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Banks, Lenders & Investors Business Development & Marketing Finance General Turnaround

Is commercial property investment no longer a safe haven?

commercial property a safe investment?Commercial property pre-pandemic was considered one of the more secure options for money by investors, particularly by pension fund managers.
But the consequences of changing consumer behaviour, the aftermath of the pandemic lockdown and the retail High Street revolution would suggest a pause for thought and perhaps a rethink.
While the most obvious sector of business related property to be in trouble is retail it may prove not to be the only one.
Retail has been hit by a significant move to online shopping that has been building for several years, but it is also beset by what has been called an archaic rental collection system, whereby rents are payable quarterly.
The most recent Quarter Day was on 24th June (Midsummer Day) and it has been estimated that in the region of just 14% of retailers were paid their rent that day.
It was no surprise, therefore that Intu, owner of some of the UK’s biggest shopping centres, such as Lakeside and Manchester’s Trafford Centre called in the administrators the day after the Quarter Day.
Intu had been struggling even before the lockdown as a result of a list of store closures announced throughout the year so far, including well known names such as Warehouse, Oasis, Monsoon, Quiz, Pret A Manger and others. It has been estimated that in excess of 50,000 jobs have been lost in the sector so far.
The lifting of lockdown in retail is not likely to help to restore the High Street’s fortunes given the restrictions and limitations shops have had to impose to ensure customers are safe from infection.
But commercial property is not only about retail.
Lockdown meant that many businesses had to close their offices and again, they have only been able to re-open amid considerably changed circumstances for safety reasons.
Not only this, but many previously office-based businesses have discovered that their employees can work efficiently and often more productively from home and have therefore they have been reviewing their business models to enable employees to carry on working remotely.
Where they have a need for some employees to be in the office at least some of the time, they have introduced rigorous sanitisation measures, abandoned such practices as hot desking, installed safety screens at more widely-spaced desks and introduced flexible working so that employees no longer have to arrive or leave at the same time. Much of this is aimed at helping staff avoid travelling on crowded public transport but it is  also a recognition that flexibility is benefitting both employers and employees.
The trust issue assumed by management has also largely been allayed; indeed staff have tended to work harder at home than they did in the office with few companies experiencing any loss in productivity. I would argue that requiring staff to work in the office was never a trust issue but more one related to the egos, status and security of managers who need the reassurance of having staff on hand; nothing to do with employees’ ability to work.
Inevitably, the successful experiment will mean that many businesses no longer require such large commercial premises and will terminate leases as soon as possible to downsize the space needed.
Indeed I know of two large professional firms who were about to move into larger offices in the City when the lockdown hit, fortunately for them they hadn’t signed the lease and have since decided then no longer need larger premises since everyone has worked perfectly well from home.
Furthermore less space will be needed as the recovery to pre-lockdown levels is looking unlikely.
Earlier this year McKinsey produced a paper full of advice for private equity and investors in commercial property about the radical changes they would need to consider for the future.
“Many will centralize cash management to focus on efficiency and change how they make portfolio and capital expenditure decisions. Some players will feel an even greater sense of urgency than before to digitize and provide a better—and more distinctive—tenant and customer experience.”
And this was just the start!
It went on to suggest that commercial property owners, especially in B2B environments, will have to change their behaviour and “engage directly with tenants. They should follow up quickly on the actions they have discussed with tenants. Not only are such changes the right thing to do—they’re also good business: tenants and users of space will remember the effort, and the trust built throughout the crisis will go a long way toward protecting relationships and value.”
However, the report does suggest there will be some commercial property niches that could benefit from the pandemic upheaval, such as commercial storage, and in time there may be others.
There is no doubt that the nature of the commercial property market is changing, but it is perhaps premature to predict its demise.
#commercialproperty #safeinvestmnent #propertymanagement #commerciallease
 

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Banks, Lenders & Investors Cash Flow & Forecasting Finance General Insolvency

Something for everyone in the Spring budget – but will it be delivered?

Spring budgetWho could envy a Chancellor having to deliver a Spring budget just one month into the job and in the midst of a global pandemic?
The Spring budget came after the early morning announcement of by the BoE (Bank of England) of an interest rate cut from 0.75% to 0.25%. Was this an outgoing Governor stealing an incoming Chancellor’s thunder?
With short term measures to help businesses deal with the Covid-19 consequences and others dealing with the environment, infrastructure, business taxes and addressing regional inequality the Spring budget covered them all.
The headline was a commitment to invest in infrastructure in support of the government’s commitment to ‘level up’ the economy by focusing investment on the Midlands and North: “over the next five years, we will invest more than £600bn pounds in our future prosperity”.
Many worries of SMEs were addressed by the £30bn package of short term measures to deal with the consequences of the Covid-19 epidemic.
They included abolishing business rates altogether for a year for small retailers with a rateable value below £51,000 extended to include museums, art galleries, and theatres, caravan parks and gyms, small hotels and B&Bs, sports clubs, night clubs, club houses and guest houses.
There was also a promise that business rates as a whole would be reviewed later in the year.
Any firm that is currently eligible for the small business rates relief will also be able to claim a £3,000 cash grant.
The Government will also cover up to 80% of a coronavirus loan scheme to cover the cost of salaries and bills and will offer loans of up to £1.2m to support small and medium sized businesses.
£2bn will be allocated to cover firms employing fewer than 250 people that lose out because staff are off sick with the cost of a business having to have someone off work for up to 14 days refunded.
The benefits rules will be relaxed to enable those who currently do not qualify for sick pay, such as the self-employed and gig economy workers, to claim benefits, which will also now be paid from day one of sickness.
Fuel duty was also frozen for a further year, but tax relief on red diesel will be removed over two years albeit with an exemption for farmers, rail and fishing.
In the longer term and over the five years of the parliament, the much-anticipated £170bn spending on improving the transport infrastructure and addressing the regional imbalance was also confirmed.
This will benefit the construction industry and is no doubt part of another statement: “Today, I’m announcing the biggest ever investment in strategic roads and motorway – over £27bn of tarmac. That will pay for work on over 20 connections to ports and airports, over 100 junctions, 4,000 miles of road.”
Similarly, the Chancellor confirmed that more than 750 staff from the Treasury and other departments will move to a campus in the north of England, as well as significant investment on R & D and that at least £800m will be invested in a new blue skies research agency, modelled on ARPA in the US.
Among a host of environmental initiatives, a new tax on plastic packaging is to be introduced, as well as freezing the levy on electricity and raising it on gas from April 2022.
Given the uncertain prospects for the UK’s economy, how many of the longer-term promises will be realised is likely to depend on the Government’s ability to borrow at unprecedentedly low rates so that it remains to be seen how much of the longer-term spending will actually happen.
It also remains to be seen how difficult the processes by which SMEs can claim help for Covid-19 related losses will be and whether the promise to review business rates as a whole will materialise.
The PR spin is already in place such as RBS’s claim today that it will provide £5bn of support for SMEs when in practice the small print refers to this as an extension to existing loan and overdraft facilities.
Notwithstanding any cynicism the Chancellor’s rhetoric was optimistic claiming his budget was aimed at “Creating jobs. Cutting taxes. Keeping the cost of living low. Investing in our NHS. Investing in our public services. Investing in ideas. Backing business. Protecting our environment. Building roads. Building railways. Building colleges. Building houses. Building our Union.”

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Banks, Lenders & Investors Business Development & Marketing Cash Flow & Forecasting

Key Indicator – a snapshot of the current state of commodity prices

minerals among the commodity prices going downOngoing fears of a global economic recession, not to mention the escalating trade war between the USA and China, are having an impact on commodity prices.
August has been a particularly torrid month, according to analysts, with iron ore prices in particular suffering a sharp drop – up to 30% according to a report in the Financial Times, although other sources also back this up.
The ongoing uncertainty has also had its effect on oil prices, with OPEC cutting production while the USA has increased theirs. This has had its impact on the futures price of oil, with Brent Crude for October falling 31 cents, or 0.5%, to $60.18 a barrel.
According to the latest analysis from Marketwatch.com, published on August 30, “Commodities will end August with a second straight monthly loss”.
It says that the S & P GSCI index, which tracks 24 commodities across five sectors was down by more than 4% at the end of August, following a fall of 7% in July.
Gold and Silver prices, on the other hand have been steadily rising, with Silver reaching a 1-year peak last week, breaking $17 per ounce and Gold prices rising by almost 7% in August.
In the grain sector, Marketwatch reports the biggest decline in corn, of more than 0.9% over the year. Corn futures prices for August were also down, by 9%.
Bloomberg publishes a useful summary of commodity prices covering three sectors, energy, precious and industrial metals and Agriculture here.
Stability is not yet in sight with the ongoing uncertainties over global trade, fears that Germany will soon fall into recession, the outcome of Brexit still unknown and the latest set of USA-imposed tariffs on Chinese goods kicking in from September 1. As a consequence, predicting what will happen to commodity prices is going to be increasingly difficult for the foreseeable future.
This is not likely to be something businesses will be happy to hear as it makes planning more risky.
 

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Banks, Lenders & Investors Business Development & Marketing Finance General Turnaround

June macroeconomic snapshot of UK regional economic inequality

UK regional economic inequality snapshotWe hear a lot about UK regional economic inequality, so as part of our series of macroeconomic snapshots we’re taking a look at some of the data.
These are just a few examples of recent announcements of businesses facing closure or insolvency in the immediate or near term: British Steel, Scunthorpe (c.3,000 jobs), Honda UK, Swindon (3,500 jobs), Kerry Foods in Burton-upon-Trent (900 jobs). What they all have in common is that they are situated in the regions outside London.
Then, of course, there is the ongoing carnage in the High Street retail sector which according to the British Retail Consortium’s calculations has cost 75,000 jobs since the first quarter of 2018.
The long decline in UK manufacturing, initiated in the 1980s Thatcher era, has hit the regions of the north and Midlands, and S. Wales, particularly hard.
In January this year NIESR (National Institute for Economic and Social Research) calculated that since the mid-1990s regions that now have reduced shares of the national economic pie are the North West (-1.8%), West Midlands (-1.4%), Yorkshire and the Humberside (-0.8%), and the North (-0.4%).
The ONS (Office for National Statistics) list of the top 10 most deprived UK towns and cities are Oldham, West Bromwich, Liverpool, Walsall, Birmingham, Nottingham, Middlesbrough, Salford, Birkenhead and Rochdale. In their most recent report, they took into consideration metrics like low incomes, levels of employment, health, education and crime.
By contrast, real output rose twice as fast in London as in other regions over the 10 years to 2017. The “the Golden Triangle of London, Cambridge and Oxford that attracts over half of all research funding – more than £17bn” while just £0.6bn goes to the north east, according to Newcastle on Tyne MP (Lab) Chi Onwurah.
Also, according to the 2019 Global Cities report released today by consultancy firm A.T. Kearney, London has been ranked as the top city in the world for future business investment.
Of course, none of this disparity is a revelation. The 2010-15 Conservative/Liberal Democrat coalition prioritised cutting public spending in the short term over all other objectives, including regional equality and long-term social cohesion. One of their first acts was to abolish the regional development agencies. But in 2014 the then chancellor, George Osborne coined the phrase Northern Powerhouse, a recognition, and arguably a u-turn, that action was needed on UK regional economic disparity.
There is some evidence that the north’s economy has strong foundations, with productivity growing at a faster rate than in London between 2014 and 2017 and jobs being created at a greater rate than the UK average.
According to new report from TheCityUK, the trade body says the number of people employed in the financial services sector in Wales has jumped by over 20%, about 11,000 people. There has also been a 10,000 rise in the West Midlands, 12,000 in the East of England, and 24,000 in Yorkshire and Humber. Conversely, the number of financial workers in London has dropped by 10,000 since 2016, and by 32,000 across the South East of England.
However, with a £3.6bn cut in public spending in the north of England since 2009/10 and 37,000 fewer public sector workers, there is also evidence, reinforced by IPPR figures in May, that the Northern Powerhouse has been “undermined” by austerity, with power and resources “hoarded in Westminster.”
There is clearly a long way to go before the UK’s regional economic disparities are anywhere near to being reduced.
 

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Banks, Lenders & Investors Business Development & Marketing Finance

Why the current model of free market capitalism is failing SMEs

synbol of capitalism for the richIn the late 1970s the then UK Prime Minister Margaret Thatcher and US President Ronald Reagan both espoused the idea of minimal state regulation and of allowing free market capitalism to reign relatively unchecked in line with the theories of the Nobel prize-winning US economist Milton Friedman and The Chicago School, as it was called.
The assumption was that the weakest businesses should be allowed to fail and only the strongest would survive, which would benefit businesses, consumers and result in strong economies. It also assumed that the private sector would provide everything from energy to transport infrastructure to education at a lower cost than if they were state-funded.
Since then we have seen the 2008 global financial crisis, the introduction of a programme of austerity in the UK, central banks reducing and keeping interest rates artificially low, productivity in decline and a widening of the income inequality gap with increasing wealth concentrated in the hands of approximately 1% of the population while wages have barely risen for the majority.
In March the former governor of the Indian Central Bank warned, in an interview on the Radio 4 Today programme, that capitalism is “under serious threat” as it has stopped providing for the masses.
“It’s not providing equal opportunity and in fact the people who are falling off are in a much worse situation,” he said.
It should be no surprise, therefore, that so-called populist and nationalist movements, largely seen as extreme right or extreme left, have been on the rise across Europe as much reported in Italy, France, Germany and UK and also in the “Make America Great Again” USA.
Indeed, as the columnist Bagehot had reported in the Economist the previous June, that something is wrong with the current model has begun to be recognised in Conservative circles, notably by Michael Gove, who, he said, was lamenting: “the failure of our current model of capitalism to deliver the progress we all aspire to”.
The implication is that there is both “good” and “bad” capitalism and that the current situation is far from good.

What are the implications of “bad capitalism” for SMEs?

Top investor, influencer and author of Principles, Ray Dalio, Co-Chief Investment Officer & Co-Chairman of Bridgewater Associates, L.P. in New York, has produced a detailed analysis of the effects of what has gone wrong and how capitalism should be reformed.
He says: “Over these many years I have .. seen capitalism evolve in a way that it is not working well for the majority of Americans because it’s producing self-reinforcing spirals up for the haves and down for the have-nots.”
Dalio also argues that while necessary in 2008 the results of the Central banks’ actions have been to drive up the prices of financial assets focusing investors on financial returns in the short term at the expense of investing for the longer term.
While his focus is on the USA, much of his argument applies to the UK also, in the outcomes being a rise in rent-seeking investment, which puts nothing back into businesses, the economy and society, a race for higher and higher CEO pay, short-termism and a marked lack of highly-educated and skilled young people coming into the workforce.
All of these make it increasingly difficult for SMEs to thrive and grow.
What is needed, he says, is a re-engineering of the capitalist system, to better and more fairly divide the economic pie and to have a system of accountability that makes clear whether individuals are net contributors or net detractors to society. It also needs income redistribution by taxing the richest and using the money to invest in the middle and the bottom primarily in ways that also improve the economy’s overall level of productivity.

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Cash Flow & Forecasting Debt Collection & Credit Management Finance Insolvency

First two companies named and shamed over late payment

late payment penalty?In March the first company to be named and shamed by the Small Business Commissioner Paul Uppal over late payment to a SME was announced.
The Office of the Small Business Commissioner launched an official investigation into the payment practices of the Jordans & Ryvita Company.
Using his new powers for naming offenders the Commissioner investigated Jordans & Ryvita on behalf of small business Magellan Design Ltd, which was owed approximately £5,000. As a result, the money was paid together with a further £1,400 in late payment interest.
This week the results of a second investigation, this time into health food retailer Holland & Barrett, were revealed. It was launched after a complaint from an IT company, which had asked not to be named, over an unpaid invoice of £15,000. The invoice took 67 days to be paid, well outside the company’s contractual agreement of 30 days.
Mr Uppal found that Holland & Barrett had “a purposeful culture of poor payment practices”, in which 60% of invoices were not paid within agreed terms and payment took an average of 68 days. He also condemned the retailer for not cooperating with his investigation, saying: “Holland & Barrett’s refusal to co-operate with my investigation, as well as their published poor payment practices says to me that this is a company that doesn’t care about its suppliers or take prompt payment seriously”.
Since the inception of the Prompt Payment Code and Mr Uppal’s appointment in December 2017 his office has released £3.5 million in late payments for small businesses and attracted 50,000 visitors to its website.

The effects of late payment to SMEs by large businesses can be catastrophic

The FSB (Federation of Small Businesses) has estimated that 50,000 SMEs each year close because of late payments and in July last year published research showing that 17 per cent of smaller suppliers were paid more than 60 days after providing an invoice, while close to one in five smaller suppliers are paid late more than half the time by the public sector.
While the latest results are a welcome development I would argue that until Mr Uppal is given powers to fine offenders they are unlikely to take this initiative seriously despite his efforts, for which some credit is due.
The Government’s Business, Energy and Industrial Strategy Committee has also repeated its call for Small Business Commissioner to be given the power to fine companies that pay late and for there to be a legal requirement to force them to pay invoices within 30 days.
I urge all SMEs to report late payment by large clients and especially well-known names so that more are named and shamed as a way of humiliating them into paying on time.
 

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Cash Flow & Forecasting Finance General HR, Redundancy & Trade Unions

The tide may be turning to improve workers’ rights

demonstration for workers' rightsIn December Christina Blacklaws, the president of the Law Society, warned in a letter to the Financial Times that employment law on workers’ rights had not kept pace with the changes in the way people work nowadays.
Her concerns were primarily for people working in the so-called ‘gig’ economy after the High Court ruled that Deliveroo riders had no right to bargain collectively.
Her letter said: “Case after case highlights concerns about how the workplace rights of employees, workers and contractors are affected by a law not fit for purpose and not easily understood. The lack of certainty means people are having to go to court to clarify their rights.”
Perhaps in some areas the situation is being clarified by case law such as the recent Supreme Court ruling re Pimlico Plumbers that a sub-contractor cannot be classed as an independent self-employed contractor for employment law purposes and should be treated as a “worker” who is entitled to holiday pay and other basic workers’ rights. This was similar to the Appeal Court ruling re Uber that its drivers should be classed as workers with access to the minimum wage and paid holidays.
The Government has published its proposals for employment law reform, which included giving workers the right to request more predictable hours, as well as offering enhanced protections for agency workers and heavier fines for malicious employers.
Not surprisingly, the more predictable hours proposal was dismissed by TUC leader Frances O’Grady as likely to give workers on zero hours contracts “no more leverage than Oliver Twist”.
No doubt, SME owners will say that the burdens placed on them by the living wage, work-place pension legislation and existing rules governing how they can and cannot treat employees are already onerous enough.
However, given the uncertainty surrounding a post-Brexit future and the fact that much of existing law protecting UK workers is EU law, it is understandable that employees are concerned about their future position.
In an effort to alleviate their concerns, the Government earlier this month issued guarantees on workers’ rights after Brexit, although this was quickly dismissed by an EU and employment law barrister as “meaningless” because there was no guarantee that a future UK Government would enact any future EU legislation protecting workers.
Certainly, the Labour party is offering the prospect of improved workers’ rights and a significant improvement in the power of Unions with a view to reversing the demise of the Unions and the lack of collective bargaining.
Independent of new legislation, the current low level of unemployment and large number of job vacancies would suggest that workers may regain some of their lost power and rights through their right to provide or withdraw their labour and more pertinently their confidence that they can offer it to another employer.
Given that many UK business sectors are already struggling with a skills shortage, particularly in engineering, construction and IT, and that any business that wishes to thrive and grow relies very heavily on its employees feeling valued and engaged with their employer’s future progress, this would seem to be one time when it is in the interests of both to ensure that workers’ legal protection is robust and secure.

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Banks, Lenders & Investors Business Development & Marketing Finance General

March Key Indicator – Investment in the UK

investment on solid foundationsInvestment is a tricky term to unravel largely because the investment objectives are key to any decision and predicting the future is so difficult, especially given that past performance is rarely a predictor of future returns. Despite the lack of certainty, much analysis is necessary.
Much has been made recently in the UK’s uncertain economic climate about the massive reduction in investment being made by UK businesses in their companies.
It is argued that with the future so uncertain, businesses are holding onto their cash reserves and delaying plans for growth and indeed towards the end of last year the BCC (British Chambers of Commerce) was warning that British businesses had paused investment in growth. However, this is also an excuse used by weak leaders and those who lack a vision.
But investing in the future and growth of your own business is only one level of investment.
At a higher level, investors can be pension funds, investment “vehicles” or funds run by investment companies, and Foreign Direct Investment (FDI) by businesses from one country into those in another.
A rise in investments in the stocks and shares of businesses in an economy is generally regarded as a positive thing.
So, at the moment, UK equities seem to be doing well in that Bloomberg, for example, has just reported that the UK’s top ten investors, in which it includes Invesco, Schroders, Aberdeen Standard and Legal & General, have increased their holdings of UK-listed shares by more than a third over the last three years. This is interpreted as showing a degree of confidence in the UK’s long-term future.
In January CityAM interviewed Shroders’ CEO Peter Harrison reporting that he expected 2019 to be a better year for investors.
Similarly, ONS (Office for National Statistics) data shows that overseas investment into the UK is at its highest level ever, with investment from India, the US and from Japan leading the field.
Sectors currently seen as attractive by equity investors are the financial services and, for both Angel and Venture Capital investment, the UK tech sector, particularly for those businesses developing innovative software, and in Fintech (financial technology).
The key to understanding investors and their behaviour, however, is to examine their expectations.
Much has been made of the short-termism of many investors and shareholders and its negative impact on businesses. In this scenario, investor pressure is for maximum profits or returns on their money over a short period. This pressure can change the behaviour of boards of directors and even influence the remuneration packages of CEOs so that those who deliver maximum profits in the shorter term are well rewarded.  It is questionable, however, whether this is in the longer-term interests of a business.
Generally speaking this type of expectation is most likely to come from pension fund-type investors, where fund managers themselves are under pressure to maximise profits for their members.
Arguably the most successful and reliable investment funds, however, are those that take a longer-term view and focus on the lifetime value and potential of a business.
Warren Buffet’s Berkshire Hathaway vehicle and Terry Smith Fundsmith fund are the top performers using this type of investment model.
Buffet’s “value investing” style focuses on business, management, financial measures, and value and the emphasis is on the long term. He is less interested in the market or the economy or investor sentiment, focusing instead on consistent operating history and favourable long-term prospects.
Terry Smith uses a similar approach as described in a Guardian article last year. Since its founding in 2010 it has made a gain of 309%. His fund has a low turnover of shares and his message is simple: “Buy good companies. Don’t overpay. Do nothing.”
Smith says he avoids certain sectors like insurance companies, real estate, chemicals, heavy industry, construction, utilities, resource extraction and airlines. He recently launched a new fund, called Smithson, focusing on in mid-size companies. Like Buffet’s, Smith’s focus is on the longer-term value in businesses and this is where he chooses to put his money and those of the investors who are members of his fund.
Clearly if a business can attract the interest of either Buffet or Smith in investing it can have some confidence in its stability and its future. Strangely their strategies are similar to those of well run private businesses, although this is perhaps less surprising given that their money is in their funds.

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Banks, Lenders & Investors Cash Flow & Forecasting Finance General Turnaround

January Key Indicator – exchange rates and their impact on SMEs

exchange rates are no longer measured by goldThe exchange rate is the value of a country’s currency against those of others and the factors affecting this are many, especially in a volatile political climate, both globally and locally.
Among the influences are the interest rates set by central banks, inflation, a nation’s gross domestic product and trade balance, its debt and to a significant extent, the behaviour of politicians and governments towards both their own and competing economies.
Significant fluctuations in exchange rates, as has been seen over the last couple of years, then start to affect the confidence of investors, currency traders and businesses, increasing the volatility of currency values and stock exchanges.
Two obvious examples have been the plummeting value of £Sterling since June 2016, when the UK voted to leave the EU, despite occasional upticks as the negotiations over the withdrawal agreement dragged on.
Similarly, the engagement of the US President, Donald Trump, in imposing tariffs and instigating trade wars with other competing economies, particularly China, has arguably had a negative impact on both the value of the US Dollar and the performance of its own stock market.
Economic recovery, particularly in the UK and USA, has, in any case been sluggish in the decade since the 2008 global economic meltdown, which prompted central banks to set interest at very low rates in an attempt to protect their countries’ economies by stimulating investment and business activity.

A little history on exchange rates and currency values

Until the early 1930s, countries’ currencies were valued against the value of gold – the gold standard.
The quantity of gold held by a country determined the value of its currency and under the gold standard trade between countries was settled using physical gold. So, nations with trade surpluses accumulated gold as payment for their exports. Conversely, nations with trade deficits saw their gold reserves decline, as gold flowed out of those nations as payment for their imports.
The UK abandoned the gold standard in 1931 and the US in 1933, moving instead to the current fiat system, where currency values fluctuate dynamically against other currencies on the foreign-exchange markets. Fiat money is the currency that a government has declared to be legal tender, setting it as the standard for debt repayment. Essentially its value is based on market perception.
It has been argued that moving off an actual physical commodity like gold has made currency values and therefore exchange rates more vulnerable to manipulation by politicians and central banks, and therefore created a more volatile and vulnerable economic climate. This is where the market’s interpretation of politicians and central bankers is fundamental to currency values.

The effect of exchange rates on business

It is not only exporting businesses that are affected by exchange rates and currency values.
A good recent example has been the benefits to some UK SMEs, particularly in the service and hospitality industries, which during the summer of 2018 experienced something of a boom in tourism from a combination of a long season of good weather and the decline in the value of £Sterling making it cheaper for foreign tourists to visit the UK.
On the other hand, even small local SMEs whose businesses depend on selling goods and services where parts, components, food ingredients or raw materials come from overseas saw their costs rising because £Sterling’s buying power had been reduced in comparison with currencies in other countries.

Can SMEs protect their businesses from exchange rate fluctuations?

It can be harder for SMEs to protect themselves than it is for larger businesses, but the essentials for any business survival and growth are based on managing their costs and expenditure with strict and careful attention to cash flow which is best achieved by close scrutiny of monthly, or more frequent, management accounts.
If it is at all possible to manage cash flow in a way that a business can create a contingency reserve this will provide some measure of protection to a downturn in the exchange rate.
For those that have to source supplies from overseas, hedging against cost increases due to exchange rates can be done by negotiating a forward contract in your own currency based on a set price with the supplier or at least fixing the price with purchase of a forward exchange rate. This may mean missing out on future changes in the exchange rate that might benefit the SME buyer, but will provide some degree of certainty when planning ahead.
Another option may be to include clauses in your contracts which allow you to renegotiate prices should the exchange rate change significantly within an agreed period of time.
Wherever possible try to avoid the transaction fees charged by banks for making international payments. Some money transfer specialists offer an alternative, FCA regulated, service in a free multi-currency account that lets businesses hold over 40 currencies, and switch between them using the mid-market exchange rates to make payments.
While the risks of fluctuating exchange rates can be greater for SMEs with fewer reserves to fall back on planning and good communication can help to mitigate at least some of the risks.

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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.

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Banks, Lenders & Investors Cash Flow & Forecasting Finance General

The post-election Government must start listening to business

confusing signpostAs if the post-EU referendum uncertainty wasn’t enough, businesses now must contend with a Government that is far less “strong and stable” than it was before the General Election.
Portcullis Public Affairs, of which I am a shareholder and chairman, is a specialist consultancy advising businesses on government and strategic communications.  It has an excellent perspective on the election outcome for business which can be viewed in the News section of its website at www.portcullispublicaffairs.com/oh-what-a-night-and-what-it-means/
It is almost a cliché that businesses hate uncertainty, so the implications for businesses, especially for SMEs, are not good. This has been made worse by a Prime Minister who appears to be anti-business and a manifesto that offered no reassurance to business.
Companies were already holding back on investment decisions and, in some cases, struggling to keep afloat in the face of rising costs on imported raw materials and oil thanks to the post referendum devaluation in £Sterling.
Trading conditions have gradually become more difficult since the start of 2017 as inflation and wage stagnation have fed through into the economy and dented consumer confidence – not helpful where so many small businesses in the service sector rely so heavily on consumer spending.
Many have felt that the government was not listening to or considering their concerns. Among the issues and proposals they have highlighted have been:

  • The lack of provision of growth funding after 2020 when current EU Funding ends (FSB chairman Mike Cherry).  This particularly affects SMEs in poorer parts of the country.
  • Abandoning the customs union, which allows UK firms to trade in the EU without paperwork, tariffs or barriers.
  • Requiring businesses to disclose the numbers of foreign workers they employ and failing to provide any assurances that those already working in the UK will be able to remain.  This affects all businesses where there is a skills shortage, such as construction, engineering and seasonal work on farms.
  • Being prepared to walk away without an agreement if the EU does not agree to UK’s terms.

With barely a week to go before formal negotiations are due to begin businesses have been signalling plummeting confidence and urgently demanding more engagement, flexibility and pragmatism on their needs.
Immediately after the election the Institute of Directors (IoD) reported a significant drop in confidence among the 700 members it has asked. IoD Director General Stephen Martin said the current uncertainty could have disastrous consequences for UK businesses.
“The needs of business and discussion of the economy were largely absent from the campaign,” he said. “but this crash in confidence shows how urgently that must change in the new government.”
Portcullis’ briefing ends with the view that without specialist advice businesses face making strategic errors that could be costly, or even fatal, in the current uncertain political climate.

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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.