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Cash Flow & Forecasting Finance General Uncategorized

What is the difference between a Depression and a Recession?

recession and depressionBoth a recession and a depression are characterised by an economic decline but the difference between them is down to the length of their duration with depressions lasting years.
An economy is defined as being in recession when there have been two consecutive quarters in which growth as measured by GDP (Growth Domestic Product) has contracted.
This is usually caused by a reduction in business activity and consumer confidence, such that businesses may start laying off employees and cutting back on production and on investment as their focus shifts almost entirely to their cash flow and balance sheet.
In the most recent recession, in 2008, the precipitating factor was a liquidity crisis that began in the USA where banks had lent what was perceived to be too much money on what came to be seen as risky mortgages on which borrowers then defaulted. This resulted in a loss of confidence in banks, which declined to lend to each other which in turn led to a liquidity crisis.
Recessions are much more frequent than are depressions, indeed, according to an article in Business Leader in March this year: “In the past 100 years, there have been dozens of recorded recessions (both national and international) – compared to just one depression in the same time period.”
The last depression was in the USA beginning in 1929 and lasting for a whole decade. While not strictly defined, a depression is characterised by very high levels of unemployment such as 25%, a dramatic fall in international trade such as by as much as two-thirds, and prices falling by more than 25%. They are also characterised by significant declines in stock market values and a large numbers of bankruptcies.
There has been some speculation that the Coronavirus pandemic could precipitate a depression given how much economic activity has ceased as a result of the lockdown rules imposed by many countries. However this is simply speculation and the short term nature of its impact is unlikely to be the sort of once in a one hundred years event that causes dramatic and long term economic collapse.
The IMF (International Monetary Fund) has warned that the situation could provoke a recession as severe as in 2008 but none of the serious pundits are predicting a depression.
In fact, some economists argue that a repeat of 1929 could not happen because Central banks around the world, including the USA’s Federal Reserve, are more aware of the importance of monetary policy in regulating the economy and will therefore step in with support and stimulus packages to forestall this.
 

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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
Cash Flow & Forecasting Insolvency Rescue, Restructuring & Recovery Turnaround

UK business rescue culture isn’t working and new proposals won’t work

Rescue culture is surely preferable to the grim reaper of insolvencySince the Cork Report in 1982 that led to the Insolvency Act 1986 (IA86) there have been a number of initiatives that have led to legislation aimed at promoting a rescue culture in UK.
The shift was from a penal approach to insolvency one based on a belief that saving insolvent companies by restructuring offers a better outcome for all concerned than the alternative of simply closing them down.
This can be achieved by putting the company into Administration, where an IP (Insolvency Practitioner) takes over the running of the company, including negotiating with creditors with the aim of saving the company or at least saving the business by selling it to new owners. In addition to benefitting secured creditors Administration also helps save jobs.
The alternative is a CVA (Company Voluntary Arrangement) where the directors effectively reach agreement with creditors for revised payment terms such as “time to pay” and sometimes for a write down of the debt as a condition for the company surviving. A CVA is supervised by an IP but the directors remain in control providing they meet the revised terms.
There are problems with the current regime as both cases require an IP to be involved and both are enshrined in the IA86 which means that they are tarnished by the reference to insolvency. While this might be the case, it encourages a self-fulfilling prophesy and all too many companies fail again shortly after going through Administration or a CVA which might suggest the restructuring measures were not sufficient when perhaps other factors might also contribute to the restructuring not being successful.
One provision that is missing from insolvency legislation in the UK, when compared to the USA’s bankruptcy protection (Chapter 11) and Canada’s Companies’ Creditors Arrangement Act (CCAA), is some breathing space, or moratorium, that works in practice to allow time to develop and agree a plan before entering any formal procedures.
A moratorium would provide for a temporary stay of action by creditors and suppliers while a rescue plan is devised, and it is argued, would encourage directors to act earlier when their business is in difficulties.
Indeed, there are current provisions for a CVA moratorium as a 28-day period to allow for preparing CVA proposals but it doesn’t work and is rarely used because IPs as supervisors of the moratorium have been advised by their lawyers that they could be held liable for credit during the moratorium period. It is logical therefore that IPs prefer Administration which gives them the control necessary to manage any such liabilities.
This has been ignored during the latest initiative by the Insolvency Service who, as part of efforts to improve the UK rescue culture, have consulted on proposals for a different moratorium period, presumably one that that would allow for a broader breathing space than the current CVA moratorium.
While new legislation has not yet been enacted, it would appear that the consultation has resulted in plans for a 28-day moratorium with scope for a 28-day extension. This proposal on the face of it would appear sensible but like the CVA moratorium it won’t work in practice for the same reasons: it must be supervised by an IP and it could expose IPs to liability to creditors.
Further confusion on behalf of those proposing the new moratorium relates to proposals that a business may only apply for a moratorium if it is still solvent and able to service its debts. This makes no sense, why would a business that is able to pay its debts risk damaging its credibility and ability to operate by advertising the fact that it is heading into difficulties by appointing an IP as supervisor of a moratorium that is part of insolvency legislation?
This is surely counter-productive to any attempts at saving a business since the moratorium would cut off its credit.
In my view, rescue legislation should be part of the Companies Act and if supervision is deemed necessary, then a broader range of professionals ought to be approved, not just IPs.
Furthermore, it is hard to see why an IP would not push for Administration instead of a moratorium and taking on the related liabilities; turkeys don’t vote for Christmas.
The credit for the prospective and in my view flawed legislation goes to R3 whose lobbying on behalf of IPs has captured the turnaround space and in doing so has helped kill off initiatives to develop a rescue culture.

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Business Development & Marketing Cash Flow & Forecasting Insolvency Turnaround

How to make failure your first step towards business success

failure is just one step on the road to successNone of us is perfect.  Perhaps that is why we admire so-called successful people so much.
But behind almost every business success lies a series of failures. Just ask Thomas Edison, inventor of the electric lightbulb, or Richard Branson, who has made no secret of his past business failures, or even Luke Johnson, investor in and chairman of the recently-failed Patisserie Valerie and business blogger who has written extensively about failure and pertinently for him how to spot and prevent it.
Edison said of previously unsuccessful attempts at his invention: “I have not failed. I’ve just found 10,000 ways that won’t work.”
He also said: “Our greatest weakness lies in giving up.” This along with learning the lessons from failure is the key to understanding how successful people approach failure.
Failure would be better rebranded as a trial and error approach to achieving goals where essentially each instance of failure is primarily a learning experience. Each failure simply requires humility that recognises our fallibility and a degree of honesty, thought and a willingness to learn.

Converting failure to success is all about attitude

A business failure can be a devastating experience but the worst things you can do are wallow in self-pity, sink into a depression, give up or, even worse, blame others. These characterise the behaviour of a victim.
There are plenty of business gurus with advice about dealing with failure, and most will start with advising you to accept that you may have been to blame, but the key is to move on by analysing what, precisely, went wrong and to then try again, differently. Trial and error.
Firstly, you should resist the urge to repeat past mistakes by trying the same thing again, only bigger or cheaper. For example, if your customers aren’t buying your products or services you need to give careful thought to whether your business offers something they want, in the way they can buy it, rather than something you thought was a great idea but they don’t want or don’t know about. How much market research did you actually do?
Secondly, how competent are you at running a business?  Did you have a business plan? Did you regularly check cash flow, produce management accounts and so on?  Did you put in place robust credit control and other processes? We cannot all be good at everything so if you feel you do not understand any of these subjects properly you should have the humility to get in expert help and be willing to act on it.
Were you sufficiently passionate and committed to your business? It may have seemed like a sure fire way to make a lot of money, but that, on its own, is no guarantee of success.  It is also important to be emotionally invested in what you are doing and committed to making it work.
There are plenty of inspiring examples of people who have become successful after multiple failures but what they all have in common is an ability to be honest with themselves and to learn from others, to be passionate about their idea and to never give up.

Categories
Business Development & Marketing Cash Flow & Forecasting General Insolvency Rescue, Restructuring & Recovery

Business failure can be a self-fulfilling prophecy

nusiness failureIt is often also a predictable inevitability.
The financial website Investopedia defines irrational exuberance as unsustainable investor enthusiasm that drives asset prices up to levels that aren’t supported by fundamentals.
Eventually, this becomes an unsustainable “bubble” as in the so-called “tulipmania” in the Netherlands during the 1630s, the dot com bubble of the late 1990s and more recently the collapse of many lending organisations through artificially high property prices that resulted in the 2008 Credit Crunch.
The result? Business collapse, often with repercussions well beyond those at the centre of the crisis.
Over-confidence among SME business owners may lead to failure, albeit anyone leading a company must have some self-belief and confidence to make a success of a business.  Taking risks should be based on a calculated strategy underpinned by a consideration of the risks versus the prospects of success.
But the opposite may also apply and equally lead to a business failure. Lack of confidence in a strategy and a reluctance to take risks may result in a business playing safe and stagnating. This can be due to managers not really believing their strategy will work and thereby anticipating failure in a way that reinforces their expectation. This is often the case when manages play it safe.
This may be exacerbated if the company is led by a CEO who is cautious and conservative, and who does not encourage new ideas.
It is common in businesses that have a blame culture where any new initiatives are suppressed.
But that is not how successful entrepreneurs, like the late Steve Jobs, create successful, growing companies.  Jobs was famous for ignoring preconceptions about what can and cannot be done.

What other influences increase the likelihood of business failure being a self-fulfilling prophecy?

Short term thinking can affect a business, not only when it leads to pressure from investors for profits and dividends at the expense of investment and growth.  It can mean that the CEO or business owner is distracted from thinking strategically for the longer term.
Caution over investing can become counter-productive especially when the general business and economic climate is pessimistic and businesses sit on money that could be invested. Over time this reduces productivity by not replacing old plant and equipment or hardware and software to the point where they are costing excessive time and money to maintain or use.
Failure to keep up to date with the latest innovations can lead to a business losing ground against its competitors and eventually losing customers and orders.
It takes a combination of courage and caution, wisdom and daring to keep a business growing and moving forward – and the help of a mentor or adviser to add perspective and help avoid a predictable inevitability.