worrying about protecting its future it is very hard to be told to be patient.
To provide more information about business rates and grants, I am maintaining an update on the support available for SMEs in my guide at onlineturnaroundguru.com.
At the current moment on business rates this is the situation:
A one-off grant of £10,000 is available to eligible businesses to help meet their ongoing business costs and applies to those businesses that occupy property that is eligible for small business rate relief or rural rate relief.
There will be cash grants to retail, hospitality and leisure businesses, based on the rateable value of your business property. Those with a rateable value of under £15,000 will receive a grant of £10,000. Those with a rateable value of between £15,001 and £51,000 will receive a grant of £25,000.
All retail, hospitality and leisure businesses in England including covers shops, restaurants, cafes, drinking establishments, cinemas and live music venues and premises used for assembly and leisure. It also covers hotels, guest & boarding houses and self-catering accommodation. Will be given a one-year business rate holiday.
Administering all these will be the responsibility of your local authority and while you do not need to do anything to claim them it may be wise to register your business as paying by direct debit so that your bank details are registered with the local authority  and you should keep an eye on the situation with your relevant authority.
Please be assured that as more details on the various Government measures to support businesses emerge or if anything changes I will update the information as soon as possible.
For more business help please go to onlineturnaroundguru.com.
Above all, if you need help and support I am here for you.
 

Categories
Accounting & Bookkeeping Cash Flow & Forecasting Finance Turnaround

Key Indicator: is the global supply chain too vulnerable to shocks?

global supply chainFor years, businesses have seen the global supply chain as a means of keeping down costs through sourcing goods and services from low-wage countries and importing them often from across the globe.
This may work as a business model for manufacturers seeking to keep their prices as low as possible, and for retailers’ cash management where payment terms and just in time delivery often meant only having to pay for goods after they have been sold. Indeed, stock ties up cash in inventory and storage as well as incurring the cost of warehousing, storage and administering stock, the less stock needed then the less cash needed.
But what happens if events cause a disruption to the smooth flow of the global supply chain causing shortages of finished goods or the essential elements for their production?
The current Coronavirus outbreak that originated in China and is now spreading across the globe provides the perfect illustration of the knock-on effects of such disruption.
According to an Economist article this week, by using a just in time model “multinationals have left themselves dangerously exposed to supply-chain risk owing to strategies designed to bring down their costs”.
Furthermore, it argues that in the last 20 or so years, large multinationals have become much more reliant on China. “China now accounts for 16% of global GDP, up from 4% back then. Its share of all exports in textiles and apparel is now 40% of the global total. It generates 26% of the world’s furniture exports.”
Chinese manufacturing activity fell to 35.7 from 50 in January, according to the PMI index where above 50 is a measure of anticipated growth and below is decline.
Among the industries significantly hit by China’s containment efforts, from isolating regions of the country to closing down factories, have been the electronics, car and clothing industries but they are not likely to be the only ones.
Companies that have already reported significant negative effects have included Apple, Diageo, Jaguar Land Rover and Volkswagen. But the impact is not just on manufacturing but also is on services with BA owner IAG and EasyJet forecasting significant reductions in bookings and cancelling flights.
The reduction in manufacturing output will also hit freight with both shipping and airfreight experiencing lower volumes that in turn impact oil prices that have fallen significantly to below $50 a barrel for the first time since the summer of 2017, according to an article in the Guardian.
Efforts to restrict the movement of people have already caused the cancellation of the Motor Show in Geneva, the Mobile World Congress in Barcelona and MIPIM, the annual real estate jamboree in Cannes.
All this has worried investors with stock markets plummeting around the world, in the case of the FTSE100, down 13% by the end of last week – a decline only last seen during the Financial Crisis of 2008.
Is it time to rethink business’ reliance on the global supply chain?
The current situation with Coronavirus illustrates the vulnerabilities in an over-reliance on the global supply chain and particularly the disproportionate sourcing of inventory from East Asia and China.
However, there are other potential sources of disruption to the supply chain. They include the ongoing tariff wars between China and USA, extreme weather events such as the 2011 tsunami in Japan, and armed conflicts.
Notwithstanding all these factors, arguably the greatest factor is global warming and environmental damage. The mood around the world is changing and people are becoming increasingly worried about this.
The fall-out from Coronavirus may be heightening awareness but demands from consumers and investors for a more ethical and socially conscious sourcing is beginning to concentrate the minds of CEOs on their businesses’ vulnerabilities to the global supply chain.
Indeed a knitwear manufacturer based in Leicester, UK, is reporting an increase in orders from more local retailers in the wake of the coronavirus outbreak.
Will others follow suit?
 

Categories
Accounting & Bookkeeping Cash Flow & Forecasting Finance Insolvency

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?

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Accounting & Bookkeeping Cash Flow & Forecasting Finance General Insolvency

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.

Categories
Accounting & Bookkeeping Cash Flow & Forecasting Debt Collection & Credit Management Finance

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?

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Accounting & Bookkeeping Cash Flow & Forecasting Debt Collection & Credit Management Finance Insolvency

Can SMEs afford to wait any longer for a business rates review?

business rates review is urgent for businessesRetailers have been calling for months for a business rates review as the decimation of the UK’s High Street continues.
In early August more than 50 leading retailers wrote to the Chancellor urging him to change tax rules to boost the UK High Street and the business law firm RPC has reported that there has been a 65% increase in the number of businesses challenging their rates bill in the last quarter, with 4,000 challenges made in the first quarter of 2019, up from 2,430 challenges in Q4 2018.
RPC explains that the increase in challenges shows broadening dissatisfaction with business rates. Jeremy Drew, Co-Head of Retail at RPC, explains that the property tax is so complex that each new ratings review sees thousands of challenges lodged by businesses.
The retailers’ call was reinforced later in the month by the CBI (Confederation of British Industry), whose chief economist Rain Newton Smith said reform would be an enormous help to companies facing uncertainty and rising costs.
So, it is not only retail businesses that are struggling as new figures from an investigation by the real estate adviser Altus Group revealed earlier this week.
Using the Freedom of Information Act, it asked all the councils in England to provide details of how many business premises had been referred to Bailiffs.
It found that during the financial year 2018/19 councils appointed Bailiffs to visit 78,000 non-domestic properties including shops, restaurants, pubs and factories to collect overdue business rates.

What are the chances of a business rates review in the near future?

There are worries that in the light of politicians’ and Government’s ongoing tunnel-vision focus on Brexit urgent domestic concerns are being forgotten.
A total of 10 trade bodies have written to the Treasury Select Committee to express concern that the recent ministerial reshuffle has risked delaying urgent business rates reform.
Robert Hayton, head of UK business rates at Altus, said: “It’s not the mechanics of the rating system that is of primary concern to business but the level of the actual rates bills.”
“Commercial property is already making a significant contribution to overall UK tax revenues…with the highest property taxes across the EU…”
And John Webber, Head of Business Rates at commercial real estate advisers Colliers International, has said that a Government promise to carry out business rates reviews every three years, rather than every five, “ will merely scrape the surface of a current business rates system that needs much more drastic reform”.
This includes a revamped appeals system, which has been made so complicated that at first SMEs were deterred from using it. Also, a lack of staff at the VOA (Valuations Office Appeals), Colliers argues, has created an enormous backlog of appeals being settled.
The Times recently reported that the number of outstanding appeals has risen six-fold.
It is clear that if the UK economy, which relies heavily on SMEs, is to survive and thrive once Brexit is finally settled (if it ever is) the conditions in which they operate will have to be vastly improved, and quickly, if they are to be able to manage their cash flows, create sustainable business plans and grow in the future.
Perhaps the most urgent element of this is a business rates review given that the present system is far from fit for purpose.

Categories
Accounting & Bookkeeping Cash Flow & Forecasting Finance Insolvency

Late payments situation getting worse for some SMEs

late payments penalty?According to the ICAEW (Independent Chartered Accountants of England and Wales) late payments to SMEs are a bigger problem than they were a year ago.
Of the nine SME industries analysed, it said, six had reported that the problem of late payments was worsening.
The FSB (Federation of Small Businesses) too, has said that while there have been some improvements thanks to the efforts of the Small Business Commissioner Paul Uppal, late payments remain a major problem and research by Lloyds Bank Commercial released at the end of last month found that last year almost two thirds (62%) of SMEs that were being paid late “failed to chase up for fear of harming customer relationships” also cited time constraints as a significant factor.
The cost to small businesses has been considerable, according to research published by Hitachi Capital earlier this month. It estimates late payments have cost SMEs £51.5bn in the last year.
Its survey of 1000 businesses found that 31% have experienced late payments costing their business at least £10,000 in the last 12 months.
It said that 27% reported that late payments have hit profits, while 12% said the issue had forced them to defer pay to staff. Around 40% have had to use their own money to fund cash flow in their business, with 80% using personal savings to keep their business operational.
Mr Uppal has meanwhile continued to investigate SME complaints and published reports since I last provided an update on the situation.
In mid-July he suspended 18 companies from the Prompt Payment Code, including BT Plc, British American Tobacco and Centrica.
He investigated several complaints and has published reports naming and shaming the companies involved.
They included Bupa Insurance Services Ltd who had failed to pay an invoice for £29,403.76 on 2 November 2018 based on 45-day end of month payment terms. Payment was eventually made 30 days late on January 15 2019 after the SME and Mr Uppal had chased on several occasions.
Also named and shamed in separate reports were Zurich Insurance PLC which eventually paid a claim 65 days later than its agreed payment terms.
Another company, Sambro International failed to pay a small graphic design company within its promised 30 days, for two invoices submitted in November and December 2018. Eventually following Mr Uppal’s investigation, one was paid 56 days late and the second 23 days outside their contracted terms.
Clearly, Mr Uppal and the Chartered Institute of Credit Management (CICM), which administers the system of removal of businesses from the Prompt Payment Code are doing their best, but in the current uncertain economic climate SMEs have enough to worry about without this constant and relentless mistreatment by larger customers and it is well past time the Small Business Commissioner was given stronger powers of enforcement.

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Accounting & Bookkeeping Cash Flow & Forecasting Finance General Turnaround

How much can businesses realistically plan for no-deal Brexit?

no-deal Brexit amid Global economic slowdownClearly businesses are operating in very uncertain economic times with no-deal Brexit having become a game of political football and with such an unpredictable outcome.
While a degree of uncertainty is a fact of life in business, which is why I strongly recommend regular and at least monthly scrutiny of management accounts, the current situation is arguably unprecedented.
We are in the midst of a global economic slowdown, with UK manufacturing activity at its lowest level for six years and the economy stagnating according to the British Chamber of Commerce (BCC) latest quarterly report published last Monday, much of this being self-inflicted following the Brexit referendum.
And worse, the UK is now beset by a contest to elect a new leader for the “governing”, Conservative party in which only a small group of party members have a say, and seemingly with both candidates adopting increasingly intractable positions on leaving the EU by the end-October deadline and even worse with the prospect of leaving with no deal in place.
It was alarming for UK businesses to hear the most recent comment, from the previously moderate and supposedly business friendly entrepreneur, Jeremy Hunt, that he would be willing to tell business owners that they should be prepared to see their companies go bust in a no-deal Brexit as a price worth paying to fulfil a “democratic” promise to voters.
Meanwhile his opponent, and the alleged favourite to win, famously used a four letter word to dismiss business concerns and, more recently, according to his colleague, the International Trade Secretary Liam Fox, has failed to grasp that leaving with no deal actually precludes the UK relying on a 10-year standstill in current arrangements using an article of the EU’s General Agreement on Tariffs and Trade (article 24 of the general agreement on tariffs and trade) which actually only applies if there is an agreement in place.
Amid this turmoil the Governor of the Bank of England, Mark Carney, has urged businesses to prepare properly with the relevant paperwork for a no-deal Brexit to allow them to continue to export to the EU.
Furthermore, in the last few days it has been announced that around £96 million has been paid to consultants helping the Government to prepare for departure, while Tom Shinner, the top government official in charge of no-deal Brexit planning has resigned as has his colleague, Karen Wheeler, the HMRC official in charge of “frictionless” Brexit border planning.
How on earth can businesses be expected to make realistic and achievable plans for an unknown future against this backdrop?
Well, there is some help to be had, courtesy of the BCC, which has issued its own Business Brexit Checklist, divided into nine sections of some detail about the areas businesses should be looking at.
They include assessing their Labour and Skills needs for the next few years, Cross border trade and the paperwork that will be needed in the event of no-deal, Currency/intellectual property/contracts, Taxation/insurance, Regulatory compliance/data protection, European funding and a link to a Government’s online support called ‘The Business Preparation Tool’.
To be fair, UK businesses, particularly manufacturers, did their best to prepare for the March Brexit deadline, stockpiling essential parts, materials and the like to be able to ensure continuity in the expected aftermath but it would be unreasonable to expect them to continue to tie up capital indefinitely in this way.
Indeed, most UK car manufacturers brought forward their annual shutdown to coincide with the March deadline as a means of preparation. There is no doubt that the further delay and continuing uncertainty is a major factor that is causing our largest export industry to struggle.
At the other end of the scale I believe that UK SMEs are among the most resilient and innovative in the world and will find ways to survive come what may and in spite of whatever economic damage is caused by the politics of Brexit.
But for the time being the sensible strategy may be to hold off on any major investment, to focus rigorously on management accounts and cashflow, and to ensure strategy and business plans are as flexible as possible to cover a range of eventualities. If necessary contact a rescue and turnaround adviser.
As for current political announcements, they might be taken with a large spoonful of salt.

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Accounting & Bookkeeping Cash Flow & Forecasting Finance Insolvency

What is the future for company audits?

conducting company audits

In principle, company audits must be carried out on any public body, FCA regulated business and most companies unless they are exempt. The exemption threshold means a company must have at least 2 of the following: an annual turnover of no more than £10.2 million, assets worth no more than £5.1 million, 50 or fewer employees on average.

The audit industry has been under review for some time and this scrutiny has intensified since the collapse of Carillion the construction and outsourcing firm in early 2018.

The industry is dominated by the “Big Four”, Deloitte, EY, PwC and KPMG, who audit almost all of the FTSE 100 largest companies. Despite their dominance other accountants have also come under the spotlight such as Grant Thornton who were auditors of Patisserie Valerie that went bust recently, apparently due to a £40 million fraud.

Mr Dunckley, CEO of Grant Thornton told MPs on the business, energy and industrial strategy committee “we are not looking for fraud and we are not looking at the future and we are not giving a statement that the accounts are correct. We are saying they are reasonable, we are looking at the past, and we are not set up to look for fraud.” MPs were not impressed. Should they have picked up the fraud as part of their audit? What is their level of accountability for failing to spot the fraud?

One of the contentious issues raised has been a suspected conflict of interest between auditors’ auditing and consulting arms.

In 2018 PwC, was fined £6.5 billion for its “inadequate review” of now-defunct department store BHS’s books.

In April 2019 the FRC (Financial Reporting Council) fined KPMG £6m and “severely reprimanded” them, telling them to undertake an internal review over the way it audited an insurance company, Syndicate 218, in 2008-09.

And in May 2019 the FRC fined KPMG another £5m and again “severely reprimanded” them after they admitted misconduct over their 2009 audit of Co-operative Bank.

KPMG must be feeling the heat as it was also the auditor for Carillion, which collapsed with debts estimated £1.5bn.

Since the Carillion collapse the CMA (Competition and Markets Authority) has been investigating and announced its recommendations in April.

It concluded that there should be:

* A split between audit and advisory businesses, with separate management and accounts

* A mandatory “joint audit” system, with a Big Four and a non-Big Four firm working together on an audit

* Regulation of those appointing auditors

The CBI criticised the proposals saying they could add cost and complexity for business with no guarantee of better outcomes and could restrict access to the skills required to carry out complex audits.

For smaller businesses, including those below the exemption threshold, company audits can be an effective test of a company’s accounts and are a useful tool for directors in assessing their business’ health.

The worry is that the seemingly endless question marks, fines and “reprimands” issued to large firms and their presumed conflict of interest between earnings from consultancy and from audit work could undermine confidence in the audit function and in the many smaller accountancy practices that diligently carry out audits.

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Accounting & Bookkeeping Business Development & Marketing Cash Flow & Forecasting Finance

UK economy macroeconomic update at the end of March 2019

UK economy crystal ball gazingAmidst the tedious ongoing, protracted and now further extended Brexit process, predicting where next for the UK economy is akin to crystal ball gazing.
So, a macroeconomic update on the UK economy can only be a short term snapshot, from which it may be possible to tease some potential signs for the future although the impact on UK of some global trends make some predictions more certain.

The state of the UK economy after the first quarter of 2019

As ever, we have seen a mixture of positive and negative economic data but it should also be remembered that Brexit is a distraction since the UK economy is heavily dependent on the EU and global economies which have been slowing markedly.
In defiance of most economists, unemployment continues to decline and is at its lowest level for 45 years, and employees are finally seeing modest, albeit recent, above inflation wages growth after many years of minimal wage increases. This has no doubt contributed to the higher levels of income tax and helped narrow the gap between government spending and revenue. Consumer spending has also held up rather better than predicted to help the UK economy.
While the FTSE 100 dropped to 6,584 in December it has since recovered to 7,490 but not yet to its historical peak of 7,877 in May last year. Much of the recovery would appear to be a reversal in economic forecasts for interest rates, which were expected to rise in US and UK but now are projected to remain the same for some time and even may be reduced as some are predicting. As a benchmark the yields on UK 10-year Gilts (bonds) are currently 1.23% up from 0.52% in July 2016, and US 10-year Treasury bonds are 2.58% which is down from their 5-year high of 3.23% in November last year.
The rate of house price growth has been at its lowest for almost eight years and the UK economy expanded by just 0.2% in the latest three months with the Treasury, the Bank of England and the City predicting the weakest growth for eight years for 2019.
Export orders, too, have gone down, with UK export growth falling by 0.8 points to 95.6 in the first three months of the year.

Worrying signs ahead for the UK economy

The UK’s service sector accounts for 80% of its economy and the most recent purchasing managers’ index for February from IHS Markit/CIPS fell to 48.9 in March from 51.3 in February, where any figure below 50 shows a contraction in the sector. Construction, too, remained below 50.
IHS Markit/CIPS is predicting that the UK economy will grow by just 0.8% this year. PwC has also downgraded its GDP growth forecast for this year to 1.1% from 1.6%.
At the end of March, there was some evidence from the REC (Recruitment and Employment Confederation) that employers were scaling back hiring and investment plans.
More concerning is the flight of capital out of the UK with Santander moving spare capital away from its British operations and EY (Ernst & Young) analysis suggesting that banks, asset managers and insurers are opening or expanding their European centres, with 23 companies announcing the transfer of £1trn in assets.
Despite what some might regard as a gloomy outlook, it would appear that prospects for the UK economy are better than those for Europe and possibly than for US.
It will be interesting to see what happens over the next quarter now that extra time has been agreed to sort out the Brexit situation.
Normal business life cannot remain on hold forever, but whatever the outlook we should get on with doing business and not wallow is apathy or self-pity.

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Accounting & Bookkeeping Cash Flow & Forecasting Factoring, Invoice Discounting & Asset Finance Finance Insolvency

How can SMEs manage credit control and late payment effectively?

Prompt Payment Code: late payment penalty?There is no doubt that getting invoices paid on time can make a significant difference to SMEs’ cash flow and the lack of cash due to late payment can make or break a business.
Clearly, there are cash flow advantages for those late payers who string out paying their invoices for as long as possible, while the opposite is true for those waiting on the receiving end, often SMEs.
Towards the end of last year Xero Small Business Insights calculated that the average British small business is owed £24,841 in late payments on any given day.  It is clear that Government initiatives, such as getting businesses to sign up to its Prompt Payment Code, are proving less than effective. A year after the appointment of Paul Uppal, the small business commissioner, it was announced that his service had recovered just £2.1m in unpaid invoices on behalf of small companies. Pitiful!
All this has prompted the Government’s Business, Energy and Industrial Strategy Committee to call, yet again, for firms to sign up to the Prompt Payment Code and for the Small Business Commissioner to be given the power to fine companies that pay late. It says large firms should be legally forced to pay their small suppliers within 30 days.
In January Mr Uppal announced a traffic light warning system to be used to name and shame large firms that fail to pay their suppliers on time.
Will this strike terror into the hearts of persistent late payers and force a change of behaviour? I think not, although making it a criminal offence for directors would work, as currently is the case for HMRC’s Security Demands.

Do SMEs do enough to protect themselves from late payment problems?

Annual research by Bacs Payment Schemes showed that in 2018 small businesses in the UK faced a bill of £6.7bn to collect money they are owed by other companies, up from £2.6bn in 2017.
It is a problem that the FSB (Federation of Small Businesses) estimates is the reason for the collapse of around 50,000 businesses a year.
Some, however, would argue that SMEs should take more responsibility for and be more aggressive in recovering monies owed for the work they have done in good faith, but it’s hardly a level playing field. The cost of money claims through the courts is now horrendous.
Of course, a well-managed business should have a robust credit control system in place, which sets clear expectations from the moment it contracts for work, including a stated agreement with the client that invoice payment will be due within a defined number of days, usually 30.  It is wise to also credit check all new customers. It is also wise to check payment is scheduled for payment before it is actually due; this deals with most excuses in advance.
Payment should be made as easy as possible with online banking details and address for postal payments included on all invoices. If it is feasible perhaps a small discount could be offered to those who pay early or within a stated time period. A supplier to one of my manufacturing companies offers 90 day payment terms with a 40% discount if payment is made within 30 days. That’s my margin so late payment is painful.
The credit control system should also have clear, robust procedures for following up on late payers, from sending out reminder letters that make it clear that failure to pay will likely incur significant costs and disruption such as suspension of the account.
However, even with a robust system in place, and one on which the business acts, there may still be late payment problems and SMEs can use such services as factoring, where another company takes on responsibility for collecting and chasing invoices, or invoice discounting, where, again, another company takes on the task of chasing invoices but with the SME having ultimate control.
In both cases, however, these are fee-paying services, effectively “lending” money up front to the SME at less than the full value of the outstanding invoices. If you use such services do be aware that many have a recourse clause so make sure to check if you remain liable or have to reimburse the lender.
While borrowing against book debts might improve an SME’s cash flow, it comes at a price and often with hidden additional costs and conditions in the small print. This is where an independent broker, not an online one, is a useful ally when looking for book debt finance.
Another option is to take out credit insurance although this normally only pays out in the event of your customer going bust and doesn’t solve the late payment problem.
Why should a business have to pay extra/ lose part of its revenue in order to recover money promptly for work it has done in good faith?
What is needed is robust, effective legislation, and follow-up action, with sufficient teeth to eradicate this persistent problem once and for all.
A free guide to debt collection for SMEs is available for download at:
https://www.onlineturnaroundguru.com/p/getting-paid-on-time

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Accounting & Bookkeeping Cash Flow & Forecasting Finance General Turnaround

Are we facing recession in 2019 and is it time to redefine growth?

the effects of a recession can be devastatingThere is no doubt that uncertainty and pessimism are dominating predictions for both global and national economies at the start of the year.
The question is whether this uncertainty will develop into full-blown recession
The official definition of a recession in Investopedia is “a significant decline in economic activity that goes on for more than a few months. It is visible in industrial production, employment, real income and wholesale-retail trade. The technical indicator of a recession is two consecutive quarters of negative economic growth as measured by a country’s gross domestic product (GDP).”
The whole definition is based on the definition of GDP and what is continuous economic growth. While implied, there is little about living standards, getting people out of poverty or growth of employment.
By many measures there are worrying signs of a slowdown. However as noted by the IMF (International Monetary Fund) at this month’s Davos meeting of the WEF (World Economic Forum) a recession is by no means certain.
The IMF predicted global growth of 3.5% in 2019. In October, it forecast 3.7% and for the UK, growth of about 1.5% this year and next, but it also says there is substantial uncertainty around the figures, given uncertainty over the Brexit outcome and ongoing trade wars particularly between China and the USA.

Are there pointers towards recession in the UK?

In some sectors, notably retail, house price growth and motor manufacturing, the trend has been inexorably downwards.  Consumers, too, have been reining in both their borrowing and their spending.
However, while stresses in the economy may be building, they are not at a critical point yet. In manufacturing as a whole, the IHS Markit/ CIPS UK Manufacturing PMI increased to 54.2 in December 2018 from an upwardly revised 53.6 in November.
Employment, another critical recession indicator, is also at an all-time high. But with businesses already announcing job cuts or moves to Europe ii there is no Brexit deal, and an estimated 70,000 retail jobs lost in the past year it will be interesting to see how the employment figures hold up over the coming year.

How will a switch to sustainability impact on traditional measures for recession?

The urgency of tackling climate change has never been greater, nor the time shorter, and there is increasing awareness that economic models based on perpetual growth, especially in those countries reliant on consumer spending, are going to have to be replaced by models that embrace sustainability.
It is possible, therefore, that the idea of recession as defined at the top of this article, will carry significantly less weight in any sustainability model.
The question is whether we need to think more radically to find a new and more appropriate definition of an economy’s health and success rather than using some theoretical construct if we do move to improve the future for everyone.

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Accounting & Bookkeeping Banks, Lenders & Investors Cash Flow & Forecasting Factoring, Invoice Discounting & Asset Finance Finance

January sector focus: Fintech

using Fintech to make purchase in shopFintech is used describe new technology that seeks to improve and automate the delivery and use of financial services.
Originally the term was applied simply to technology employed at the back-end systems of established financial institutions.
Over time, however, the Fintech definition has been expanded to include any technological innovation in — and automation of — the financial sector, including advances in financial literacy, advice and education, as well as streamlining of wealth management, lending and borrowing, retail banking, fundraising, money transfers/payments, investment management, asset management and some would now also include crypto currencies such as Bitcoin and their administration.
Fintech is also sometimes described as disruptive technology, in that many Fintech start-ups are designed to provide financial services in non-traditional ways, such as by offering online shoppers to secure immediate, short-term loans for purchases, bypassing their credit cards or by offering online and App-only services that bypass traditional lenders.
While traditional lenders and finance providers have tried to adopt some of the Fintech innovations, they begin with burdensome overheads and cannot generally compete unless they embrace the need to fundamentally change their existing thinking, processes, decision-making, and overall corporate structure. This is not something most managers can cope with.
There is now a vast array of Fintech categories of which the following are just a few examples:
B2C for consumer banking activities such as arranging loans and providing customer credit facilities,
B2B for small business clients (as above)
B2B for small businesses for activities such as taking payments, credit management and managing debtor ledgers
B2C for consumers for activities such as contactless payment and payment by mobile phone, online banking, applying for financial services such as a mortgage or loan, online shopping payments and many more.

Fintech as a part of the UK economy

In 2017 at the first ever International Fintech conference argued that the UK was the leader in this sector with a competitive advantage in the provision of Fintech services due to its sophisticated financial community and the growth of technology hubs like Silicon Fen in Cambridge and Silicon Roundabout in London.
The phenomenon was described as being an essential aspect of the UK vision for “an outward-looking, Global Britain” which would not only provide a high skilled, high wage economy but would attract the best talent from all over the world.
At that time, according to Treasury figures, the industry was worth £7 billion to the UK economy and employed an estimated 60,000 people.
It has been calculated that there are almost three times as many UK banking and payments companies now than there were in 2005 while the rest of the world has seen theirs fall by around one-fifth on average.
In May 2018, Technation reported their research in an article in Information Age that the UK’s tech sector, of which Fintech is a part, was expanding 2.6 times faster than the rest of the UK economy, with Fintech start-ups located not only in London but throughout the UK.
The Technation analysis also looked at the impact of Brexit on the sector, finding that by and large tech firms were undaunted by the prospects of leaving the EU.
However, Financierworldwide, provided a more sober analysis, identifying some of the potential challenges to Fintech.
These included future freedom of movement of labour and the absence of sufficient numbers of skilled tech workers available in the UK, the loss of the ease of the passporting of services to other EU markets and consequently the decision Fintech companies may face of whether to relocate to other countries in Europe, at least in the short term. Among the cities expected to be most likely to benefit from welcoming such moves are Dublin, Paris and Berlin.
There is also the worry that the loss of passporting rights after Brexit would deter the currently high levels of investment in UK Fintech.
Finally, regardless of Brexit, if Fintech is to thrive, after a year of seemingly frequent banking technology meltdowns, not to mention hacking scandals, there needs to be much more robust and secure protection against fraud and data protection. To achieve this we at K2 have invested in Tricerion as the future of login security. Check it out at www.tricerion.com.
 

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Accounting & Bookkeeping Banks, Lenders & Investors Cash Flow & Forecasting Finance Insolvency Rescue, Restructuring & Recovery

Why the big four auditors are under intense scrutiny – an update

investigation into the big four auditorsFollowing the collapse of the company Carillion in February this year the role of its auditors came under the spotlight and investigations were promised, notably by the FRC (Financial Reporting Council) and the CMA (Competition and Markets Authority).
The reason for this was that the business had won several large public sector contracts, among them to build two hospitals, and also because its collapse put a number of subcontractors and jobs in jeopardy. However, primarily it was because its financial health was revealed to be considerably shakier than the directors had suggested.
The company’s annual audit had been carried out by KPMG, one of the big four auditors, and in March 2017 it had expressed no concern over reported profits of £150m, even though four months later these proved to be illusory. Perhaps they may have been reassured by the company’s ‘internal auditor’, Deloitte, which might also be looked into since it may have involved helping ‘massage’ numbers for KGMG to report on.
The role of the auditor is  ”to provide an independent opinion to the shareholders on the truth and fairness of the company’s financial statements,” according to The Institute of Chartered Accountants in England and Wales (ICAEW), one of the bodies appointed to approve and register auditors. Auditors’ reports, filed at Companies House, are used by suppliers and other interested parties to make decisions about their involvement with a company.
Not surprisingly, when the FRC, published the results of its annual inspections of the big four auditors in June it singled out KPMG for an “unacceptable deterioration” in the quality of its work.
But it also found that the overall quality of the audit profession is in decline and that only half of KPMG’s FTSE 350 audits. were deemed satisfactory.  In fairness it should be said that the FRC scores for the others in the big four had also declined. Deloitte scored 79%, down from 82% last year, EY fell from 92% to 82% and PwC was down from 90% to 84%.
It also fined PwC (Price Waterhouse Cooper) £6.5 million for its failings in auditing of retailer BHS two years before its collapse.
The calls for a radical overhaul have been growing as there seem to be so many accounting scandals, such as the recent problems with Patisserie Valerie. The calls reflect public concern about a conflict of interest since these businesses also earn massive fees from their clients for consultancy work.
Earlier this month KPMG announced that it will no longer do consultancy work for the UK’s biggest companies if it is also auditing them.

So when will there be some answers on the big four auditors?

According to a report in CityAM last week there are now five investigations either pending or on the go.
The CMA investigation following Carillion was expected to reveal its findings before the end of the year but it has recently announced that it is also intending to study the entire auditing market to see whether the big four were crushing competition from smaller firms.
Sir John Kingman, the chairman at Legal & General, was tasked by the government this summer with reviewing the operations of the FRC, whose outcome may strengthen its powers. The FRC is also reviewing itself separately from the Kingman investigation.
Shadow Chancellor John McDonnell has commissioned Professor Prem Sikka, an academic at the University of Sheffield, to review the sector and make recommendations with this report due by year end.
Finally, the Beis (Business, Energy & Industrial Strategy Select Committee) leader Rachel Reeves (Labour) has announced that it will review both the Kingman and CMA reviews, probably starting in January.
It will take a while before all the results are in and revealed but it looks like time is running out for the big four auditors and they can expect changes to regulation, to their ability to carry out both audits and consultancy, and possibly, some hefty fines at the end of it all.
 

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Accounting & Bookkeeping Business Development & Marketing Cash Flow & Forecasting Finance General

Should SMEs consider appointing non-executive directors (NEDs)?

older woman non-executive director It is hard for SME directors to step back and look at the bigger picture when they are so immersed in day-to-day operations. Could they benefit from having experienced and objective non-executive directors (NEDs)?
Research carried out by law firm TLT, University of the West of England and the Association of Chartered Certified Accountants this summer suggested that SMEs did not understand how to recruit or engage with NEDs. The conclusion was that smaller firms with NEDs were not benefiting as much as they could.

What does a non-executive director do?

The NED is an independent director, who sits on a business’ board of directors but does not form part of the executive management team.
NEDs’ primary responsibility is to attend board meetings and crucially to turn up prepared having read the board pack and researched the key matters that require decisions. They should also monitor reports and carry out their own review so they can ask pertinent questions with view to assisting develop systems and strategy and resolving problems. This can involve offering specific and objective advice but does not require them to know the answers, more important to help find ways of finding the answers.
They should have a longer-term perspective and can act as mentors.
The more engaged ones will network, looking for new opportunities and useful contacts and building relationships inside and outside the business.
Obviously, it can be useful for a NED to have experience specific to your business but this is not necessary and can be an impediment since they may be less likely to embrace change.
In a recent description of the role of NED, the IoD (Institute of Directors) said their role was “to provide a creative contribution to the board by providing independent oversight and constructive challenge to the executive directors.”
Referring to the 1992 Cadbury Report it also said, “they should bring an independent judgement to bear on issues of strategy, performance and resources including key appointments and standards of conduct”.
The recent update on corporate governance code introduced by the FRC (Financial Reporting Council) in July specifically referred to the potential role for NEDs as an option for building a wider engagement with stakeholders, particularly the workforce. Having a designated NED for this was one of three options it suggested. The code will become effective from 1 January 2019.
Anyone considering or invited to join a business board as a NED should understand that there is no legal distinction between executive and non-executive directors.  latter have the same legal duties, responsibilities and potential liabilities as their executive counterparts.
It makes sense, therefore, for potential NEDs to carry out proper due diligence and to be properly briefed before being appointed. The ICA has an excellent set of guidelines and advice for NEDs here.
Independent oversight of the strategy and direction, executive remuneration and performance, systems and risk management, and audit of a business is something that surely would benefit their businesses.
While these apply to all businesses, SMEs in particular can benefit from having directors with board and governance experience to introduce best practice and act as a mentor to those SME directors who have had limited exposure to well-run boards.

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Accounting & Bookkeeping Cash Flow & Forecasting Debt Collection & Credit Management Finance

Fine words are not enough to enforce the Prompt Payment Code

Prompt Payment Code: late payment penalty?Last week saw two announcements on the ongoing issue of late payments by large companies to SMEs, both described as measures to end the problem.
The first announced the appointment of Paul Uppal, Small Business Commissioner, to the Prompt Payment Code’s Compliance Board alongside a promise from business secretary Greg Clark to strengthen the voluntary Prompt Payment Code.
The second, by Small Business Minister Kelly Tolhurst, was a call to submit evidence to help the Government to identify “the most effective way possible to tackle this issue once and for all”. The deadline for submissions is November 29 and you can find out more here. Her press release states: “Nearly a quarter of UK businesses report that late payments are a threat to their survival.”
According to the Times, Mr Clark had also promised that 90% of undisputed invoices from SMEs on Government contracts would be paid within five days. He also floated a proposal to make company boards appoint Non-Executive Directors with responsibility for supply chain practice.
In view of the IoD’s (Institute of Directors’) estimate that late payments put 50,000 SMEs a year out of business, I make no apology for revisiting this appalling situation for a fourth time this year, following my previous blogs on April 12, June 28 and a Stop Press on September 25 in which I mentioned a Times report that Mr Uppal had helped just nine SMEs with complaints since his appointment in December last year.
New research from Hitachi Capital, reported in Credit Connect, has also revealed that 17% of business owners say they are forgoing paying themselves a wage so they can pay their staff on time. This rises to 27% of small businesses that say they are already struggling to survive.

The history of action on late payment and the Prompt Payment Code

The Small Business, Enterprise and Employment Act 2015 made it mandatory for larger businesses (those with more than 250 employees or £36 million in annual turnover) to report their payment practices and performance on a half-yearly basis.
Non-compliance is a criminal offence, subject to prosecution. Yet since it came into force in April 2017 only 2,000 of the 15,000 businesses required to comply have submitted reports, and of these, some of the information has been inadequate. Despite the criminal aspects of non-compliance by 13,000 businesses, there have been no reported prosecutions.
In December 2017 Mr Uppal was appointed Small Business Commissioner with a brief, to support (my italics) SMEs in taking action on late payments and on making a complaint.
It was just a month or so later that Carillion, a known late payment offender and a signatory to the voluntary Prompt Payment Code, went bust and three months on from Mr Uppal’s appointment, as I reported, a survey by Close Brothers Invoice Finance found that 84% of those SMEs asked had little confidence that the appointment would have a positive impact on their businesses. It would appear that Boris Johnson’s two-word comment about business was prophetic.

Action that should be taken on late payment and the Prompt Payment Code

Perhaps I am being cynical but the latest Government announcements were made during the Conservative Party conference – no doubt to garner positive headlines in view of the general cynicism about the Government’s understanding of SMEs problems, especially given that businesses are becoming more public about the ongoing Brexit negotiations?  Time will tell.
As one commentator, Greg Carter, founder and chief executive of Growth Street, said in CityAM “At present, the Prompt Payment Code … dictates that invoices should be paid within 60 days, other than in ‘exceptional circumstances’. We’ve all seen now that these voluntary stipulations are worth little more than the paper they’re written on.”
He added “But no matter how energetic and effective the small business commissioner is, he must be supported with a robust, meaningful, and (crucially) enforceable code.”
This, surely, is the point. For SMEs to see any meaningful improvement in payment times, there must be a sufficiently strong set of penalties that are actually imposed to ensure businesses comply. As Mr Carter says in the article action needs to follow rhetoric. Failure to police the Small Business, Enterprise and Employment Act 2015 says it all.

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Accounting & Bookkeeping Cash Flow & Forecasting Finance General

Zero hours contracts and self-employed workers revisited

self-employed workers: fruit pickersBusinesses have been quick to recognise the benefits of using zero hours and self-employed workers as a means of reducing their overheads.
The costliest item for most SMEs is their payroll and for many the legal obligation of paying the national living wage is seen as a significant burden, hence the popularity of the zero-hours and self-employed models.
According to the latest ONS (Office for National Statistics) figures the number of zero-hours contracts in use across the UK rose by about 100,000 in 2017 to 1.8 million.  That is still below the peak of 2.1 million in May 2015.
Nevertheless, these contracts are clearly still popular with some sections of the work force, particularly students, women and part time workers, as well as SMEs, for their flexibility.
However, in the last six months several court rulings have arguably eroded the benefits to business of using self-employed workers.
The most recent was a Supreme Court rejection of an appeal by Pimlico Plumbers in June 2018, against the decision of an employment tribunal ruling of unfair dismissal. The case involved a self-employed plumbing and heating engineer, Gary Smith, whom Pimlico had dismissed when he tried to reduce his working hours following a heart attack.
As a result of other court cases both DPD and Uber have had to change their employment models to provide worker benefits such as holiday pay, the minimum wage and pension contributions.

What next for businesses using self-employed workers?

Businesses understandably will want to retain the maximum flexibility to be able to adjust worker availability to reflect seasonal peaks and troughs and to keep a tight control over their overheads.
While it is likely that there will always be some workers who will value that flexibility to be able to fit working hours around other responsibilities, such as family or educational commitments, the UK economy is currently in a situation of full employment which makes it harder to both find and retain suitable employees.
Despite the current uncertainties resulting from the UK’s decision to leave the EU, a looming global trade war and an increasing number of workers affected by the many retail store closures that have been a feature of the last few years, there is likely to continue to be a shortage of relatively low-skilled workers due to the reduction in numbers of EU migrant labourers since the 2016 vote to leave the EU.
This is of particular concern to the agricultural sector that needs seasonal workers to pick and pack fresh produce.
Not all of this can be addressed by increased automation, which in itself has significant cash implications at a time when businesses are holding back on investment while there is uncertainty over their prospects for future trading.
If, as looks likely from the court cases, the mood among workers is shifting against being used as disposable labour, businesses will also have to assess the damage to their reputations from sticking to the zero-hours and self-employed models.
Is it time for SMEs to reassess their employment practices and as a consequence their business models?

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Accounting & Bookkeeping Cash Flow & Forecasting Debt Collection & Credit Management Finance

Late payment regulations need beefing up

late payment penalty?In April this year I reported on the scepticism with which SMEs had greeted the appointment of a Small Business Commissioner to help SMEs to deal with larger businesses’ late and unfair payment practices.
Paul Uppal was appointed in December 2017 and ran his own small business for 20 years. In interviews since, he has reportedly said he hoped the problem can be solved by “cultural change rather than legislation”.
But in any case, Mr Uppal’s powers are limited to taking information from SMEs, investigating and helping them through a complaints procedure. Changing behaviour and holding to account larger business and especially public bodies this is not.
He said he will name and shame persistent late payers.  I don’t think he has offenders quaking in their boots! Indeed, given the practices they condone in their firms, or turn a blind eye to, I don’t believe ‘shame’ is something executives worry about. The new badge of honour is having the hide of a rhinoceros.
Mr Uppal’s appointment was the second of two measures introduced by the Government to tackle the problem of late payment.
Previously, from April 2017, it introduced a legal requirement on large businesses to report via a publicly available Government website on a half-yearly basis on their payment practices, policies and performance for financial years beginning on or after 6 April 2017. Failure to report or reporting misleading information has been made a criminal offence punishable by a fine.
The legislation covers businesses above a threshold of:
* £36 million annual turnover
* £18 million balance sheet total
* 250 employees
By December 2017 only 29% of larger businesses that had reported had paid invoices within 30 days on average.
So much for the shaming strategy.

Stronger penalties on late payment are needed

The calls for tougher action are growing stronger.
A report by YouGov has revealed that legislation that would force payment of bills within 45 days is strongly supported by 61% of British companies with fewer than 250 staff.
The FSB (Federation of Small Businesses) has estimated that 50,000 SMEs each year close because of late payments and that public bodies are among the worst offenders, with 89% of suppliers to government reporting that they had been paid late.
From my work with SME owners, I am well aware that waiting for up to 120 days for payment by a larger customer can play havoc with your cash flow and can push you into insolvency if you aren’t brutal with agreeing and enforcing appropriate terms for payment of your invoices.
It is a difficult balance to strike, payment terms versus your relationship with important customers. Managing the relationship involves making sure that your terms are followed. You can be sure they will demand theirs.
While tougher regulation might enforce a maximum time for paying invoices, together with meaningful penalties for failure to comply, I would argue that you need to establish payment terms up front and then make sure they are observed.

Categories
Accounting & Bookkeeping Cash Flow & Forecasting Debt Collection & Credit Management Finance

Can SMEs have confidence in the Government’s new Small Business Commissioner?

mall business commissioner a superhero?In December 2017 the UK Government appointed a Small Business Commissioner with the remit of supporting SMEs struggling with late and unfair payment practices when dealing with larger businesses.
The Commissioner appointed to tackle this is Paul Uppal, who ran his own small business for 20 years, and it will be his job to support SMEs in taking action on late payments and on making a complaint.  There is also a website where SMEs can get help.
Three months after his appointment, however, research by Close Brothers Invoice Finance found that very few SMEs have any confidence that the Commissioner will be able to make a difference. Their report says: “84% of SMEs do not anticipate that the introduction of the small business commissioner will have any positive impact on their business.”
According to Mike Cherry, National Chairman of the Federation of Small Businesses (FSB): “The UK is gripped by a poor payments crisis, over 30% of payments to small businesses are late and the average value of each payment is £6,142. This not only impacts on the small business and the owner, it is damaging the wider economy.”
It has been estimated by the Centre for Economic and Business Research that a group of 22,000 so-called high growth small businesses make a disproportionately large contribution to the economy, providing an estimated £65,000 per worker compared to the national average of £55,000.
However, while very high on the list, ‘late payment’ was not SMEs’ only concern when asked about their issues and prospects for 2018.
According to a survey by chiefexecutive.com, high on the SME list of challenges were firstly recruiting, retaining and developing quality people, followed by managing growth and change (specifically access to and cost of funding) and the Government’s competence, regulation and understanding of business.
In fourth place was managing uncertainty (the wider geo-political and economic context). Other research has found that more than half of SMEs felt that their Brexit concerns were being ignored and that ministers were not listening to their views.
Given that SMEs are seen as the key to improving the UK economy’s growth and productivity plainly they will need as much support as possible.
As the deadline for leaving the EU is less than a year away it is high time that there was serious attention paid to SME voices and that significant and effective steps taken to address them.
The Small Business Commissioner appointment is a start, but he might also take up other causes for small businesses, not least holding banks to account for their dealings with SMEs. There is the prospect of a complaints procedure that avoids the need to deal with issues through the courts. There is also the creeping nature of fees and charges which go unreported in the press, the latest being Lloyds revised fees that for some have in interest rates being increased up to 52% and fees being increased by 240%.
it remains to be seen how effective the new Commissioner will be.

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Accounting & Bookkeeping Cash Flow & Forecasting Finance General

What are the accounting options for SMEs?

woman doing her accounting I have talked previously about the importance of having up to date and regular Management Accounts where there are fundamentally two options for producing them: either doing the data entry, bookkeeping and accounts in-house, or outsourcing all or part of the work to a specialist firm.
Related to this is whether certain services are outsourced, such as Year End accounts, tax returns, payroll and pension administration.
Hybrid options should also be considered such as data being entered into the accounts by in-house staff with external bookkeepers or accountants doing more advanced work such as bank reconciliations, producing VAT returns and producing management reports.
If any of the work is done in-house, then suitably trained staff will be needed as will having access to the right accounting packages.

Considerations when looking for an accounting package

There are several accounting packages that might be considered where the main factors are choosing one are whether it produces the reports you want, does it have the functionality you need, is it appropriate for your business, its ease of use and cost.
Most packages are now cloud-based so you are likely to pay a monthly fee. Most also provide scope for upgrade and adding functionality depending on the size and complexity of the business and its requirements but for smaller businesses it makes sense to start with a basic package.
Among the best-known for SMEs are Sage, Quickbooks and Xero and all of these are flexible with scope for adding more functionality and reports.
The basic requirements will be to produce standard reports including: profit & loss, balance sheet, trial balance, aged debtors and aged creditors. These should also allow for reporting by period such as last month and year-to-date figures and the ability to compare them with the same period last year.
They should also make it easy to produce and file VAT returns, do invoicing and produce account statements for reconciling accounts and chasing payments. Additional functionality could include daily reports of key figures, monitoring dashboards, links to bank accounts, managing and online filing of payroll, pension auto-enrolment and, if relevant, the tracking of stock and order processing.
A package that offers all these options can be used for monitoring efficiency and business processes, for monitoring cash flow as well as producing Management and Year End Accounts, but remember, the more sophisticated the package, the greater complexity and higher the monthly fee. Do remember when producing reports based on data, “rubbish in, rubbish out”.
Backup, security, reliability and update of the software are also factors.
Related to the package decision are controls which might be done through the package such as of purchasing decisions to issue and approve prices and orders, and cash flow management to make and authorise payments. I advocate that these should be separate from those administering accounts and done by different people.
If all of the above are outsourced, then a business doesn’t need its own accounting package as the outsource supplier will use their own. However, if any of the work is done in-house then one will be required. Some outsource suppliers use several packages and can be flexible, however most use a preferred brand so you won’t have a choice and you should check it can be tailored to suit your business. You will also need to check if you need your own version for them to access and work on or if you can have access to theirs.
If you do decide to do all or any of the work in-house, then in addition to choosing a package you will need to consider the cost and overheads associated with both employing staff to carry out the work and training them on how to use the software.
There is no doubt that a comprehensive and detailed accounting system is needed to monitor productivity and cash flow, and the right one can save time and cost, but clearly considerable research and thought is needed before choosing the appropriate accounting package for your business.
Your accountant, providing they know and understand your business, ought to be able to help you choose the right one.

Categories
Accounting & Bookkeeping Finance General HM Revenue & Customs, VAT & PAYE

The High Value Dealer and the new Money Laundering Regulations 2017

The High Value Dealer and money launderingMoney laundering is the process of making illegally-gained proceeds (i.e., “dirty money”) appear legal (i.e., “clean”). The first step in the process involves introducing cash into the financial system by some means, known in the jargon as “placement”.
Typically, this can involve making a purchase, or a deposit for the purchase of, a high value item from a business and paying in cash.
In 2017 the Government introduced the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations. This was a 4th update of legislation that was first introduced in 2003 in a bid to stamp out money laundering.
While the regulations deal with the criminal aspect of laundering money they have implications for reputable businesses that unwittingly might be targeted by criminals, among them High Value Dealers (other specified service providers are also detailed in the guidance).
A High Value Dealer (HVD) is defined as a firm or sole practitioner making, or accepting, cash payments of the equivalent of €10,000 or more.
Under the regulations HVDs must carry out a risk assessment on their business’ vulnerability to being used as a conduit for money laundering, review it regularly and keep records of both the transaction and the customer. They must also ensure they and all staff are trained to spot suspicious activity and they must carry out due diligence and risk assessments on clients to whom high value goods may be supplied. Again, all this must be documented.
HMRC (HM Revenue and Customs) oversee HVDs and its inspectors can turn up unannounced to check the records. If they do attend they will look most closely at cash receipts for goods and tend to make the assumption that the receipt is illegally laundered money unless the HVD can produce suitable checks on their clients.
HMRC has the power to impose fines for any infringements based on the failure to produce records and the penalties can be steep, up to 100% of the value of the sale. Since the regulations were brought into force HMRC has updated its guidance for HVDs, downloadable as a PDF

Are you a High Value Dealer?

Many SMEs may fall into the category of being HVDs without realising it.
Your company may be at higher risk if it has:

  • customers carrying out large, one-off cash transactions;
  • customers that are not local to the business;
  • overseas customers especially from a high risk third country as defined by the EU.

I recently came across a family business of 30 years–plus standing with an impeccable record of honest and debt-free trading selling large second-hand capital items.
While it had very few transactions involving cash payments, three were identified as being above the €10,000 cut-off point. Despite the fact that these three were with long-standing and known customers, the HMRC inspector ruled that the transactions had breached regulations, by not producing documents proving the identity (copy of a driving licence or passport) and place of residence (utility bill) of the customers concerned. HMRC imposed a fine on the company of £20,000, saying this was a 50% reduction on the maximum. Understandably my client is contesting this as being excessive, but the matter hasn’t yet been resolved.
With such legislation, HMRC might be seeking to maximise its revenue, but whether justified or not, it costs a lot of time and money for an SME to contest such a harsh judgement, one that can so easily have been avoided.
While my client, after 12 years of my support, now has a strong balance sheet and if necessary can pay the fine, it is easy to see that the size of the fines may push some SMEs into insolvency.
It therefore makes sense to know whether your business comes under the definition of a HVD and to ensure it is protected and complies with the regulations.

Categories
Accounting & Bookkeeping Banks, Lenders & Investors Finance Turnaround

What is a company audit and why is it important?

audit seal of approvalFollowing the collapse of Carillion in January this year with over £900 million of debts, a £590 million pension fund deficit and uncalculated £millions in uncompleted contracts several investigations were announced into what went wrong.
Among these is a probe, by the independent accountancy regulator, the Financial Reporting Council (FRC), into the company’s audits for the years 2014, 2015 and 2016 by auditors KPMG, to identify any breaches of regulatory requirements “in particular the ethical and technical standards” required of auditors. This week the FRC also announced inquiries into two of the company’s former financial directors.
This is not surprising given that Carillion was one of the UK Government’s largest contractors for outsourced services and building projects, but it is often the case that where businesses collapse one of the spotlights invariably falls on the auditors.

Why focus on auditors when things go wrong?

The Institute of Chartered Accountants in England and Wales (ICAEW) is one of the bodies appointed to approve and register auditors, as required by law, and defines the purpose of the audit as follows:
“to provide an independent opinion to the shareholders on the truth and fairness of the {company’s] financial statements, whether they have been properly prepared in accordance with the Companies Act and to report by exception to the shareholders on the other requirements of company law”.
Audit reports are filed with Companies House and used by suppliers and other interested parties to make decisions about their trading relationship with the company concerned, not least how much credit to extend.
Auditors therefore are the public scrutineers and should be held to account if they are found to be complicit in any deceit through concealing problems that ought to be highlighted.

Who is required to have a statutory audit?

While there are some exemptions covered below, in principle, any public body or business above a defined turnover and size, as well as any business of whatever size that comes under FCA regulation, such as those involved in banking and insurance, must have audited accounts.
In addition, a business, whatever its size, must have an audit if shareholders who own at least 10% of its shares request one at least one month before the end of the financial year for which the audit is being requested.

Who is exempt from a statutory audit?

Subject to the above, businesses and organisations qualify for exemption if they can satisfy at least two of the following three conditions: an annual turnover of no more than £10.2 million, assets worth no more than £5.1 million and/or 50 or fewer employees on average.

Who can carry out an audit?

Accountancy companies containing suitably qualified individuals and which are registered with a recognised supervisory body, such as the ICAEW, are empowered to carry out audits.
To qualify they must be and be seen to be independent, to comply with auditing standards and ensure that all their employees are “fit and proper persons” competent and qualified to carry out the work.
Equally important is the code of ethics to which auditors must conform, which includes behaving with integrity, and being objective, only accepting work the member or firm is qualified to do and maintaining standards of professional knowledge. The auditor must also maintain confidentiality and must not use information about a company it is auditing for their own professional gain.
Another requirement for auditors is for them to demonstrate that they do not have any conflict of interests with the company they are auditing. This can be an issue for large complex companies but essentially the auditor ought not to have any relationship or be doing any work that might be used to influence the outcome of an audit.
Plainly, it is important for there to be some proper scrutiny of a business’ accounting and handling of its finances, for the sake of creditors and those people who have a stake in its survival and this is why the role of auditor in the event of a collapse is inevitably going to be a focus of investigation.
 

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Accounting & Bookkeeping Cash Flow & Forecasting Finance General

What are the main ingredients to include in monthly Management Accounts?

Ingredients in Management AccountsRegularly reviewing your Management Accounts is one of the most helpful ways for you to monitor the performance of your business.
It is essential to monitor the right metrics so you know how the business is doing and can make adjustments as appropriate.
There is no legal requirement for a company to produce Management Accounts on a regular basis but waiting for the Annual Accounts is too late if you want to make the ongoing adjustments necessary to improve productivity.
The frequency, quality and type of information they contain is therefore crucial.
Ideally, Management Accounts should be produced monthly and should contain an up to date Balance Sheet, a detailed Profit and Loss statement, a Trial Balance and summaries of Aged Debtors and Creditors.
The Balance Sheet shows the company’s assets and liabilities and how much money the business owes to suppliers at any one point in time as well as how much money it has in the bank. Central to this is the cashflow, which needs to be well-managed.
The Profit and Loss (P&L) statement ought to report both monthly and year to date figures. Overall it is a measure of the business’ health although some companies make profits but poor cash flow by not getting paid. The P&L can also be used for much more by reporting sales by market or product sector and their associated cost of those sales and direct costs to monitor margins. It might also group overheads into logical cost areas. so you can monitor the fixed cost elements of your business.
Maintaining a spreadsheet of the monthly P&L is also useful to show trends and monitor the success of marketing initiatives. This spreadsheet in particular is a key tool for establishing a culture of continuous productivity improvement.
The Trial Balance is a useful reference for looking behind the numbers. Essentially all entries in the accounts are allocated to a Nominal Code where the Trial Balance is a list of all the Nominal Codes with a value of all entries against that code. The Balance Sheet and P&L consolidated the values for a number of codes to produce a meaningful report. As an example there may be several different sales codes where the P&L may report only one. I use this example as I have suggested earlier that the P&L report several sales codes since it is easier to monitor the P&L than the Trial Balance.
Another aspect of the Trial Balance is to monitor errors in the accounts since it relies on the double-entry accounting system. If the total debits equal the total credits, the Trial Balance is considered to be balanced.
The Aged Debtors and Aged Creditors are also useful. While I suggest a summary schedule is used to avoid having too many pages of information, the detail reports by customer/ supplier show the individual sales and purchase invoices so you can monitor which ones are outstanding.
The Management Accounts can be a great source of management information but need engagement with your accountant or accounts controller to set up the reports in the first place. If you have the right information you can make the right decisions, it’s all about having the right ingredients.

Categories
Accounting & Bookkeeping Finance HM Revenue & Customs, VAT & PAYE

The latest Making Tax Digital updates for SMEs

Making Tax Digital and old fashioned tax collectionIn the distant past tax was simple, it was collected by collectors and stored somewhere safe like in the Treasury at the Great Mosque of Damascus. Incidentally the Mosque was formerly a Christian basilica and is alleged to contains the head of John the Baptist, it is definitely worth a visit for those brave enough to visit Syria.
 
Over the years chancellors have found ever more creative ways to claim tax revenue and we have become collectors filling out increasingly complicated forms and remitting tax due to the treasury. It is however possible that digital filing may reverse the trend by making it simpler for us as tax collectors to complete and file returns, but woe betide those of us who make a mistake.
Research carried out by Ipsos Mori for the Government and released in December has found that 70% of small businesses and landlords are unaware of what will be required of them under the new Making Tax Digital (MTD) initiative.
Do you know what the updated MTD rules are and to whom they apply?
The Government published updates last month outlining some changes to the original MTD plans.
The new rules will apply from April 2019 with pilots before then and they will only apply to businesses with a turnover of £85,000 per year, which is the VAT threshold, and then only for meeting their VAT obligations.
Originally the intention was to phase in full MTD for Income Tax Self-Assessment (ITSA), Value Added Tax (VAT) and Corporation Tax (CT) between tax years 2018/19 and 2020/21. However, widening the scope beyond those above the VAT threshold has been deferred and the Government has pledged that it will introduce expand MDT until the new system is working, and not before April 2020 at the earliest.
Is anyone exempt from Making Tax Digital?
The Government has also published an impact assessment covering people with disabilities and those in rural locations where there is poor broadband.
It has concluded that both groups will find it difficult to comply with MTD.
The report says: “Ultimately, if a business cannot go digital, it will not be required to do so. The exemptions under Making Tax Digital mirror the existing VAT online filing exemption.”
If your business must comply with the MTD then you should allow enough time before the 1st April 2019 deadline to source accounting software that will be compatible with the Government’s system, factor the cost into your cash flow, and familiarise yourself with the process.
Alternatively, if you have an accountant who already files your tax returns online, you might check they are prepared for the new rules and will comply.
It is also worth investigating whether it would be more cost effective and efficient to outsource it to them rather than getting to grips with the software in house. New software is linking bookkeeping with bank accounts to automate the necessary filings so now might be the time to investigate alternatives to your bookkeeping systems and how you produce and file reports.

Categories
Accounting & Bookkeeping Cash Flow & Forecasting Finance General Insolvency

Detecting and combating business fraud

detecting business fraud
Any business without robust systems can be vulnerable to fraud, either perpetrated by third-party criminals, suppliers, clients or even internally, by employees.
It has been calculated that the typical organization loses 5% of its annual revenue each year due to employee fraud.
As with cybercrime, which we have covered in previous blogs, prevention is preferable to dealing with the consequences, and will help avoid unnecessary loss of cash and write down of profits.
This means monitoring, having clear policies and processes for handling money but also checking they are being followed.

Signs of possible business fraud

Business fraud comes under three main headings, asset misappropriation, corruption and financial fraud.
Watch for unusual behaviour, such as people calling in sick frequently, becoming defensive or irritable. Be alert to complaints from clients or customers relating to a specific employee.
In bank reconciliations, deposits or cheques not included in the reconciliation could be indicative of theft. Other symptoms include credits, write offs, phoney customers, cancelled and refunded till receipts with no documented proof of the reason, also duplicate payments, excessive expenses claims and altered time sheets. The big giveaway here is inadequate accounting systems, inadequate records and a lack of reconciliation that all help conceal fraud.
Another giveaway may be in the stock inventory where the available stock does not match with records. The big giveaway here is inadequate stock control, poor record keeping and a lack of stock checks.

Minimising the opportunity for business fraud

Top of the list is to ensure that there is robust record keeping for all transactions, whether it be transactions with customers and clients, ordering of stock and materials or book keeping.  There should be a clearly-explained reporting system for employees to use if they identify a possible problem.
Keeping records alone is not enough, however.  Regular independent checks to identifying any discrepancies is essential for monitoring the accuracy of reports as well as identifying inappropriate activity.
Make sure that you know your employees so you can detect changes in attitude and behaviour and that they are aware of the business’ policy on fraud prevention and the penalties for anyone caught.
Similarly, if a business is approached by a new client with a potential large order, it is wise to check their credentials with a credit reference agency or, if it is another business, with one of the many services that vet business clients.  It is also helpful to make any new order conditional on payment of a deposit, which can be anywhere from 10% to 50%, and setting up a system of staged payments.
Finally, if fraud appears to be systematic there are outside experts, such as Certified Fraud Examiners (CFE), Certified Public Accountants (CPA) and CPAs who are Certified in Financial Forensics (CFF) who can be hired to investigate.
Prevention of fraud costs far less than the consequences which in some cases can cause a business to become insolvent.

Categories
Accounting & Bookkeeping Banks, Lenders & Investors Factoring, Invoice Discounting & Asset Finance Finance General

Fintech for SMEs

Fintech mobile phone bankingFintech is a topic much discussed in business publications, often in hyperbolic terms, but very few can define it precisely.
Initially, Fintech, short for financial technology, was the word for the technology used in the plumbing as the back-end of established consumer and trade financial institutions.
However, according to the online financial dictionary Investopedia, Fintech now denotes a range of technological innovations in the financial sector, including in financial literacy and education, retail banking, investment and crypto-currencies like bitcoin.
This wider definition more accurately describes the range of possibilities for SMEs to use financial services and engage with the financial sector especially as some Fintech services, we would argue, are revolutionary and open up services that were previously only available to large companies.
Part of the problem lies with the mainstream banks, lenders and most of the traditional suppliers of financial services including factoring, invoice discounting, fund raising and advice, who have remained deeply conservative in the way they do things and the way they charge for their services. Many have not benefited from the technology revolution, or if they have they haven’t passed on that benefit to SMEs.

How can SMEs benefit from Fintech?

SMEs can benefit from significantly reduced costs by bypassing traditional ways of using financial services, and in many instances by bypassing the traditional suppliers.
Fintech has done much to disrupt traditional models, for example, peer to peer lending via firms like Ratesetter and Zopa and equity crowdfunding via CrowdCube or Seedrs has grown. These online platforms now provide alternative sources of lending and investment to SMEs who no longer need to use their bank or finance brokers to fund their business.
Entrepreneurs can, via an online platform, pitch directly to the world for loans or investment in their companies and ideas. While they may still have to produce a sound business model and show that there is a market for their idea, online models can speed up the funding process dramatically.
Another benefit of Fintech has been mobile payment and currency conversion as innovative methods of swiftly and economically transferring funds across geographical borders. Online and cross border payments are undergoing a secondary Fintech revolution with Blockchain technology and crypto currencies like Bitcoin and Ethereum gaining traction.
Blockchain, as an open, distributed ledger system that records transactions between two parties efficiently in a verifiable and permanent way, is likely to fundamentally change the way we do business and offers opportunities that none of us have yet considered.
Payment systems, such as Go Cardless, Paypal and Stripe alleviate the cost and bureaucracy of invoicing and collecting payment, removing the need for debit cards, credit cards and expensive merchant service accounts.  This is of benefit both to consumers buying online and to businesses selling goods or services to consumers and to other businesses.
Other areas where Fintech offers fast and efficient services are in monitoring, tracking and managing accounts and financial transactions. Mobile technology provides users with information in their hand to provide accurate information and allows entrepreneurs to make timely decisions.
Finally, for those who have the skills and knowledge, the opportunities for developing ever more innovative and useful Fintech ideas and converting them into a viable business are only going to increase.

Categories
Accounting & Bookkeeping Business Development & Marketing Cash Flow & Forecasting Finance General Turnaround

Is your accountant an information processor or an information interpreter?

piggy bank information interpreterThe right accountant can be a very valuable resource for the SME, but their real value depends on the services they offer.
Choosing an accountant needs to be done with some care since anyone can set up as an accountant without any qualifications whatsoever.
So, the first thing to do is to make sure that any you are considering are actually properly qualified.  There are two recognised bodies, the ACCA (Association of Chartered Certified Accountants) and the ICAEW (Institute of Chartered Accountants in England and Wales).
There is a third body whose members focus on bookkeeping rather than advice, the AAT (Association of Accounting Technicians).
Each has its own examination and qualification system and all three require annual membership renewal which includes the proviso that the applicant must show evidence of CPD (continual professional development) they have undertaken in the intervening year.

Decide what services you want from your accountant

At a basic level, the information processor is essentially a bookkeeper who will do no more than prepare your management and annual accounts and may advise you of your tax liability. Indeed, all too many SMEs only prepare annual accounts months after year end which provide little information to help make decisions about the future.
However, increasingly accountants are becoming proactive and offering a great deal more, much of it as valuable advice to SMEs.
They include reporting the management accounts on a regular basis in a format that provides insights such as project reports or profitability by client or by product category. They can also help with analysing alternative funding options and produce forecasts.
You may also be able to appoint them as an arbitrator on your behalf if there is a dispute with HMRC over payments or liabilities, similarly with VAT and PAYE returns.
Again, there is a qualification for accountants offering this service, the CTA (Chartered Tax Advisor). Accountants must be ACCA, ICAEW, or ATT qualified to take the CTA exams.
The additional benefits of the studying, qualifications and professional development, are that your chosen accountant will have the technical knowledge as well as experience from their client base. This can help them understand the needs of your business and provide the basis for giving advice on any problems they foresee or any opportunities there may be to develop and grow.
They will also be able to advise you on the financial implications of any business initiative you may be considering.
Despite the opportunity for accountants, not all of them take this approach as it involves taking the time and trouble to really understand your business. It also requires investment of time on your part as well as some cost for the accountant’s additional input.
So, do you want your accountant to be an information processor or an information interpreter? Remember it’s in their interests to help you grow because as you do, so will they.

Categories
Accounting & Bookkeeping Banks, Lenders & Investors Cash Flow & Forecasting Finance Rescue, Restructuring & Recovery Turnaround

The latest insolvency figures reveal a worrying trend for some businesses sectors

Road sign to liquidation or insolvencySMEs in the supply chain sectors that particularly rely on consumer spending should pay heed to the latest insolvency figures, for January to March 2017.
While the figures released by the Insolvency Service at the end of April show a relatively small increase by 4.5% compared with the last quarter of 2016, the trend has been upwards now for three consecutive quarters.
There were 2,693 Creditors’ Voluntary Liquidations, 68% of 3,967 total insolvencies for the first three months of 2017, affecting particularly the construction and the wholesale and retail sectors.

Consumer confidence, inflation and import costs

As higher prices, particularly for food, have started to feed through into the shops, there have been signs of a weakening in consumer confidence and a slowdown in spending.
While the “headline” story since the New Year has been the demise of 28 large retailers including Jaeger, Agent Provocateur, Brantano and Jones Bootmaker, the implications are clear for those businesses involved in the wholesale supply chain, many of them relatively small SMEs.
Both KPMG and Begbies Traynor, have been monitoring the trends for companies in what they call “significant distress”.
Analysis by KPMG of notices in the London Gazette reveals that the numbers of companies entering administration are still relatively low, however Blair Nimmo, head of Restructuring, has identified a “steady creep in numbers that we’ve witnessed over the last 12 months”.
Begbies Traynor’s Red Flag Alert research for the first three months of 2017 has identified an increase in companies in distress, up by 26% on average over the past year in key sectors of the consumer-facing supply chain, with the Industrial Transportation & Logistics businesses up by 46%, the wholesale sector up by 16%, and the Food & Beverage Manufacturing sector up by 15%.

How do SMEs survive the growing insolvency headwinds?

Given the higher costs of raw materials imports due to the devaluation of £Sterling since the EU Referendum result, businesses will not be able to absorb all these costs and will have to pass them on to customers. This in turn is likely to reduce income for UK focused SMEs and lead to greater pressure on those that have high fixed costs.
As ever, it pays businesses to ensure they are as lean and fit as they can be and that means scrutinising their costs and reducing them wherever possible.
Regular monitoring of cashflow may reveal opportunities for cutting fixed costs and introducing efficiencies, for example outsourcing transport or automating activities such as accounting and invoicing. Another critical area for SMEs is to improve cash flow such as introducing more rigorous follow-up on late payments, and invoicing as soon as possible. Close attention to credit control and collaborating with other small suppliers can also help when dealing with larger customers and getting them to pay on time.
Above all, potentially vulnerable SMEs should not wait to get restructuring help and advice. An objective eye sooner rather than later and before a business is in crisis can make all the difference to survival.

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Accounting & Bookkeeping Cash Flow & Forecasting Finance General

Why do the self-employed in SMEs earn less than their employed counterparts?

K2 Blog March 14 2017 self employed small businessmanOne of the main reasons why there was so much opposition to the proposal in last week’s Spring Budget to raise National Insurance (NI) payments for the self-employed was that they generally earn less than their counterparts in direct employment.
Not only that, but accepting that the primary purpose of NI is to contribute to the costs of unemployment benefits, sickness pay, holiday and maternity/paternity leave, those in self-employment are entitled to none of these. Therefore, the argument that the measure was aimed at introducing more fairness into NI contributions between the two groups was seen as disingenuous.
According to research from the Resolution Foundation published in October last year, the self-employed earn less than they did in 1994-95. At the same time, they now make up almost 5 million of the workforce and their numbers have risen by 45% since 2001-02.
The research also found that the proportion of self-employed business owners with their own staff had fallen.

Who are the self-employed?

To bring greater clarity to the discussion it is important to define the different types of self-employment.
Firstly, as businesses have sought to reduce their overheads on payroll they have seized the opportunities offered by zero-hours contracts and outsourcing work, which has relieved them of their responsibility for contributing to employees’ NI, leave entitlements and pensions.
Consequently, many of the self-employed are workers who cannot be distinguished from employees such as delivery drivers, taxi drivers, cleaners, builders and IT support workers, who might previously have been directly employed.
There is a second group of self-employed, those who have started their own businesses, whether as sole traders, running micro-businesses or larger and these belong to the category of SMEs. They can provide a range of goods and services from plumbing and heating to house renovation to website development to business consultancy. Some, but not all, may be budding entrepreneurs.
In some ways, it is irrelevant whether their employment status has come about by choice or compulsion as businesses have sought to reduce their payroll costs and obligations.
The main trigger, according to the Resolution Foundation, was the 2008 Financial Crash.  It led to an increase in the numbers of the self-employed, introducing more competition in the demand for their goods or services, leading to a decline in both hourly rates and the working hours available to them.
So, competition and the need to cover the costs that would otherwise be borne by employers may account for a proportion of the lower pay of the self-employed, but another consideration is that many are also responsible for the purchase, running and upkeep of any vehicles and equipment needed for their work. Not all of this may qualify as a tax-deductible business expense.  Not only this but they must cover the costs of administering their business such as maintaining accounts, filing tax returns and business insurance as well as covering professional, compliance and training costs.
Closing the NIC gap is not so fair after all.

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Accounting & Bookkeeping Cash Flow & Forecasting General

Employee productivity and how it is changing

Breaking the wall K2 Partners Business Blog

The standard definition of productivity for a business is “A measure of the efficiency of a person, machine, factory, system, etc., in converting inputs into useful outputs.”
It is usually calculated by dividing the output for defined periods by the total costs (capital, energy, material, personnel).
That has served well for businesses involved in manufacture of a defined product and, to an extent, for those in the service sector.

The productivity calculation is changing thanks to technology

While it was straightforward to assign a value to the inputs of labour when production relied on people doing the work the equation needs to be adjusted with the increasing use of automation for all or part of the manufacturing process.
While capital, energy and material may still have a quantifiable cost that can be measured the role of personnel changes significantly.
While, of course, efficiency and optimising output are still essential to maximising productivity, how does labour fit into the calculation, when human beings are no longer performing those repetitive tasks on the production line?
The manufacturing model is changing where by the traditional manual role has largely been replaced by the management of equipment and systems.  This may involve programming equipment to set up the process, monitoring it while running and intervening only when something is wrong or in the event of a breakdown.
The new manufacturing roles require technical knowledge, materials management skills, quality control, administration and planning production. The blue collar worker is now a skilled and often highly trained engineer who no longer needs supervising by a traditional manager.
Even such basic jobs as road sweeping are no longer about a person with a sweeping brush and dustcart. They are now more likely to involve someone operating a mechanised sweeper, which may need more training and skill. Modern tractors and farm equipment take technology to a new level.
While automation can eliminate back-breaking labour and improve productivity in manufacturing, it still needs people with the training and knowledge to operate machines, maintain and fix them and to understand how to get the best performance out of them.
This may result in the need for fewer employees in a business, but with a higher level of skill and education and therefore higher levels of pay. A consequence is less need for middle management.
Therefore, when calculating business productivity where automation is playing a part, the costs of the various inputs, including personnel, and their relative importance will need to be rebalanced.

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Accounting & Bookkeeping Banks, Lenders & Investors Cash Flow & Forecasting Finance Turnaround

Choosing to do business in $dollars, instead of £Sterling

currency exchange boardWhile there is uncertainty and volatility in currency exchange rates, as has been the case since June 2016 and the EU Referendum outcome, many UK businesses might find it more attractive to trade in another currency, especially if they are purchasing goods in another currency.
Since June the value of £Sterling has plummeted by some 15% against the $Dollar and around 12% against the €Euro, making imports, such as raw materials, goods and supplies to the UK more expensive, although it has been positive for those UK companies that trade overseas.
This month the US Federal Reserve increased interest rates by 0.25%, suggesting that there is more confidence in the US economy and in the strength of the $Dollar.

The business advantages of using another currency

It is plainly of no benefit to a UK business operating only in the UK to switch all its transactions to another currency, but the situation is different for exporters and those who pay for purchases in another currency.
For these businesses the decision to switch, most likely to $Dollars, is about taking a longer term view of risk and currency values.
Many businesses work in other currencies and the $Dollar is for many industries the standard currency, as well as the one used when doing business in the Far East.
Opting for trading in $Dollars is changing the way you think about your business, in particular about paying bills, where it might be advantageous to have a $Dollar currency account.
One question to ask is what currency is more suitable given that UK interest rates are driven by the desire to protect employment.  Are US interest rates more stable that the UK?  If the UK is keeping interest rates low to promote employment, on one level that is a measure of instability.
Interest rates have been held down for far longer than they should have been since the 2008 Financial crisis and we would go for trading in $Dollars rather than any other currency.  It is all about managing risk.
But there is a note of caution. The cost of commercial insurance policies for those using $Dollars tends to be much more expensive due to the assumption that a business is more likely to be exposed to US law and the prospect of litigation.
If you got this far, I thank you for reading my blogs and wish you a very happy New Year.

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Accounting & Bookkeeping County Court, Legal & Litigation Finance General

Business insurance – are you properly covered?

business insurance protectionThere are many situations that can be covered by various types of business insurance, some compulsory, others advisable but how does a business choose what is essential?
To some extent it may be about assessing the risk for a specific business but inevitably it will also be determined by how affordable non-essential cover may be.

Business insurance required by law

Most employers must by law insure against liability for injury to their employees arising out of their employment under the Employers’ Liability (Compulsory Insurance) 1969 Act. It should cover all the places where employees are working, whether in the UK or elsewhere.
The minimum level of cover is £5 million and businesses must both display copies of the certificate of insurance prominently where employees can see it and they are advised to keep a copy of the insurance document for a minimum period of 40 years.
The Health and Safety Executive (HSE) is responsible for enforcement and has the power to fine up to £2500 for any day when you are without suitable insurance. If you do not display the certificate of insurance or refuse to make it available to HSE inspectors when they ask, you can be fined up to £1000.

Other business insurance policies to consider

While not required by law other types of cover may be advisable and these will depend on the nature of the business.
Professional Indemnity cover, for example, is likely to be important to such businesses as legal and accountancy firms, architects & design practices and professional advisers.
For anyone selling products whether online or via e-commerce, it is important to have product liability cover in case a product they have either manufactured themselves and supplied or simply bought in and supplied causes damage to either a person or their home for which the customer may then claim compensation. Remember the Samsung phones that caused fires.
Public liability insurance is another business insurance that many would be advised to have, especially if members of the public, suppliers and others visit their premises, as is the case with retailers, but also if they supply a service that is carried out at customers’ premises.
The fundamental question to ask is whether there is a chance that your business activity could cause damage to the public or to their property. Lawyers love customers who are injured while in a shop.
Equally, where a business has contractors regularly supplying services at others’ premises and therefore using vans to travel and to transport expensive tools and equipment insurance cover against theft from the vehicle may be essential, as indeed are the obvious vehicle and premises insurances.
There are also lots of add ons to consider such as policies that cover production delays due to strike action or when equipment breaks or loss of profit due to flooding or fire, and many more scenarios that might be considered.

Where do you go for insurance cover?

The first step is to seek advice from any trade association of which your business is a member. It may be also that appropriate insurance cover is included in your membership fees. One example is the market traders’ association who provide insurance for those who sell goods at craft fairs, indeed many event organisers carry insurance that covers the stall holders.
Failing that, seek out a knowledgeable insurance broker, who can provide advice as well as discuss the pros and cons of the different policies. They can also search out relevant cover specific to the business’ needs.  That way cover may be more appropriate and affordable than a combined all-risk policy, parts of which may not be relevant.

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Accounting & Bookkeeping Cash Flow & Forecasting Finance General

How does the recent business rate revaluation affect you?

business rate revaluation up or down?It has been a long time since business rates were last revalued, but finally the Government’s Valuation Office published draft new rates on September 30, 2016.
They will come into effect from April 2017, leaving a window for businesses to challenge or appeal their new assessment.
In some cases, it was anticipated that small businesses would see a reduction in their charges because they have been based on 2008 valuations and in some cases businesses will be eligible for transitional relief.
Changes announced in March 2016 mean that small businesses with a rateable value (RV) of below £12,000 will be exempt from payment.

Check your business rate revaluation

Businesses can check their new draft business rates online, but the following are some examples:
In Ipswich, a street close to the town centre containing a mix of restaurants and small, independent retailers, one small retail unit of 100 square metres was RV £5,100 (2005), £7,200 (2010) and the draft RV for 2017 is £9,600.
In a small retail mall in Harwood Road, Fulham, London a small retail unit of 54.6 square metres was RV £16,750 (2005), £17,500 (2010) and has remained unchanged in the latest valuation.
By contrast, a large retail unit of 12,754 square metres in Oxford Street, Westminster, London, has jumped from RV £3,630,000 (2010) to draft RV £5,850,000 in 2017.
There is some suggestion that the valuations have been adjusted to allow for a fairer system for smaller businesses taking into account some years of over payment since 2008.
The chairman of the Federation of Small Businesses (FSB) Mike Cherry last week welcomed the review, especially the possibility of relief for some small businesses, but has also called for more frequent revaluations because there will have been a “big jump between the old valuation and the new one”.
The Local Government Minister, Marcus Jones, said “as we make the system fairer up and down the country, nearly three quarters of companies will see no change, or even a fall in their bills, including 600,000 who from next April will have their bills cut altogether”.
We would urge all businesses to check their new valuation online and to share your views on the impact it will have on your business.

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Accounting & Bookkeeping Cash Flow & Forecasting Debt Collection & Credit Management Finance General

The latest on the Government’s Prompt Payment Code initiative

invoice paid illustrationA legal duty for large businesses to report on their payment practices was included in the Small Business, Enterprise and Employment Act 2015 as part of Government initiatives to speed up payment to small businesses.
At the same time the government announced its intention to set up a voluntary initiative, the Prompt Payment Code, to which businesses would be encouraged to sign up.
Although the new rules were meant to come into force in April this year, this was delayed until October.
Now there has been a further update from the Government which states that the statutory duty for large businesses to report will not now come into force until 6 April 2017, at the start of the new financial year, although they are being encouraged to sign up early.
While there is still some consultation taking place and further work planned for the website to refine the signing up process for businesses taking part voluntarily, there has been some progress, according to a letter and announcement last week to those who have already signed up to the code.
Additional measures and a progress report were announced by Margot James, Minister for Small Business and Philip King, CE of the Chartered Institute for Credit Management (CICM), which is administering the scheme.
They include the establishment of a compliance board to oversee the scheme, the proposed future appointment of a Small Business Commissioner and confirmation that central government departments are committed to a target of paying 80% of undisputed invoices within five working days and the balance within 30 days.
The letter also revealed that there have already been successful challenges against those businesses already signed up, of which there are now more than 1,800 from all over the country.
There is more information about the initiatives on the Prompt Payment Code website including a full list of the signatories.
Specifically, our SME clients are encouraged to check whether larger customers have signed up to the code and whether their payment terms conform to the code.

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Accounting & Bookkeeping Cash Flow & Forecasting Finance General HM Revenue & Customs, VAT & PAYE

Quarterly digital tax returns – watch this space!

tax and calculationsQuarterly digital tax returns – watch this space!
The then Chancellor, George Osborne, announced in the March 2015 budget a proposal to radically change the tax system away from annual paper-based returns.
This would apply to everyone, both businesses and sole-traders, and require them to submit quarterly tax returns entirely online.
That was the plan and lengthy and comprehensive consultation was promised before the system would be finalised.
Indeed, this comment appears on the HMRC Roadmap website page, last updated on August 15 2016 : “We do not underestimate the scale of these reforms and are introducing them gradually between 2018 and 2020, because we know how important it will be to get them right and to give individuals and businesses time to adapt.” Quite so!
However, since then there have been a number of delays and changes which have made it hard for SMEs in particular to work out just exactly what will be expected of them and when.
In July, following the changes in Government personnel after the EU Referendum, Accountancy Age reported that HMRC had cancelled a Stakeholder Conference planned for July, as well delaying the issuing of consultation documents, of which there are six relevant to different groups of taxpayers.
HMRC also plans to hold regional and online consultations, but as yet there appears to be no detail.
All of this with a consultation period supposed to be completed by 7th November this year.

So what is going on?

Already as a result of feedback, changes have been made to the proposed plan including possibly introducing a threshold of £10,000 annual turnover, below which all unincorporated businesses and landlords will be exempt from keeping digital returns and submitting quarterly updates, deferring the start of Making Tax Digital for some other small businesses, giving them extra time to get used to digital record keeping and quarterly updating, exempting digitally excluded businesses from digital record keeping and quarterly updating and introducing simplifications, for example extending cash basis accounting to more businesses.
Consultation questions have now been published by HMRC, and appear to be comprehensive, asking among other things for comments and information about the likely additional costs they will face in buying software, in training, and in business and advisors’ time.
We would advise SMEs to make themselves aware of the proposals and ideally respond to the consultation if they wish to have some influence over what will be a radical change for many of them bearing in mind that the 7th November deadline has not been extended – as far as we can ascertain!
In due course we will post notes for SMEs to make sure they are prepared but for the moment we don’t yet know what impact the proposals will have. However, SMEs should be aware that if the quarterly filing of accounts as originally proposed is implemented, compliance will involve a significant investment in both time and money.

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Accounting & Bookkeeping Finance General

Are you prepared for Pension auto-enrolment?

get organisedThere cannot be many employers now who are not aware of the government’s legislation to ensure that all employees are enrolled in some form of workplace pension scheme and for most SMEs the deadline for action is approaching fast.
The new system – called automatic enrolment – started at the beginning of October 2012 with staff who work for the biggest businesses, with others being signed up over the following six years. It is expected that all employers will have joined the scheme by 2018.
Under the new system, those who work in the UK, are aged over 22 and under the state pension age, are not already in a scheme, and earn more than £8,105 a year must be automatically be enrolled. Those employees who already save in a workplace pension scheme or are self-employed will not be signed up.

Who has to comply?

Even if you only employ one person you are an employer and you have certain legal duties.  There is a guide for employers here   The process is now at the point of targeting micro businesses and SMEs with fewer than 50 employees. The Pensions Regulator issues letters telling employers their Staging Date, which is the date by which they must have a pension scheme and administration system operating. You can check your own here
Failure to register incurs hefty fines starting with a fixed penalty of £400. In some circumstances employers can be issued escalating penalty notices at a prescribed daily rate of £50 up to £10,000 depending on the number of staff employed by the business.

What’s involved and how long does it take to set up?

The advice is to allow at least six months before the staging date to make sure all the components are in place.
The employer needs to identify a suitable pension provider willing to provide a scheme.  Some smaller employers have found that providers are only interested in working with those that have a significant number of employees, although the Government has set up a basic scheme called NEST.
If an employer manages their own payroll and uses payroll software they also need to check whether it is able to accommodate pension scheme management or whether they need to buy additional components.
Accountants who have been preparing for helping clients with or managing their auto-enrolment schemes as part of payroll management services have identified some issues that can cause problems.
The first is cost. Buying an add-on package to existing software can cost about £350 and you need to check whether it is compatible with the Government’s online auto-enrolment software.
The second problem is again software-related in that employers will also need to purchase pension providers’ software and in some cases may find that it is unable to “talk” to the Government software. This too may need to be resolved.
Thirdly, there is the complexity of setting everything up. Here, it is wise for a business to check that their accountant managing their payroll, if they have one, has the capacity and is willing to carry out auto-enrolment.
Finally, once a scheme is in place and operating it needs to be administered.  It works on the employer providing Real Time information so employers will need to factor in the cost and time for this.
It may be more cost effective to outsource the whole process to your accountants or a payroll management service, many had been preparing for auto-enrolment for some years and will have dealt with the software incompatibilities and tested them. Alternatively speak to a pensions adviser but they can be expensive and do look for other options like those offered by membership organisations eg the fixed price package offered by the Federation of Small Businesses.
Whichever solution you adopt the time spent on early research will save costs and may avoid fines down the line.

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Accounting & Bookkeeping Cash Flow & Forecasting Finance General Turnaround

Understanding allowable business expenses is important

get organisedThis month is a good time to look at all aspects of your business “housekeeping” for two reasons.
Firstly, it will be some time before businesses have a clear picture of the effects of June’s EU referendum result on the UK economy and on trade so businesses can use this period to bring systems, process and records up to date and develop a clear picture of their current position.
Secondly, late July and most of August are traditionally the time when many people take a break and with the housekeeping done it is much easier to relax and to use the time for thinking and reflection to be reinvigorated for the return to work.
First on our suggested housekeeping list is business expenses and what can be claimed.
A key issue for many businesses is understanding what items are allowable business expenses and this can be important for ensuring a business does not pay out more than it needs to in tax.
It should be said at the outset that the regulations on what can be claimed as a business expense are complex and businesses would be well advised to consult their accountants or tax advisors.
What follows is therefore an overview.  The general rule is that most business expenses are likely to be allowable for tax relief.
This would cover accommodation, use of private cars, meals, repairs and renewals, business rates, energy and other overheads.  The devil, however, is in the detail.
Accommodation of staff is a good example.  Hotel stays would be allowable, but a company renting a flat for staff is only allowable if the journey is considered by HMRC to not be commutable. Travel expenses are also conditional.  Most people are aware that travel from home to work cannot be claimed as a business expense.  However, in some circumstances use of a private car for work is eligible for a mileage allowance at 45p per mile for the first 10,000 miles and at 25p per mile thereafter. In most cases a company car is likely to be more tax efficient.
Meals are allowable if staff are likely to be away from their normal place of work for more than five hours but be aware that there is a lot of HMRC advisory guidance on the details. There is no tax relief for entertaining clients.
Repairs and equipment replacements are allowable as capital expenses if the value of the items is more than £100.
Business rates and overheads are allowable provided the business is occupying business premises. For the self-employed and people working from home the regulations for claiming overheads changed in 2015-16 to a new flat rate allowance graded on how many hours are worked.
The lessons are to seek advice about the details, to understand what precisely can be claimed for and to maintain meticulous records just in case HMRC wants to inspect them.

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Accounting & Bookkeeping Finance General HM Revenue & Customs, VAT & PAYE Insolvency Rescue, Restructuring & Recovery Turnaround

Understanding the benefits and drawbacks of Directors’ Accounts

tax and calculationsHistorically it was common practice for director/shareholders to borrow money from their company and clear the loan with dividends from the company’s profits.
One of the reasons for doing this was to avoid paying National Insurance and PAYE on the drawings, where directors and accountants understandably seek to minimise tax and improve cash flow by treating drawings as dividends.
HMRC are onto this and would prefer directors’ drawings to be accounted for as salary subject to PAYE, which they now monitor monthly through the Real Time Information (RTI) reporting of payroll payments.
It remains the case that directors may receive loans from their company, provided that it is not in financial difficulty and subject to adherence to the provisions of the company’s articles and the 2006 Companies Act. However, loans above £10,000 must have shareholder approval, and terms agreed and documented by the company’s board.

Changes to the tax regulations

Directors should also be aware of changes to the tax liability rules introduced in March 2013 to deter tax avoidance:
If a director’s loan is not repaid within nine months following the end of the company’s accounting period it is treated as an outstanding loan.  This can cause problems for the company because it then becomes liable to a Section 455 tax paid by the company. The director is also subject to income tax as a benefit on interest-free loans. The company, and director on his personal return, must also comply with reporting of all this.
Companies and directors are therefore advised to agree the treatment of loan accounts at the time that the loans are made and note this in a board minute at the time.
Additionally, since April 2016 changes to the rules mean the tax threshold on dividends is £5,000. Above this, directors now have to pay tax at 7.5% if they are basic rate payers and at 32.5% if they are in the higher rate tax band. Also the tax charge on outstanding loans to participators was increased to 32.5% for loans, advances and arrangements made on or after 6 April 2016.
All this may not stop the practice of directors borrowing against expected dividends since the only way HMRC know about a directors’ loan is if it is accounted for as an outstanding director’s loan in the company’s year-end accounts. While there are often directors’ loans at year end, they are normally cleared by declaration of a dividend where the accountants do their job and help companies avoid director loans being a problem.
This practice has been a fairly tax-efficient way for directors and shareholders to draw down money from their company.
However, dividends can only be declared if a company has distributable reserves, essentially retained profits.
The problem comes when the company does not have sufficient distributable reserves. In this case the director loans have to be included in the year-end accounts or in the statement of affairs if the company becomes insolvent.
Liquidators have a duty to recover the directors’ accounts from the directors. In the case of smaller businesses, insolvent companies often have very few assets that can realised so the liquidator is often looking to recover director loans to pay her/his fees.
In view of the personal liability for repaying loans, directors would be well advised to declare dividends on a monthly or at least quarterly basis if they want to avoid being in the position of having to repay a director’s account. If there are not sufficient retained profits, then drawings should be accounted for as salary through the payroll. If cash is tight then withholding payments to HMRC is not the solution. They are tightening the screw and directors should seek help from a turnaround or insolvency professional
 

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Accounting & Bookkeeping Cash Flow & Forecasting Finance General Turnaround

Who makes purchasing decisions in your business?

escalating cash pileControlling expenditure should be a fundamental principle for any business and the business plan should contain details of the company’s purchasing policy and costs in relation to its gross margins and overheads.
Too often the ability to place orders is given to too many or insufficiently experienced people within a business without clear purchasing guidelines that define limits and protect margins.
It is important that there should be senior management oversight of purchasing and that those who place orders do so within the set parameters and budgets such that any additional expenditure needs management approval.
Any purchases that are higher than the set parameters such as above a % cost of sale will mean that goods are being sold to customers for less than the stated gross profit margins and sooner or later this may lead to serious financial problems for the business.
It may be that in some instances if directors consider a purchasing decision, for example if the price of raw materials has risen to the point where it reduces the potential profit margins too far on what seems at first to be a lucrative order from a customer, they would be wise to decline the order.
The two key questions therefore are firstly whether a business has a defined system in place for controlling purchasing expenditure and secondly who in the company is given the power to place purchase orders.

Tight control is key

Here’s a lesson from history to illustrate. Over a 40-year period as its managing director Arnold Weinstock built the General Electric Company (GEC) into a highly successful British owned global business.
He was notorious for maintaining tight control over expenditure and would meet managers annually to set the next year’s budget.  If they wanted to spend £500 more than the limit set they would have to get his approval and be able to make a good, detailed case for why it was necessary. Generally, they didn’t.
There is a lesson for smaller businesses about having robust purchasing systems with parameters such as setting the maximum % for variable costs and budgets for fixed costs.
In relation to overheads and investment in assets, these should be fixed in a budget to avoid over spending. All too often small items are overlooked like staff ordering stationery because they can’t find the stapler or pencil sharpener, when in actual fact there are usually several hidden in desk drawers. Even relatively small purchases can quickly mount up.
While a business will want everyone to be able to do their jobs without every single purchasing decision having to be approved by senior management it is important to both set the limits and then to monitor them.
It is also about being very careful about who in the company has the power to make purchases and how orders are placed. Ideally every order should be placed with a purchase order where a copy is matched up to the purchase invoice. Orders by telephone and email are difficult to monitor and can result in unpleasant surprises, especially when they exceed the budget. And, all too often the person concerned has left when a really big problem arises.

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Accounting & Bookkeeping Cash Flow & Forecasting Finance General

Which is better – stock or cash?

Whether bought-in inventory, finished goods or raw materials, slow-moving stock is not only something that takes up space, it also ties up cash.
Retailers tend to be disciplined with their inventory management, monitoring it item by item to maintain high prices and thereby margins for those that sell quickly and reducing prices or holding a sale for obsolete and slow moving items.
However, non-retail business often keep stock for a long time, without considering the financial aspect of whether it would be better to keep it or get rid of it.
A regular review of stock and its financing is necessary for an efficient business. If stock is purchased on a 30-day credit and has been sold before the end of the period that is good stock and cash management.
It is not so good when money is tied up in stock that has been on the shelf for months, so it is a good idea to have a system of monitoring with regular reviews to assess the value and consider what to do with it.
Most companies account for stock as a current asset on the balance sheet, but this can deceive them into believing its value and the prospect of it being turned into cash. Indeed most small businesses only carry out a stock-take and adjust the stock value in their accounts once a year, normally when they prepare the annual accounts.
Monitoring stock-turn, aging and margins will allow strategy to be set as to how long stock should be held and how to get rid of it.
Regular stock-takes will identify how much cash is tied up and whether or not it is better turned into cash, even when this is at a loss.
Getting the balance right is key to the survival of many businesses.

Categories
Accounting & Bookkeeping General Rescue, Restructuring & Recovery Turnaround

How many suppliers does your business really need?

In the course of our work in helping SMEs to become more efficient and targeted, we often come across businesses that have a large number of suppliers.
Keeping track of ordering, invoicing and payment across many suppliers can be a needless burden on the administrative system. Especially when reconciling your statements with theirs.
It also makes it more difficult for the business to understand and manage the risks that may be hidden in its supply chain.
A typical example of a business with too many suppliers is the building company that goes to a number of different builders’ merchants for the same materials. It may be that at some point they have either found a supplier that was cheaper or that they had used another supplier to source materials not available with their usual one.
Over time, the list of suppliers grows and grows while the original reason for using them no longer applies.
While it is important for all businesses to keep their costs down and therefore to shop around for the best deal, the time spent ‘shopping round’ is a hidden cost that contributes to inefficiency by adding to the administrative burden.
If on the other hand a periodic review of prices is carried out and an approved supplier list is used, then the hidden cost of ‘shopping round’ and the administrative burden of managing lots of purchase ledger accounts can be significantly reduced.
It may of course be that there is an advantage to having back up suppliers but great deals can be achieved with a discount on price and high levels of service where the supplier has the “loyalty value” of your regular, longer term custom.

Categories
Accounting & Bookkeeping Cash Flow & Forecasting Finance General HM Revenue & Customs, VAT & PAYE

SMEs need to keep on top of their tax bills

HM Revenue and Customs (HMRC) may have been accommodating in the early years after the 2008 financial crash, but not any longer.
In the last three years HMRC use of powers of distraint and seizure of goods from SMEs that have failed to pay VAT, PAYE and also on late payment of self assessment tax bills has been rapidly increasing.
In 2014-2015 distraint powers were used to seize business assets from 1,080 SMEs, according to the finance organisation Funding Options, quoted in an article by Business Money in July. By comparison, 1,376 seizures were carried out in 2011-12 and just 730 in 2010-11.
Previously, these powers had almost fallen into disuse. Then, after 2008 HMRC showed some forbearance for businesses facing difficult economic circumstances with them approving approximately 400,000 Time to Pay arrangements.
However, the signs are that for the last three years, with Government pressing for improved tax gathering, distraint has become more and more aggressively pursued and increasingly in cases of late payment of self-assessment tax bills.
Under these powers Revenue officers have enforcement rights and can attend company premises after issuing a Notice of Enforcement if payment is not made within seven days.
The officer can then take control of the company’s assets whether by walking possession (seizure of goods without removal) or immediate removal and if payment is not made within a further seven days, the goods can be sold to recover the money owed.
The introduction of real time monitoring of PAYE and wages SMEs a couple of years back means that HMRC has far more accurate information about what companies are likely to owe in tax and are plainly acting far more quickly and decisively to recover it.

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Accounting & Bookkeeping Banks, Lenders & Investors Business Development & Marketing Finance General

How can a start-up business assess the advice it is given?

An intending start-up business needs advice that is good quality, good value for money and, crucially, impartial.
Getting good quality advice that is value for money is the challenge for every entrepreneur and start-up on a budget.
Whereas the large corporate looking for advice can afford expensive lawyers and advisers, this is rarely the case for a start-up, which has to be more careful about where it spends its money.
It is important to identify those areas for which it is important to pay as opposed to those where it is less so.
Typically the areas where advice is needed include fundraising, investor and shareholder agreements, terms of trading with clients and suppliers, employment, finance and accounts, business planning and development, production, systems, sales and website. Wow, it is a lot and as a business rescue specialist, it is easy to see which areas were neglected when a business gets into financial difficulties.
One way of prioritising what is worth paying for and is good value is to do a lot of research and exercise a degree of judgement. Most lawyers and advisers will provide a level of free advice so take advantage of it. In addition other business owners are normally happy to share the benefit of their experience, but beware that they may only know the way they dealt with a problem and may not be able to advise on alternatives, hence the need to do lots of research.
A good tip for assessing advice you are given is whether an adviser is outlining a range of possible alternatives as options and helping you work through the assessment process to consider the pros and cons of each option.
Steer clear of those who simply tell you what to do as you don’t know if they only know one way, or they have an agenda for recommending their way.
Furthermore you won’t learn from such advisers as it is the assessment and exercising of judgement about alternatives that helps you learn how to manage advisers and often reject advice.
Only when you have spoken to a number of lawyers and advisers will you be able to tell who is trying to sell you a product and who is giving genuine advice.

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Accounting & Bookkeeping Business Development & Marketing Cash Flow & Forecasting Finance General Turnaround

Do SMEs gather enough data to make informed decisions?

While large companies tend to have systems that provide information for management to monitor activity and make informed decisions, small businesses tend to ignore these in the mistaken assumption that because the directors are involved in everything they know what is going on.
Many SMEs simply focus on profit and loss, where the directors monitor how profitable the business is. They will also certainly keep an eye on the bank account. This may reassure them about their cash position.
However, without a balance sheet and regular scrutiny of the current assets: book debts and work in progress, stock and short term liabilities: factoring, trade creditors and VAT/PAYE it is difficult to know the real situation.
It is common for small businesses to run out of cash because they simply haven’t been paying suppliers or HMRC.
The reassurance of cash in the bank is little comfort when liabilities are mounting.
We would argue that it’s essential to have a basic dashboard of key figures to review regularly, including some of those items listed above. This will give a more accurate picture of where the business is today, but even so does not necessarily tell you where it is going.
Monitoring performance also requires further information, such as debt collection, aged debtors or pre-payment by customers as well as sales related information such as inquiries, quotes and sales orders are equally essential for planning the future.
While every business is different, each should have a dashboard of information that will help it monitor performance and adjust plans to ensure it doesn’t run out of cash.
What information is crucial to your business future?

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Accounting & Bookkeeping Business Development & Marketing Cash Flow & Forecasting Finance General Turnaround

Why do SMEs need to understand their balance sheet?

For years we’ve seen many SMEs who do not produce regular management accounts, which we would argue are far more important to the small company than year-end accounts.
Too many SMEs rely on the profit and loss and do not put enough time into understanding their balance sheets.
Yet it is the balance sheet that tells a business what is really in the ‘tank’ which is more than simply the cash in the bank. Current assets and in particular those like recent debtors, work in progress and easy to sell stock that can all be quickly turned into cash are key. The other item to monitor is current liabilities such as trade creditors and HMRC liabilities. Withholding payment can provide temporary respite and even improve the cash balance in the bank but creditors don’t go away.
A related issue is that a lot of SMEs are reliant on factoring or invoice discounting their book debts which essentially means that there is little cash to come back to them when the book debts are paid. All too often such companies have large liabilities without current assets to service them so they become reliant on new sales or prepayments which are in fact another liability.
If, for example, a business has book debts of £10,000 which are factored at 70% and a liability to trade creditors of £5,000, it has a problem because it really only has £3,000 to pay the trade creditors since the factoring company will keep £7,000 of book debts when they are paid.
It is crucial for all SMEs and in particular those planning to grow to understand their balance sheet and ensure that they have sufficient cash to fund growth without over trading, ie running out of cash.
I shall address monitoring the balance sheet and possible key indicators in a future blog.

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Accounting & Bookkeeping Cash Flow & Forecasting County Court, Legal & Litigation Debt Collection & Credit Management Factoring, Invoice Discounting & Asset Finance Finance Rescue, Restructuring & Recovery Turnaround

Can SMEs afford to recover debts?

From this week SMEs wanting to pursue recovery of a debt of £20,000 or more through the civil courts will have to pay an advanced fee of £1,000 or more.
The fees for civil courts have been increased by an estimated 600%, on a sliding scale calculated at 5% of the value of the amount claimed.
The payment has been increased by more than the actual cost of court action and is therefore called an “enhanced” fee.
The worry is that debtors will have even less incentive to pay what they owe if they suspect their creditor cannot afford the court fees to recover debts.
SMEs would be well advised to take even greater care to protect themselves when taking on new customers. For B to B services it is always advisable to check the credit history of a potential business client and be very clear on the wording of any contract.
Businesses should also check the small print of any credit insurance they might have. They need to know the cost of making a claim in addition to that for the credit insurance as claims normally require proof of default such as getting a court judgement and enforcing this before being able to make a claim.
This also may justify factoring where the finance provider normally collects the debts, although beware any recourse clause that allows them to transfer uncollected debts back to the company.
For both B to B and B to C businesses it is also advisable to review credit risk and terms such as deposits, significant early payment discounts and security including personal guarantees should be considered. Why wouldn’t a personal guarantee be provided if the client’s intention is to pay the debt?
A supplier of goods to Viper Guard, my vehicle parts company, offers a 30% discount for payment within 30 days. They always get paid on time.
While final approval was passed in the House of Lords last week, it is expected that the Law Society and other lawyers’ representative bodies will seek a judicial review of the legality of the new charges.

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Accounting & Bookkeeping Cash Flow & Forecasting Factoring, Invoice Discounting & Asset Finance Finance Insolvency Rescue, Restructuring & Recovery Turnaround

Does your business have adequate procedures in place?

Procedures can help avoid nightmare situations like the example below.
We came across an extreme example recently of how seemingly small things can escalate to create a massive problem.
A drum of cable was ordered and delivered to a company from a supplier. The goods were delivered to one site, but the delivery note was sent by email and signed for by someone at head office, who did not check the actual delivery.
The supplier subsequently sent an invoice to the accounts department at head office, located at a different site to the delivery address. The invoice was for £55,000. Nothing was done to check validity of invoice until the company received notice of intention to issue a Winding Up Petition from the supplier’s factoring company.
It was only at this point that anyone looked at the details on the invoice. Clearly, delaying payment is one issue but the situation has been made worse by leaving it so late to deal with the realisation that something was fundamentally wrong as the usual price for a drum of cable was in the region of £2,800.
Unfortunately, although the price on the order was wrong, goods had been supplied and a delivery note was signed. This was reasonably taken as confirmation that the client was happy to pay an invoice for the amount on the order. Even the creditor’s approach to dealing with late payment was logical.
The problem was trying to resolve the situation.
This could all have been avoided if the company had had any one of a number of procedures in place.
Possible procedures include using approved suppliers, checking prices, checking orders, inspecting goods, not signing delivery notes without carrying out checks, approving invoices for payment and approving payment, which could have avoided this situation.
The key message is that procedures prevent small problems from escalating into nightmare situations.
Do you have adequate procedures in place?

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Accounting & Bookkeeping Business Development & Marketing Cash Flow & Forecasting Finance General Rescue, Restructuring & Recovery Turnaround

Planning ahead? Declutter first

The period between Christmas and New Year is a time when many SMEs plan ahead for the next year.
Something that is often forgotten, however, is that it is difficult to see clearly through a pile of unfinished business that has been put to the bottom of the list because it was not urgent.
Is your book keeping up to date? Have you done your expenses? Does filing need attention? Is it time to cull some of those contacts who might have been useful but with whom you have had no interaction?
Planning ahead is not only about setting new goals and targets but also about becoming more organised so that progress can be monitored and reviewed at regular intervals, and your plans adjusted accordingly.
Preparing for next year is not easy if the information on the past year’s performance is not up to date.
Equally it is hard to think clearly, let alone plan when surrounded by clutter or outstanding actions.
If this is a situation you recognise, perhaps the decluttering process will encourage you to consider how to make life easier next year. There are a number of ways to reduce the build up of clutter, they are however boring since they involve discipline which is something most entrepreneurs lack.
The logical solution is to set aside a specific slot in the diary, every day, week or month to ensure that the low priority but essential jobs such as record keeping and admin get done. It also makes sense to ask why you are doing tasks, indeed your time is valuable so stop doing non essential tasks if they aren’t necessary, or consider outsourcing regular activities such as accounts or filing.
Loud music can help you declutter – I recommend Queen.

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Accounting & Bookkeeping Cash Flow & Forecasting Finance General HM Revenue & Customs, VAT & PAYE Insolvency Rescue, Restructuring & Recovery Turnaround

Record keeping and HMRC communication

SMEs should be prepared for HM Revenue and Customs (HMRC) to become more aggressive in following up on late payment and tax avoidance.
MPs criticised HMRC this month after it emerged that the difference between the amount it should collect and its actual collection total had increased by £1 billion (from £33bn to £34bn) in the year to April 2013.
The tax gap is also forecast to increase by a further £3bn for the year to 2014.
The House of Commons’ Public Accounts Committee has also criticised HMRC for not doing enough, quickly enough in tackling tax avoidance schemes.
SMEs are arguably easy targets when HMRC is coming under pressure so they would be wise to ensure that their records are all in order and payments up to date.
It is important to keep copies of all filings and communications with HMRC, preferably confirming phone calls in writing and to not ignore any communications from them.
If you are unable to pay a liability, they are helpful and providing you are proactive they will agree payment terms. If you do agree payment terms then stick to them otherwise they won’t believe any other undertakings you give so make sure your cash flow forecasts are realistic.
Independent of making any payments, make sure your various tax returns (VAT, RTI -PAYE and corporation tax) are submitted on time to avoid automatic penalties.
If it is all becoming too much, remember tax is one area where early help from a professional can be invaluable.

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Accounting & Bookkeeping

A chance to get involved in a much-needed review

The terms and conditions governing most financial transactions affect us all in both our business and our personal lives.
A modern, properly transparent and regulated personal property security law, or transactional law, is central to the functioning of an economy, affecting everyone from small businesses, borrowers and finance providers of all types, creditors and debtors, lawyers, insolvency practitioners and lawyers.
According to Professor Louise Gullifer, executive director of the Secured Transaction Law Reform Project, a wide-ranging project investigating English transaction law, the current situation has serious flaws, some of which follow:
It is a complex mixture of case law and a number of statutes, which may guarantee lawyers an income but is opaque to both them and the non-experts it might be affecting.
Current law on fixed and floating charges can affect the cost of credit and the willingness of financial institutions to lend especially to unincorporated small businesses, forcing them into structuring themselves in forms that may not be appropriate to their needs in order to access secured finance.
In the case of insolvency, the lack of an up to date, clear and transparent registration system for secured assets can complicate matters for both creditors and debtors.
Business rescue is often hampered by the emergence of security that is not registered with Companies House or on the Land Register. This relates to a lack of transparency about ownership or control of specific pledge assets that distorts most balance sheets such that corporate solvency and viability is often not clear.
This is a wide-ranging and comprehensive project looking into this and the organisers are inviting as many people as possible to get involved, make comments, or raise concerns.  There’s more on the secured transactions law reform project website: http://securedtransactionslawreformproject.org/

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Accounting & Bookkeeping Banks, Lenders & Investors General Rescue, Restructuring & Recovery Turnaround

Further evidence that a safe pare of hands is not enough for growth

Some new figures on attitudes to innovation from Price Waterhouse Cooper reinforce the point that growth will not come from being risk averse and hoarding cash.
In the UK the most innovative top fifth of companies grew 50% faster than the bottom fifth and, more alarmingly, the survey found that in the UK just 32% of companies regarded innovation as very important, compared with 46% of German and 59% of Chinese companies. Just 16% of UK companies planned to prioritise product innovation in the coming year compared with almost 33% globally.
Further proof, if it were needed, that, while it would of course be foolish to be complacent about economic recovery, the risk-taking, innovative manager is needed more at this point in the cycle than the risk-averse accountant.
 

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Accounting & Bookkeeping Banks, Lenders & Investors Business Development & Marketing Rescue, Restructuring & Recovery Turnaround

A safe pair of hands does not include plans for growth

UK companies are reportedly hoarding as much as £700 billion in cash. Despite this, business investment grew by just 1.7% in June, according to Bank of England Governor Mark Carney, in his first speech to businesses in Nottingham.
It appears that businesses are still not confident of sustained economic recovery, and this may be understandable following the shock waves after the onset of the global economic crisis in 2008.
When times are hard the general rule is to put an accountant in charge as they will basically hoard a company’s cash.  Accountants are generally pretty risk averse and when the emphasis is on controlling cash flow they are a mainstay of business survival.
But at what point in the cycle should companies start to look at investment and growth for future profits? And at what point should accountants take a back seat and hand over to someone else?
In UK we tend to be slow to adapt to changes in the market. Let’s face it no one will criticise managers for not losing money. Only too late will shareholders realise they have been left behind.
We are still pursuing a strategy of hoarding cash when perhaps the time has come to shift from pessimism to optimism and at the very least we should be planning for growth. Now is the time for carrying out market research, modest investments, testing markets and building capacity for growth. 
We need managers with courage, managers who value mistakes and will learn from them, managers who know how to grow businesses.

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Accounting & Bookkeeping General HM Revenue & Customs, VAT & PAYE Insolvency Voluntary Arrangements - CVAs

Beware of Directors’ Loan Accounts

Accountants often advise clients to use directors’ loan accounts as a device to help minimise their personal tax liabilities. However, be warned, they only work when the directors are also shareholders and the company is making profits.
Essentially they involve the directors borrowing money from their company and drawing only a minimum salary through their company’s payroll. The loan account is paid off by declaring a dividend and this is a legal way for directors to minimise their personal tax and it avoids having to pay employee and employer NI contributions.
This is fine when a company is profitable but it can become a problem if the company does not have sufficient profits as distributable reserves that can be used to clear the loan.
We are coming across increasing numbers of companies that have not made a profit and where the loan cannot be cleared, leaving the directors effectively owing money to the company.
This can be a serious problem if the company is hoping to reach a Time to Pay (TTP) agreement with HMRC to defer payment of corporation tax, PAYE or VAT because HMRC generally stipulates that such loans are repaid as a pre-condition of approval.
Similarly, when proposing a Company Voluntary Arrangement (CVA) or when a company becomes insolvent, the appointed administrator or liquidator will most likely ask the director(s) to repay the loan. Before approving a CVA, experienced creditors particularly HMRC also tend to demand repayment of directors’ loans.
It is often forgotten that such attempts to reduce tax carry the risk of creating a huge personal liability. To avoid it, we recommend that such dividends are declared in advance so as to avoid a loan or at least regularly to avoid building up a huge directors’ loan account. This avoids the normal practice of waiting until long after year end when the annual accounts are prepared, during which time the company may incur losses that mean dividends cannot subsequently be declared.
A further note of caution relates to any directors’ loan account outstanding at the company year end, which will be highlighted to HMRC in the accounts. Despite any intention to reduce the tax liability, tax legislation seeks to limit the benefit by imposing a section 455 CTA 2010 tax liability (under Corporation Tax Act 2010, formerly s419 of the Income and Corporation Taxes Act 1988). While this tax can be recovered when the loan is subsequently repaid by the director, whether in cash or as a dividend, it triggers a significant tax liability on the company.

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Accounting & Bookkeeping Cash Flow & Forecasting County Court, Legal & Litigation Debt Collection & Credit Management Factoring, Invoice Discounting & Asset Finance General Interim Management & Executive Support Rescue, Restructuring & Recovery

Companies are failing to manage Debt Collection and Credit terms

Many companies are risking their own solvency and ability to carry on trading because they neither manage their debt collection proactively nor have clear procedures for setting and imposing credit terms with their customers. Consequently they are suffering from late payments, or worse having to write off invoices due to bad debts.
They compound the problem by extending credit to customers who turn out to be a bad risk.  If a customer is itself borrowing money under a factoring or invoice discount facility then the company is depending on their customer’s customers thus creating a pack of cards that if recoursed as a bad debt after 90 days could bring down everyone in a supply chain.
I believe the root of the problem to be the company’s own credit management where I find that very few companies have a robust system in place.
The key steps are to do a credit check on any new customer, to set limits, manage them and regularly review customers’ credit levels.
Getting paid however requires more than just a credit check, it involves starting management of invoice payment long before it is due. Checking the invoice is approved for payment for example, will avoid discovering that the order was not fulfilled exactly as required, or the invoice has not been received! 
Paperwork is crucial. There should be a procedure in place whereby the delivered/ completed order is signed for/ off with a clause on the document that includes written confirmation that the customer’s requirement has been satisfactorily fulfilled.
In addition companies also need late payment procedures. If an invoice remains unpaid after the due date, a robust system for managing late and non paying customers should include putting a stop on processing any further orders and debt collection that may result in litigation, and enforcement if necessary.

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Accounting & Bookkeeping Business Development & Marketing Cash Flow & Forecasting General

Franchising Can Be Great if You do the Research and Check the Small Print

Many people dream of owning their own business and in the current economic climate are finding themselves pitched into starting up perhaps before they are quite ready.
A franchise often comes with an established brand, support in training, promotional materials and advice so it is tempting to see buying into a franchise as a safer option than going into business completely independently. 
But sinking savings or redundancy payments into any kind of business is a risk and a franchise is no different.
The big danger in taking on a franchise is getting a false sense of security that someone else is responsible for your business. They aren’t and a business plan is as important for a franchisee as for an independent trader.
Also, while the franchise provides support, it may also impose limits on independent action in order to protect its brand and reputation. The most successful franchises have tested their business model and methods and incorporated these into the package. It can happen that a franchise has failed because the franchisee has failed to follow the advice.
In a recent case of a franchise business in difficulty one of the biggest issues was that the franchisor declined to take any legal steps to protect its intellectual property or its franchisees’ rights.  
The franchise model offered complete geographical coverage and each local franchise unit’s success depended on the whole network‘s efficiency, but there was nothing to stop people who had gained privileged knowledge within the franchise from setting up in competition.
It is essential when setting up any business to scrutinise any legalities required, take advice and to negotiate. Until comfortable with the terms do not buy into a franchise.
Essentially, yes, a franchise can be a very good business opportunity but it does not eliminate much of the risk inherent in setting up a business and needs the same preparation work as for any business start-up.