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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 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?
 

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

Running out of cash – crisis management, the first step in dealing with a cash crisis

crisis management when running out of cashCrisis management when a company is in financial difficulties is about quelling the understandable panic and taking a long, hard look at managing the business’ cash flow and the potential for action that makes the business viable.
Running out of cash is the cause of most business failures where the cash flow test of insolvency applies such that a company is insolvent if it is unable to meet its liabilities as and when they fall due. This doesn’t mean the business should be closed down but it does mean the directors should take clear steps to deal with the financial situation.
The first thing directors need to appreciate is that their primary consideration is to protect the interests of creditors rather than that of shareholders. This is where an insolvency or turnaround professional as an outsider can help by bringing an objective assessment of the personal risk when making decisions and the prospects that turnaround initiatives can be taken to restore the business to solvency.
Initial action by experienced turnaround professionals will focus on the short term cash flow while at the same time they will consider the medium and long term prospects for the business and whether the business model works or needs to be changed. This may be contrary to insolvency professionals who may be interested in justifying their appointment under a formal insolvency procedure.
Any review by professionals will consider how financial situation developed where it often the case that over time creditors have been stretched. Indeed, there are many reasons for the shortage of cash that often leads to a delay in paying suppliers whether this is due to a decline in sales, poor debt collection, bad debts, inadequate credit control, over trading, over stocking, funding investments and growth that doesn’t translate into sales or indeed myriad other reasons.
Guidance from the ICAEW (The Institute of Chartered Accountants in England and Wales) is that at this stage:
Getting cost controls properly in place, insisting all purchases (however small) are signed off centrally by the managing director or finance director, chasing harder to collect outstanding debts, or agreeing new payment terms with creditors can have a quick impact and help ease an immediate crisis.
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.
The business also needs to control cash on a daily basis, with payments made on a priority basis with purchases approved by an authorised person who is aware of their impact on cash flow.
This will avoid the risk of returned cheques. It is also advisable to talk to the bank and keep it aware of what is being done to keep things under control.
This is the first step in crisis management when a company is having financial difficulties, but thereafter a restructuring adviser can be invaluable in taking a long, hard look at the business operations, its processes and its business plan to identify areas where performance is weak or unprofitable and whether and how the company can be returned to profitability if these elements are removed.
Getting external and objective help is likely to be necessary and my guide to running a business in financial difficulties is a useful reference.

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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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.
 

Categories
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

Categories
Cash Flow & Forecasting Finance Turnaround

September Key Indicator – energy and fuel costs

energy and fuel costsWhile the biggest overheads for industrial and manufacturing businesses are generally staff, equipment and premises costs, energy and fuel costs also have a significant impact on profitability.
Indeed, for those in the transport industry, the cost of fuel can make the difference between profit and loss and is often difficult to pass on to customers.
UK businesses are particularly vulnerable to rising energy and fuel costs for several reasons.

Electricity and gas

Approximately 50% of the UK’s electricity is produced from fossil fuels, mainly natural gas and coal, most of which are imported.
21% comes from nuclear reactors however the UK’s nuclear power stations will close gradually over the next decade, with all but one expected to stop running by 2025.
24.5% of electricity currently comes from renewable sources, mainly wind farms.
As backup the UK imports electricity but it also exports some.
Gas, on the other hand is mostly imported.
Energy companies buy supplies many months ahead on the wholesale market. The UK’s six largest suppliers, nPower, British Gas, EDF Energy, Eon and Scottish Power have announced at least one price rise this year, by an average of 5.3%, and some have also announced a second rise. They are blaming these rises on higher wholesale and policy costs (such as Government requirements for the installation of smart meters).
According to most analysts the price trend is inexorably upwards and likely to remain so. It is not helped by the reduction in the value of £Sterling following the 2016 EU referendum outcome, which has made importing anything, from raw materials to goods and services considerably more expensive.

Petrol/Oil

Oil prices are vulnerable to supply and demand but here, too, there has been a steady upward trend, certainly for the last two years.
Brent Crude (from North west Europe) has risen from a per barrel price of $48.48 in July 2017 to $74.25 in July 2018. This is the source of much of the UK’s petrol and diesel. OPEC oil prices have also risen from a 2017 average $52.52 per barrel to an average of $69.02 in 2018.
Some analysts are predicting that world prices will start to reduce into 2019, but the Brexit impact on exchange rates may mean UK still having to pay more for oil. In addition, geopolitical uncertainty such as the change in the US attitude to Iran and the threat of sanctions makes a drop in prices less certain.
This is easily monitored at the petrol pump which has seen a steady rise in the prices of both petrol and diesel, currently as high as 133.1p per litre in some petrol stations.

How can SMEs reduce their energy and fuel costs?

Each company is different and much will depend on how many vehicles you need, how many and how large your buildings are and how much energy is required to run your production processes and offices.
While domestic consumers are constantly exhorted to switch energy suppliers to reduce bills, much less attention is paid to business customers doing the same. According to the website Money Saving Expert, which also provides advice for businesses, it is possible to make substantial savings through switching and negotiating with suppliers, also through collaborating with others to achieve volume discounts.
It claims: “On average small businesses spend approximately £5,100 on electricity and £4,100 on gas per year” and shopping around can save £1,000s. There are a number of buying clubs and membership organisations that are negotiating volume deals for members which again can achieve significant savings.
So, it can make sense for a business to shop around for the best deal, albeit that dual energy tariffs are not available to businesses. It is, however, possible for businesses to get one to three-year fixed rate deals.
Similarly, it makes sense to ensure vehicles and buildings are as energy efficient as possible where there are a number of grants available, although many are EU grants so don’t delay if you want to take advantage of these. Useful sources of information about grants can be found at the Energy Saving Trust and from your local authority where the development officer is normally the best person to contact.

Categories
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
Cash Flow & Forecasting Finance Insolvency

How often should SMEs review business contracts?

review business contractsIn times of economic uncertainty, a careful business will regularly scrutinise its cash flow to ensure there are no hidden surprises.
When, as currently, costs rise profits decline unless sales prices, purchase costs and other expenditure are adjusted, and most businesses do this regularly by referring to their profit and loss figures in the accounts.
However, monitoring the management accounts does not keep an eye on the underlying obligations such as those for asset finance, service agreements or outsourced processes with both suppliers and customers where a review of these can identify scope for saving money.
Examples of cost savings following a review of contractual obligations include a recent client that was paying for computers on lease finance many years after the computers had been scrapped. The agreement provided for a three month notice that could have been terminated four years earlier. Another is the standard BT charge of £16.99 per month applied to business numbers to cover listing in their directory. It’s in the small print and very few clients seem to have spotted it.
Another good reason for a review of business contracts is that so many are old and out of date. An example is the agreement with suppliers. This is likely to have been struck as part of a credit application some years ago. An example is another client who had supply agreements with the major building materials suppliers including one with Travis Perkins that was fifteen years old. It was part of a credit application for as £10,000 facility and included personal guarantees given by the directors at the time. It was still in place despite all the directors having left and the facility being increased to £150,000.
So it makes sense to regularly review its business contracts.

Obstacles to changing business contracts

Having conducted a review of the contracts and identified any that are no longer fit for purpose, it may be necessary to seek expert advice and certainly to check the fine print as many contracts contain fees for early termination in the detail. Terminating leases is a particular area that needs advice.
While many agreements can simply be terminated against the contractual notice terms, others may require negotiation.
Even if terms for termination are reached it may be that help with drawing up a watertight and acceptable settlement agreement may be necessary. On the other hand, if agreement cannot be reached, this is where a specialist is needed.
Given the lack of legal experience and constraints on time in most businesses, reviewing contracts tends to be a low priority such that this should be done either as part of a formal annual review or it should be outsourced to advisers. As part of any review a company diary should be updated to flag any notice dates, termination dates and any specific agreements that might need a more frequent review.
What is not in doubt is that contracts should be reviewed regularly.

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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.

Categories
Finance General Insolvency Rescue, Restructuring & Recovery Turnaround

What’s the difference between stress and pressure in business?

stressed businessman 2 Huffington PostAsk a business owner how things are going and they are more than likely to use the words “stress” or “pressure” interchangeably in their response.
But, according to Dr Hendrie Weisinger, Ph.D, a well-known US psychologist who has worked with many leading businesses and professional organisations, there is a significant difference between the two words.
He argues that a stressful situation is one where there are too many demands and not enough resources available to meet them, whether these are time, money or energy.
A pressurised situation is one where the outcome of something depends on an individual’s, or a team’s performance.
Stress can lead to feelings of being overwhelmed, while pressure tends to cause anxiety.
So at this time of year, many in the retail sector are under pressure but if they have got their forecasts right they will have the resources, mainly staff and stock, to cope and meet demand.
However, for the struggling business experiencing cash flow difficulties, the situation is one of stress.  Whatever the causes, a lack of cash or a dramatic decline in orders, the issue is one of survival and how to continue operating without some action.
The problem is that feelings of being overwhelmed can lead to inertia when the last thing that the business owner facing such difficulties should do is nothing.
We will be looking at how to deal with stress, and stressful situations, throughout this month.
(picture courtesy of Huffington Post)

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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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Banks, Lenders & Investors Cash Flow & Forecasting Finance General Rescue, Restructuring & Recovery Turnaround

What’s the point of a business plan?

Business gurus will insist that a SME has no credibility or chance of success without a proper business plan.
There’s no prospect of raising finance without one, even, these days via crowd funding.
But many small business owners struggle with the concept of setting targets for revenue, growth or increased turnover in one, three or even five years time, especially given the volatility of local, national and export markets since 2008.
It can feel like crystal ball gazing or fantasy. Who knows what may happen next?
But what most forget is that a plan isn’t set in stone. It needs to be re-visited regularly and should be adjusted as conditions change.
Most business advisers would advise flexibility and regular reviews of performance so that goals and decisions about spending can be adjusted accordingly.
As part of a flexible business plan, nowadays an essential ingredient is the cash flow forecast.
This can then be used to spend more or less depending on the availability of cash and the return on it being invested such as on growth and marketing initiatives, or on efficiency and cost reduction measures.
For businesses to successfully survive the economic uncertainties that look as though they may be with us for some more years they will need to plan for multiple outcomes regardless of what is planned.
So yes, a business plan is still an essential map through uncharted waters as long as it is looked at regularly and adjusted when necessary.

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Banks, Lenders & Investors Business Development & Marketing Finance General Rescue, Restructuring & Recovery Turnaround

Should SMEs stop complaining and just get on with business?

As another large bank, HSBC, is named for helping wealthy clients to evade tax payments, a new poll carried out among 2000 SMEs has revealed that three quarters of those responding felt that big companies put profits before ethical standards.
76% of them also felt that big businesses acted unfairly towards them.
The poll has prompted the FPB (Forum of Private Business) to call for a five-point business ethics plan to protect and promote the UK’s SMEs.
There is likely to be a clamour of complaint and demand in the run-up to the election, not to mention party promises to ditch red tape, make lending to SMEs easier and so on. Do they really care or simply want our vote?
Whether any of this actually happens, whichever party, or parties are elected, remains to be seen.
However, all of this is wearyingly familiar and leads us to question whether it would be wiser for SMEs to just get on with business, sell, keep control of cash flow, spending and growth plans, and not expect politicians to make things better?

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

Planning for the year ahead

SMEs often use new year as an opportunity to plan for the year ahead and might benefit from knowing about Rudyard Kipling’s six wise friends: Who, What, Where, Why, When and How.
But while it may be straightforward to answer What (the goals and targets), When (by what deadlines) and Where (what sector and what clients might be most productive) the Who, Why and How are more difficult.
Who: the allocation of tasks is critical for success, including leaving you time to spend on the non-daily activities. Do you have the right people in your organisation, do they have the skills, such as devising and carrying out the marketing strategy that will be needed to meet your goals?
How: are there alternative ways such as outsourcing activities?
Why: this essentially invites you to consider your business model that encompasses all the elements of your business. Is it viable? Do you have sufficient funds or the cash flow to support your plans? Does it generate sufficient profits to justify your effort?
Finally, are you as the owner spending enough time on strategy, finance, marketing planning and leadership as all too often these are neglected when you are busy with the daily operation?
When planning for the future, it is worth considering whether an outside expert might be able to help you, you might be surprised how valuable this can be and it doesn’t need to be expensive in terms of cash and time.
I wish you a very happy new year.

Categories
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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Cash Flow & Forecasting Finance General Insolvency Turnaround

What can SMEs do to improve productivity?

With so much uncertainty still hanging over the economic recovery it is tempting and prudent for SMEs to continue to watch their cash flow and keep a tight rein on spending.
However, there may be some instances where this could be a false economy that will inhibit a future productivity gain.
We have been seeing businesses that are still holding back on upgrading their IT systems or software.
Businesses use IT to make life easier and more efficient and while it makes no sense to try to keep pace with constant IT innovation, equally it can be counter-productive to hold on too long to the point where a system is either very slow or no longer fit for purpose.
A good example is switching to online bookkeeping. This is a case where changing to an online bookkeeping system rather than using an old-fashioned manual method or even a computer package is likely to save both time and money. Not only can the online system be shared with key people or outsourced to a bookkeeper but it can be monitored by your accountant, saving on the time and costs as well as offering scope for improving the quality of reports.
Perhaps you can suggest other examples of processes that could help SMEs to boost productivity?

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Cash Flow & Forecasting General Rescue, Restructuring & Recovery Turnaround

Is it wise to rely so heavily on a recovery led by consumer spending?

There has been some recent data and a good deal of spin about the economic recovery becoming more secure and that it is time for businesses to start investing for growth.
While unemployment may be steadily decreasing, the housing market picking up and consumer spending rising a little it would, in our view, be wise to be cautious, not least because the Government seems to be relying a little too heavily on a consumer and SME-led recovery.
Firstly, there has been evidence that the jobs being “created” are part time and low-paid and that in any case wage increases are lagging far behind the rising cost of living. 
Secondly, on the evidence so far, households will be facing hefty utility and energy price rises in the region of 10% by the end of the year, despite Thames Water’s attempt to increase water rates next by 8% being rejected by the watchdog. 
Thirdly, there is also some evidence that increased consumer spending is yet again being financed by credit cards and personal debt, which has been rising steadily since mid-2012. 
Fourthly, there are still plenty of voices arguing that the ‘Help to Buy’ scheme is merely pushing up house prices and borrowing to “bubble” levels – a point reinforced by property website Rightmove, which revealed a 10% rise in property price in London in October and of an average 2.8% in asking prices in most parts of England. 
It would appear that measures to stimulate the economy are working, but can we be certain these are not a pre-election gimmick that conceals the truth? 
Regardless of short term statistics, consumer spending will continue to struggle while personal and SME levels of debt are so high and households continue to worry about making ends meet. In such a market SMEs as well as consumers might be wise to wait until after the election to confirm growth is sustainable before making big investments.
 In the meantime they would be well advised to continue paying close attention to cash flow, paying down any expensive debt or hoarding cash and if necessary restructuring to be as lean and fit as possible ready for the moment when the fat lady really does start singing, IF she does. What do others think?
 

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Banks, Lenders & Investors Cash Flow & Forecasting General Insolvency Rescue, Restructuring & Recovery Turnaround

It’s the political silly season again

The first shots are being fired in the annual round of party conference one-up-manship with Chancellor Osborne claiming that the economy is “turning a corner”.
Oh really?
It may look like that in London thanks to a rapidly inflating property bubble but out here in SME world even to say “turning a corner” may prove to be premature.
Monday saw publication of a survey by the FSB that had found 47% of its members had been refused loans in the last three months and 56% felt that banks did not care about SMEs, the much vaunted “engine for growth”.
On the same day, with the Banking Reform Bill due for debate this week, the Chief Executive of the British Bankers’ Association warned that requiring banks to improve their leverage ratio (money lent out in relation to capital reserves) could “do more harm than good”. Contrast this with Sir John Vickers, who was involved in drawing up post-crisis reforms to the banking sector and his arguing that the suggested ratios are still way too low and risky. Sounds like joined up banking!
In addition the banks are facing an estimated £10 billion in potential payouts to businesses mis-sold interest rate protection and hedging products. Other news such as the trade gap (between imports and exports) doubling in July and questions about where the demand will come from all challenge the notion of ‘green shoots’.
Businesses, like consumers, are under increasing pressure from rising prices, and continue to focus on cash flow.  While there may be a bit more optimism around it plainly has not yet translated into anything as definitive as turning a corner.
Lies, damn lies and statistics!

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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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Business Development & Marketing General Rescue, Restructuring & Recovery Turnaround

Learn to say “no”

Most of us love a bargain but it can be a false economy if the lower price means reduced quality.
From the business perspective it can be tempting to reduce prices in order to win orders when trading conditions are challenging.
I’m seeing a lot of businesses agreeing to cut their prices, but equally a lot of them are walking away.
Why are they walking away? Because they are not prepared to compromise their own business models by acquiescing to that kind of pressure, especially if they have confidence in the quality of their product or service and have done the research to pitch a fair price that gives value for money.
A good business will only take on work on terms and at prices it feels comfortable with.  A bad business will succumb to pressure.
It’s better to grow your margins than to grow your business, in my view.  What do others think?

Categories
Cash Flow & Forecasting General Rescue, Restructuring & Recovery

Is blaming the weather for a downturn in High Street trade a red herring?

With the somewhat slow and tentative arrival of Spring have come the by now regular comments blaming the weather for the struggles of High Street retailers.
But there are signs that the High Street might not be dead quite yet and that actually the weather is only a small part of the picture.
Research from analysts Kantar recently has revealed that 70% of us still like to try a product before we buy despite the boom in online shopping and that even with the rise of online shopping 90% of retail spending last year had taken place in actual shops and stores.
While trading conditions are difficult in the continuing economic crisis it may be that what is going on is actually a restructuring process between online, out of town malls and the High Street. 
Recently Tesco has cancelled some plans to build larger retail outlets but in common with other large supermarkets continues to develop smaller drop-in stores both in town centres and suburban local shopping areas. Some formerly online only stores are also moving into physical stores in a process called “showrooming”.  They include the Kingfisher-owned Screwfix, furniture store Oak Furniture Land and SimplyBe, owned by online fashion group JD Williams.
Small independents are also said to have a place on the High Street but as a specialist in turnaround and restructuring I would want to look at their business plans, costs and potential cash flow before recommending that they go ahead.
What would help most of all, however, would be for the Government to finally get the point that Business Rates, last revised at the height of the pre-crisis boom and now at an artificially high rate, which increased again in April, are no longer either justifiable or affordable for SMEs like the independent retailers.
According to Graham Ruddick of the Daily Telegraph, even the Policy Exchange, which is said to have close ties to senior Conservatives, is recommending freezing business rates for two years until they can be thoroughly reviewed. http://tinyurl.com/pxm2c2y
In our view a review and revision downward is urgent. Freezing them will only allow the Government to avoid having to consider revaluations and reductions in the hubristic hope that growth will return to pre credit-crunch “normal”.

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Banks, Lenders & Investors Cash Flow & Forecasting General Rescue, Restructuring & Recovery

Are we brewing another bubble?

Profits are up at Currys, PC World and Asda.  Outgoing Bank of England Governor Sir Mervyn King has revised upwards the bank’s growth forecast for the year and the CBI too is a bit more optimistic about “more balanced growth” in the economy.
Add to this, results from the Royal Institute of Chartered Surveyors’ latest survey showing that house buying enquiries had reached their highest level for three years and in April the Ernst & Young ITEM Club predicting a pick up in the housing market activity to almost pre-2007 levels.
Some would argue that Chancellor Osborne’s Funding for Lending and Help to Buy schemes are finally helping potential home buyers but let’s not get carried away here.
Was it not unwise lending on housing that led to the unsustainable property bubble that precipitated the 2008 economic meltdown?
Despite the unseasonably chilly May are these reliable signs of green shoots?
Or are we collectively clutching at short term straws?
We should remember that banks are still weighted down by illiquid assets such as commercial property, investors continue to seek short term gain rather than investing in the longer term future and politicians think only in career terms of keeping their seats in the next election.
Clutching at short term straws will not fix our economic problems. Investing in the longer term, in promising new companies, in support for R & D to keep our knowledge economy competitive overseas and investing in a sensible education and business support policy that provides the skilled workers for the future through apprenticeships just might give the economy a fighting chance.
In the meantime while it’s a bit early for SMEs to shift their focus away from managing cash flow it might be appropriate to revisit the business plan and model to identify any changes that should be made to prepare to take advantage of growth should it materialise.

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Banks, Lenders & Investors Cash Flow & Forecasting General Rescue, Restructuring & Recovery

Business realism – or not?

Last week we asked whether the extension of the Funding for Lending scheme by the Bank of England was a case of excessive spin.
This week the BoE seems to be reverting to realism.  The Telegraph business pages today (May 2) quote Paul Tucker, the Bank’s deputy governor for financial stability, as saying that the revised FLS scheme was not a “silver bullet”.
However, ever the optimist, Mr Tucker is still expecting FLS Mark 2 to have some effect on lending to SMEs within six months and arguing that there was reason to hope that the economy was on the mend.
Perhaps the worthy gentlemen at the BoE should get out more – and talk to the SMEs on the ground.
We are hearing nothing from SMEs to suggest that they are any more confident about borrowing and they remain focused on paying down existing debt and managing cash flow.
We remain underwhelmed about the potential for FLS to stimulate growth any time soon.

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Banks, Lenders & Investors Cash Flow & Forecasting Debt Collection & Credit Management Factoring, Invoice Discounting & Asset Finance General Rescue, Restructuring & Recovery Voluntary Arrangements - CVAs

Businesses Should Pay Down Debt and Beware Offers That Seem Too Good to be True

Many businesses are overburdened with debt and desperate for ways to deal with pressure from banks, HMRC and other creditors. All too often they are prepared to pay off old debt by taking on new debt which leaves them vulnerable to unscrupulous lenders.
Prior to 2008, interest-only loans and overdrafts were a common method of funding, and were reliant on being able to renew facilities or refinancing.
Like many interest-only loans, an overdraft is renewed, normally on an annual basis, but it is also repayable on demand. What happens when the bank doesn’t want to renew the overdraft facility?  With the economic climate continuing to be volatile and uncertain and banks under intense pressure to improve their own balance sheets, they are increasingly insisting on converting overdrafts to repayment loans and interest-only finance is disappearing.
This has created a vacuum for alternative sources of funding to enter the market where distinguishing between the credible salesman and the ‘snake oil’ salesman can be very difficult. Desperate businesses are desperate often try to borrow money and become more vulnerable to what at first sight seem to be lenders that can offer them alternative funding solutions that the banks cannot.
Generally the advice is to beware, as the recent eight-year prison sentence handed to “Lord” Eddie Davenport illustrates.  The charges related to a conspiracy to defraud, deception and money laundering, also referred to as “advanced fees fraud”. 
The court found Davenport and two others guilty in September. Meanwhile a large number of businesses had paid tens of thousands of pounds for due diligence and deposit fees for loans that never materialised and left victims even deeper in debt. The case only became reportable in October, when restrictions were lifted.
Many businesses just want to survive and are trading with no plan or in some cases no prospect for repaying debt. In such instances they should be considering options for improving their balance sheet by reducing debt. Options might include swapping debt for equity, or debt forgiveness by creditors or setting up a CVA (Company Voluntary Arrangement).

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Banks, Lenders & Investors Business Development & Marketing General Insolvency Rescue, Restructuring & Recovery Turnaround

Are Estate Agencies Safer Businesses Now than they were in 2008?

The sub prime mortgage crisis that precipitated the 2008 global recession led to plummeting property prices, very limited mortgage lending, repossessions and to a dramatic slump in the housing and commercial property markets.
Estate agencies were among the first businesses to feel the effects of the crisis. By December 2008 an estimated 40,000 employees had lost their jobs while around 4,000 estate agency offices -approximately one in four – had closed.
The smallest agencies, of perhaps four or five branches or less, were worst affected particularly if they depended solely on property sales.
So is the worst over now for the estate agency business? Not if the most recent information on the housing market is any indication.
Gross mortgage lending declined to an estimated £9.8 billion in April 2011, down 14% from £11.4 billion in March and the number of mortgages approved for house purchases hit a new low in April, at 45,166, the lowest April figure since records began in 1992.
The Council of Mortgage Lenders predicts that the numbers of homes repossessed will rise from 36,000 in 2010 to 40,000 in 2011 and 45,000 in 2012 and the online housing company Rightmove reports that average unsold stock rose from 74 to 76 properties per branch, reaching the highest ever level for May.
Although the housing market varies significantly in different parts of the UK, with London booming and East Anglia holding steady while the north suffers there is also evidence that the demand for rented property and buy to let property is rising along with rent levels.
None of this suggests that the business of estate agency is likely to be any more secure for a few years yet.  If the High Street agents are to survive they need to revisit their business models, diversify their activities into letting, make use of online marketing and be sure they are up to speed on all the regulations governing landlords’ and tenants rights’ and other property letting regulations.

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Banks, Lenders & Investors Factoring, Invoice Discounting & Asset Finance General Rescue, Restructuring & Recovery Turnaround

It is obvious why Bank Fees are High and Business Lending is so Difficult

The figures for January to March showed a shortfall of 12% against the £19bn that represents a quarter of the annual £76bn target agreed with the government under the Project Merlin scheme for lending to smaller businesses.
Only 16% of FSB members had approached banks for credit and 44% of those had been refused, including some seeking credit to fulfil firm orders.
Growing businesses need working capital to fund the goods, materials, marketing and staff for new growth. While some of that can be obtained by borrowing against the sales ledger (through factoring and invoice discounting), the banks are seeing them as too high risk.
This is actually a reasonable response by the banks where businesses have been clinging on by their fingernails since the 2008 recession and, having used up most of their working capital on paying down old loans, are therefore according to the bank models seen as at high risk of insolvency.
It is a vicious circle. Less working capital means businesses neither have sufficient funds to buy materials to fulfil orders nor are they adequately capitalised to justify new loans.  This is why it is very common for businesses to go bust when growth returns following a recession.
Once banks are realising that a company with outstanding debt is in difficulty, they are providing for the bad debt by adjusting their own capital ratios to cushion against increased risk and in anticipation of the new Basel lll rules requiring bank Tier 1 capital holdings (equity + retained earnings) to rise from 2% to 7% to be phased in from 2015 to 2018.  
The result is higher fees and higher interest rates to businesses and it is no surprise that some companies already seen as a bad risk cannot borrow money, even when orders are rising.
Businesses that have used their land and buildings to secure loans or mortgages may also face huge risk related costs due to the bank’s exposure because banks already have so much commercial property as security that cannot be either leased or sold. The bank will therefore impose penal fees in a bid to recover the provisioning costs.
It has never been more urgent for businesses to mitigate this catch 22 by calling on expert help to look at fundamental solutions and recognise they will not be able to borrow money to limp along as they have been for the last two years.

Categories
Cash Flow & Forecasting Debt Collection & Credit Management Factoring, Invoice Discounting & Asset Finance General Rescue, Restructuring & Recovery

Do Small Businesses Understand Working Capital and Liquidity?

When borrowing against current assets, such as the sales ledger using factoring or invoice discounting or against fixed assets like plant and machinery or property, there seems to be a widespread misunderstanding among businesses about business funding and, in particular, working capital.
While credit is the most common form of finance there are many other sources of finance and ways to generate cash or other liquid assets that provide working capital. Understanding these is fundamental to ensure a company is not left short of cash.
Businesses in different situations require finance tailored to their specific needs. Too often the wrong funding model results in businesses becoming insolvent, facing failure or some degree of painful restructuring. In spite of this, borrowing against the book debts unlike funding a property purchase is a form of working capital.
Tony Groom, of K2 Business Rescue, explains: “Most growing companies need additional working capital to fund growth since they need to fund the work before being paid. For a stable business where sales are not growing, current assets ought to be the same as current liabilities, often achieved by giving and taking similar credit terms. When sales are in decline, the need for working capital should be reducing with the company accruing surplus cash.”
Restructuring a business offers the opportunity of changing its operating and financial models to achieve a funding structure appropriate to supporting the strategy, whether growth, stability or decline. Dealing with liabilities, by refinancing over a longer period, converting debt to equity or writing them off via a Company Voluntary Arrangement (CVA), can significantly improve liquidity and hence working capital.
While factoring or invoice discounting, like credit, are brilliant for funding growth, businesses should be wary of building up liabilities to suppliers if they have already pledged their sales ledger leaving them with no current assets to pay creditors.

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

Saving the High Street

Retail pain continues with the news that Mothercare is to close a third of its 373 UK stores.
JJB Sports has just announced losses 0f £181.4 million for the year to 30 January 2011, three times the previous year’s loss of £68.6 million and plan to close 89 of their 247 stores over the next two years.
And HMV has just had to sell Waterstone’s for £53 million to pay down some of its £170 million of debt. In addition, they also propose to close 40 stores.
Oddbin’s too, has gone like most other wine retail chains, following its failed attempt to agree a restructuring plan with creditors, which was rejected by HMRC.
Plainly there is a major earthquake taking place on the High Street, and it is not all about cutbacks in consumer spending. More importantly retail purchasing is changing. Consumers are becoming sharper shoppers by looking elsewhere, not just in the High Street.  They are visiting dedicated retail parks combining shopping and leisure to offer an experience, entertainment and convenience in one place and are also increasing their online spending.
The government has recently asked Mary ‘Queen of Shops’ Portas to take a look at the country’s High Streets and come up with suggestions for rescuing them, clearly hoping to find a way of rejuvenating this part of the UK economy.
She may well conclude that the competition from shopping and leisure centres with their easy access via car and public transport is too much and that the High Street can survive but only if it offers something different.
Locals still like to buy from local shops that provide a personal service, ideally selling local produce such as farm-sourced. This ought to support retailers like the grocer who lets you taste a piece of cheese before you buy, independent butchers who will advise, trim or even marinate meat and local bakers. Pubs, restaurants and cafes that cater for families, young people, the elderly all play their part in supporting community, even the self-help run library. But for the High Street to avoid further decline, everyone needs to work together and this will require leadership.
You never know, the High Street may be once again be a place where shopping is an enjoyable experience, but what will it look like?

Categories
General Insolvency Rescue, Restructuring & Recovery Turnaround Voluntary Arrangements - CVAs

First decline in household income for 30 years causes pain on the High Street

The Office for National Statistics (ONS) reported recently that in 2010 real household disposable income fell by 0.8%, its first drop since 1977.
A plethora of profit warnings from major high street retailers is therefore no surprise. JJB successfully agreed a new Company Voluntary Arrangement (CVA) for repaying debt, just two years after its last one. Oddbins’ attempts to agree a CVA were rejected which led to it going into administration.
Meanwhile travel company Thomas Cook announced a 6% fall in holiday bookings from the UK. Dixons announced that it was cutting capital expenditure by 25%. H Samuel and Ernest Jones, Argos and Comet all report falling sales. Mothercare is to close a third of its 373 UK stores and HMV has just sold Waterstones for £53 million to pay down some of its £170 million of debt.
Falling consumer confidence, the Government’s austerity measures and rising commodity prices have led to a steady erosion of disposable income. An April report indicated an increase in retail sales, up 0.2% on February’s, but this was attributed to non-store (internet) and small store sales and probably conceals a continued decline in High Street sales.
After a few years of expansion fuelled by debt, it is entirely logical that the marketplace is now facing a sharp contraction as consumers spend less money while they are concerned about their job security and repaying their huge levels of personal debt.
Many companies need to contract and reduce their cost base if they are to survive. For the High Street retailers this means concentrating on profitable stores and reviewing strategy.
Growth is likely to involve developing experience based retail outlets in dedicated shopping environments or direct sales such as online. The High Street has failed to reinvent itself and the recession has accelerated its decline.

Categories
General Rescue, Restructuring & Recovery Turnaround

The Current Conundrum Over Inflation and Interest Rates

The most recent inflation rates show that the Consumer Price Index (CPI) has risen to 4%, a surprise drop of 0.4% from February and the Retail Price Index (RPI) to 5.3%, also a fraction less than February’s 5.5%.
If times were normal these figures would nevertheless trigger a rise in the interest rate to 7 % to 8%, about 2.5% above the RPI.
However, times are still clearly not normal following the financial “tsunami” that was the 2008 Great Recession. Many businesses are still struggling to survive and grow in the face of reduced spending by consumers and clients and cope with soaring materials and commodity prices and volatile oil prices because of uncertainty over events in North Africa and the Middle East.
As a result the fear that an interest rate rise might push the economy back into a recession has led to interest rates being decoupled from inflation.  Inflation is a form of currency devaluation.  It means that every £1 buys less than it did when inflation was lower.  Interest rate rises help to correct this. 
I would argue that currently many businesses are operating with huge levels of debt and not doing all they could to reduce even though they can only survive because interest rates are currently so low.  But this current situation is only temporary.
While a viable business should be able to build a surplus of cash in this situation to provide itself with a cushion once interest rates start to rise again, a business in difficulty will not have this option. It therefore needs to think ahead and revamp the business model and restructure to survive and be ready for to what will happen when things are more “normal”.

Categories
Banks, Lenders & Investors General Rescue, Restructuring & Recovery Turnaround

Will Project Merlin Make any Difference to Business Lending?

With so many companies in financial difficulties will many companies be able to take out further loans as a result of the new agreement known as Project Merlin?
The government last week announced that it had reached agreement with the UK’s four biggest banks to increase the amount of new lending to business in 2011 to a total £190 billion, of which £76 billion would be for small and medium sized businesses (SMEs). The SME portion is an increase of 15% on 2010.  
The lending to businesses will be on commercial terms that reflect the reduced number of lenders in the market. With bank base rates being so low, currently 0.5%, companies are being charged a huge premium with interest rates being set as 8 – 9% above the base rate. In addition, huge arrangement fees are also being applied, where fees representing 5 – 10% of the loan are not uncommon.
Many balance sheets are so decimated carrying huge liabilities to creditors such as HMRC, suppliers and asset based lenders (often at over value) that many businesses will not be able to justify a loan.
Business advisers, who see the effects of policy on the ground, say that one effect of Project Merlin will be for the banks to convert short term revolving facilities, such as overdrafts renewable daily, monthly or quarterly, into medium term loans. These will almost certainly be categorised as new loans in the quota reports but won’t actually represent additional, new funding. The banks continue to run rings around the politicians.
Converted loans are increasingly repayable on demand and therefore are being agreed on terms that allow the bank to keep all its options for essentially demanding immediate repayment.
Andrew Cave, of the Federation of Small Businesses, commented that the majority of small businesses were not seeking finance from the banks at the moment because the cost of existing and new borrowing is increasing and David Frost, director general of the British Chambers of Commerce, also cast doubt on whether the agreement will make any difference because of what he called the banks’ poor and opaque decision-making and over-centralised processes, with a lack of good frontline relationship managers locally in the banks.

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Banks, Lenders & Investors General HM Revenue & Customs, VAT & PAYE Insolvency Rescue, Restructuring & Recovery Turnaround

Latest Insolvency Figures Suggest that UK Business is Hanging on in There

Figures from the UK Insolvency Service just released on 4 February 2011 for the last quarter of 2010 (Q4) show a decline in compulsory and voluntary liquidations, continuing a downward trend.
The total number of compulsory liquidations and creditors’ voluntary liquidations for the quarter to 31 December 2010 was 3,955 in England and Wales, a decrease of 0.2% on the previous quarter and a decrease of 11.3% on the same period a year ago. 
However, closer examination of these numbers reveals that there were 1,200 compulsory liquidations, up 5.8% on the previous quarter but down 9.9% on the corresponding quarter of 2009, while 2,755 creditors’ voluntary liquidations (CVLs), are down 2.6% on the previous quarter and down 11.8% on the corresponding quarter of the 2009. 
Compulsory liquidations are therefore showing a very slight upward trend after the previous two quarters, when they were down 3.2% on the previous quarter and in Q2 were down 9.9%.
A more interesting and perhaps pertinent comparison is with the figures from the last recession.
Either directors are doing a fantastic job of restructuring their companies to remain profitable with positive cash flow, which is unlikely when the word is that advisers from the insolvency and restructuring professionals are not busy.
The other possibility is that “companies are just hanging on in there” with support from creditors, including HMRC and banks, adopting a very light touch on struggling companies.
Companies should bite the bullet and undergo restructuring to survive as viable businesses. Until then, they will continue to “hang on in there”.

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

Business Survival Depends on Stakeholder Co-operation and Collaboration

The support and co-operation of its stakeholders can be crucial to the success or failure of the efforts by a business in difficulty to restructure and survive.
Stakeholders are all those people who have an interest in the business and are likely to be affected by its activities and most crucially by its failure, and they include shareholders, investors, creditors, the bank, suppliers, landlords, employees (and their union representatives) and customers or clients.
Plainly, when a business is in difficulty and has called in a rescue adviser to review its activities, costs, business model and viability, any actions it may need to take as a result will be more likely to succeed if its stakeholders both understand the situation and support the proposed solutions.
While there is one key interest that all hold in common, which is that all have an interest in the business surviving if they want to continue to receive income from it, it is probable that the interests of some stakeholders will conflict with those of others.
Employees will be most concerned about keeping their jobs and their co-operation in any restructuring is likely to depend on whether they feel the management is considering their concerns as well as involving them in the changes that may need to be made.  If there are unions involved getting them on board can be the key to persuading employees to co-operate.
Creditors and investors, on the other hand, may just want to be paid what they are owed and whether they are prepared to forgo or renegotiate payments or finance in the short term will depend on how much confidence they have in its future. 
The bank’s primary concern is to ensure loans are secure, safe and will be paid and will want to be kept informed as well as being given evidence that the business has been properly looked at by a specialist adviser, shown to be viable and any proposals are realistic and have a good chance of achieving the desired results.
It is crucial that the rescue adviser is involved in the management of the stakeholders thus ensuring that their concerns are understood. This will go a long way to ensuring stakeholders’ co-operation.

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Cash Flow & Forecasting Debt Collection & Credit Management General Rescue, Restructuring & Recovery Turnaround

The Focus Must be on Cash Management When Times Are Tough

Profit and turnover are, of course, important measures of business performance but when times are as difficult as they are at the start of 2011 and many businesses are finding themselves in difficulties the main focus must shift to cash.
Cash flow is the most immediate indicator of the way a business is performing and can also provide a warning signal that action needs to be taken to prevent a slide into insolvency.
Close attention to cash flow should give a clearer picture of the immediate state of the business but while it may be possible to adjust to strengthen incomings against outgoings this is only going to be a holding operation.
The business must also look at its business plan and business model, preferably with the help of a turnaround adviser.  An objective outsider working as part of the business team to secure its medium and longer term future may identify fundamental weaknesses that undermine the ability to control cash flow.
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.
The business also needs to control cash on a daily basis, with payments made on a priority basis with purchases approved by an authorised person who is aware of their impact on cash flow. This will avoid the risk of returned cheques. It is also advisable to talk to the bank and keep it aware of what is being done to keep things under control.
Tight control of cash coupled with a thorough look at the business model and a realistic business plan will go a long way to help a business survive in difficult trading conditions.

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Cash Flow & Forecasting General HM Revenue & Customs, VAT & PAYE Rescue, Restructuring & Recovery Turnaround Voluntary Arrangements - CVAs

Save Your Company by Terminating Onerous Contracts to Cut Costs

Many directors are afraid of terminating contracts and agreements when their companies are in financial difficulties normally out of a concern that termination will lead to a cancellation payment that the company cannot afford.
If a company is experiencing fewer orders or lower sales, for example, generally it will need fewer staff but the worry is that terminating contracts of employment will trigger costs, particularly where senior staff are involved.
Similarly, a reduction in orders may mean that the company only needs two of the five fork lift trucks it has where terminating a hire purchase, hire or lease arrangement ahead of the agreed contract period will trigger a termination settlement or a contract termination liability.
Equally it might now no longer be able to afford the 12-month advertising contract it agreed six months previously. Even terminating contracts with advisers can be expensive.
A company in financial difficulties does not have the surplus cash to meet these obligations.  But while it puts off terminating arrangements it no longer needs it continues to bear the costs.
It is often better to cut the cash flow if this reduces costs that mean the business is viable: profitable with positive cash flow. There are remedies that can be used if necessary to deal with the crystallised liabilities when a company cannot afford them.
Negotiating terms for informal arrangements with creditors is sensible. It may involve negotiating terms of payment, such as a Time to Pay (TTP) arrangement with HMRC for PAYE or VAT arrears, which have been very effective in helping companies out of insolvency.
Many companies leave it far too late to reach informal arrangements that would have allowed them to terminate contracts before the company finally runs out of money.
But there is a solution that allows companies to terminate contracts and not pay for them immediately on termination. A Company Voluntary Arrangement (CVA) avoids liquidation of the business and closing it down. It allows for paying the contract termination out of profits.