A Life In Numbers

It’s a year since Lehman’s collapsed and threw the financial markets into turmoil.  And the last year has been an incredibly challenging period for many companies.  Whilst large corporates have been able to survive through budget freezes and cost reductions, although even this wasn’t enough for some, the SME sector has had even more challenges to face with the banks freezing access to finance, large customers pulling back their business, and cost cutting endeavours slicing to the bone.

There’s a big difference between a company of 10,000 cutting 10% of the workforce and losing 1,000 people.  It sounds a lot and can be distressing for all involved but it still leaves the company with 9,000 staff which can be plenty enough to take up the slack.  For an SME, there’s much more of a challenge.  The cuts have to be deeper to make a difference and for a company to reduce from 50 heads to 25, it means resources are stretched really thinly.  Sometimes to breaking point.

Any company who has lived through the last year or two and survived intact has something to be very proud of.  The challenges are by no means over yet but there are signs the worst may be over.

Building a business can be a challenge at any time but if you’ve survived through the current economic climate then it’s a a real sign that you have what it takes to succeed.  The key lesson is to remember what you learned through this period.  Actually companies can survive with tough decisions and the most useful asset in a business is not it’s resources but the resourcefulness of the management.

It’s also worth bearing in mind that there can still be more danger as we return to growth, especially if you don’t have a good understanding and control of the finances. 

So, if you’ve survived so far, well done.  If you didn’t quite make it, there’ll be other opportunities.  Whichever it is, make sure you look back and take some good lessons from the experience.

So, we have the much anticipated Pre Budget Review and the FTSE has it’s greatest day’s rise. Are the two connected or pure coincidence? Was the rise due to the budget announcements being better than expected or not as bad as the market feared? Or was it just Obama’s new finance chief?

For SMEs the most important elements were these:-

VAT changes (short and long term) - it’s debatable how much benefit the reduction will have. Many services companies rely on the VAT element coming in on their sales (and not paid out on salaries) to boost their cashflow in the month and this potentially reduces that element. If you’re spending a lot on stock, assets and general expense then it feasibly reduces your short term outgoings but again, if you’re profit making then the leveraged impact on less cash coming in from sales may hurt you.

For the accountants it creates a whole lot of extra administration and careful checking, especially in the transition periods. It’s going to mean a considerable number of tweaks to business models, accounting systems and invoice systems and there’ll be lots of errors to chase down. And certain companies will use the potential for error to justify delaying invoice payments. In some respects the worst element will be when the rates change back again and just when companies have got used to a lower payment then all the prices will increase again. And potentially up to a 20% rate.

Over time, for sizeable SMEs and companies, VAT is something of a wash through the accounts but it does interfere with the cashflow. It should ultimately benefit the small entrepreneurs and one-man-bands who are below VAT registration thresholds along with their customers, providing they can administer the changes.

Overall, I’m sure it looked good on paper and the economic theorists can wax lyrical about the macro-economic impacts but I remain to be convinced about the real benefits for SMEs.

Verdict - make sure you change your systems, invoices and models to reflect the new rate and check everyone else’s invoices carefully

National Insurance - Ouch! Of course, this isn’t a tax is it? Even the name tells you it’s a contribution. Your way of giving back. At least we have until 2010 but this still stings and adds an even greater cost to employment as the 0.5% is going on employees and employers. This will take employers rates to 13.3% on top of salaries.

Verdict - there comes a point when you have to question the costs of employment (with requisite recruitment costs, NI payments, benefits, pensions, administration, employment rights issues, notice periods and employment insurance) and consider whether it’s far better to simply bring in flexible resources which might seem a little more costly at first glance but end up as much better value when everything else is taken into account.

Corporation Tax - generously deferring the 1% rise for small businesses. So at least you’ve got something to look forward to if you can claw your way to profit in the current market. This doesn’t really do a whole lot to encourage entrepreneurship in the country and generate more employment opportunities.

Verdict - make as much profit as you can now before the rise comes in (simple as that!)

Finance and Lending - at least there seems to be some desire to get more funding into the SME sector. Unfortunately, there’s still the massive number of governement bodies advising and guiding SMEs through the maze of which they form an inherent part as highlighted by Doug Richards in his report last year. In reality this is likely to be an expansion of the existing Small Firms Loan Guarantee Scheme which is proving more popular than ever with the banks. They seem more keen on lending when they have a Government backed guarantee. If the promised Small Business Finance Scheme with guaranteed bank lending up to £1m (compared to the SFLG £250k) is introduced in the new year then this could present quite a useful line of credit. It will all depend on the qualification criteria and the application process.

Verdict - check to see if your company qualifies for any of the lending but be prepared to spend 3 to 6 months in the application process.

Business Tax repayments - a subtle but important change which essentially has the Chancellor telling HMRC to go easy on companies struggling to pay their tax bills (including corporation tax, PAYE & NI and VAT). This is actually an area that could be of real benefit to growing companies, especially on the PAYE and NI front which forms a huge (often 50%) part of their cost base and is usually expected within the month after salaries are paid. Obviously the intention is that the tax is all still paid but there is supposedly more scope for agreeing payment plans and terms.

Verdict - if you can afford to pay your tax then you need to pay it. If you’re struggling, then talk to HMRC and quote the budget review. It will be interesting to hear the responses.

Entrepreneurs generally - having previously taken away the Business Asset Taper Relief (replaced by the inferior Entrepreneurs Relief and Capital Gains changes) the chancellor continues to show a disinclination to support and encourage entrepreneurial risk takers. Increasing higher rate taxes, taking away personal allowances, reviewing offshore tax statuses (stati?), capping pension funds and increasing employment taxes all hurt those seeking to build businesses and generate employment. The whole point for many entrepreneurs is that they are willing to take a risk because they see a greater reward. And whilst there may be other non-monetary benefits such as the pride, excitement and challenge of building something against the odds and taking others on that journey with you, ultimately it’s the monetary gains (and what they can give you) that drive many entrepreneurs. Capping and taxing the amount they can make could potentially drive many overseas to friendlier economies or drive them to get proper jobs in other companies (potentially leading to the demise of those companies due to their disruptive natures).

It’s the entrepreneurs that can pull this country out of the jaws of recession if they are given the freedom to do so. This budget gives with one hand but takes away with quite a few others and it will be some time before the smoke clears and the mirrors reflect what’s really happening. Until then we’ll all have to pop a few nurofen and get back to studying the small print.

You may have seen the Sequoia Capital slides doing the rounds amongst CEOs and Investors in the Private Equity world. They start with the bold statement “RIP Good Times” and take things downhill from there.

The overall conclusion is that there are some tough times ahead (no kidding!) and there are some fundamental actions that should be taken by companies to prepare for leaner markets. What struck me most about these actions is that the sensible companies have been taking these steps all along, whether times were good or bad.

The list including activities such as “perform situation analysis”. If you’ve not been figuring out where you are and what’s going on then it’s clear you may find the future a challenge. Another item was “adapt quickly”. Anyone in the SME world knows that this is essential in the early stages but it’s often forgotten as companies grow.

Other’s included were “become cashflow positive as soon as possible” and “spend every dollar as if it were your last”. These have long been the mantras for many successful entreprenuers.

The parts that many investors have latched onto are “make cuts” and “review salaries” and it’s always worth stepping back and looking objectively at the possibility for these. The challenge in this market is making sure that you cut in the right places and don’t harm your business more in the future.

If you haven’t been applying the rules listed in the action plan, then it’s likely you’ve been getting away with it due to the growth markets we’ve seen over the last 8 years. What you may now realise is that what you really need is the expertise to help you understand what you’re seeing and create a plan to make it better.

For many entrepreneurs, the apparent recession and crunch are just business as usual, facing the daily challenge of trying to find new customers in competitive markets and managing their cashflow as closely as possible. There are even opportunities in this type of market, as often competition can fall away and if you’re prepared and flexible new opportunities open up. It’s also possible to find new ways of doing things more effectively and efficiently.

There may be talk of this being a bigger, harder recession or downturn than we’ve had for a while, but these things all run on cycles. They’ve happened before and they’ll happen again. If you have any doubt then find yourself a copy of The Fourth Turning and see how many similarities you can spot in the current social, economic and financial markets. Other good cheery books for this market include The Great Crash by J K Galbraith and Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackay. They help put everything in perspective.

It is easy to get sucked into the bad news that the tv shows and newspapers like to promote. That’s their job and they’re very good at it. The worse it looks the more you tune in or read. By all means watch and read but you don’t have to believe it’s all true.

The key thing to remember is to step back occasionally and ask what’s really going on. Look past the doom and gloom and the same stories that get repeated over and over again to make things seem worse and seek out the opportunities. They’re there if you look for them and now’s the time when everyone else could be looking the other way. Join the few who can really prosper in this market. And prepare yourself for the good times that will inevitably rise again. And perhaps sooner than you think.

It seems the government are digging themselves a deeper hole by intervening in the Lloyds/HBOS deal. As the HBOS shareprice falls the Lloyds offer could look less and less attractive for the Lloyds shareholders (and a 75% shareholder approval is needed) and there could become a point where the shareholders force the board to renegotiate or walk away.

And what does the Government do then? If it allows the deal to fail then what are the repercussions? If they give concessions to Lloyds to support the deal (which could be guarantees, underwritin of bad debt, future tax breaks) then what message does that give to the rest of the market. Don’t worry about taking on higher risk business because if you’re big enough the state will bail you out. The government has got itself into a very difficult position either way.

In an entrepreneurial market, investors and entreprenuers understand that there is risk in building and running a business. The extent of that risk is not always fully appreciated but most entrepreneurs understand that if they take too many risks in the business then they can lose their business, income and jobs. Unfortunately, directors and investors are not always fully aware of all the risks they are taking on but that’s another matter.

Until recently, the same was true for big business as well as the SME market. Now it seems the game may have changed.

So where’s the safest place to be?

I believe the SME market remains the more resilient, if it’s well managed and controlled. The challenge for large companies is that, especially in financial services, the devolved responsibility and increasing complexity of some transactions can have a massive impact on the business. In AIG, there was a solid, dependable, traditional business that had traded successfully in the same way for many years. They were ultimately undone by a small department set up to trade in derivatives, that brought only a small amount of overall income but exposed the business to massively disproportionate amount of risk.

The coming months may see many more SMEs and even large businesses fail. For large companies it will be those that have strayed into markets, industries and businesses that they don’t understand and those who are slow to adapt and change. In the SME sector it will be those who are carrying too high a fixed cost base and those who are not managing their cash. It will also be those who are too reliant on the cash flow from a few large customers who will be looking to reduce their spend and squeeze their suppliers. Ironically, due to much of the legislation supposedly in place to protect employees many companies may have to close due to the fact that they can’t afford to continue or bear the costs of undertaking a redundancy round, especially with all the costs and employment tribunal risks that now go with it.

Unfortunately, for many of these companies, they won’t be bailed out by the government and they will simply be allowed to fail.

With all the issues in the financial sector, many savers are relying on the £35k guarantee over their savings held in personal bank accounts.

Many businesses, however, have considerably more than £35k in the bank and it seems that not even that would be covered because the guarantee only covers personal bank accounts.

We called a bank for one of our clients, to be told “no one’s asked that before” and “I’m sure there would be some kind of compensation scheme you could apply for but don’t worry we’ve got lots of money”. Not the most comforting of responses.

How long could your business last if your bank went bust and you couldn’t get access to your cash?

So is it time to turn the tables on your business bank manager (sorry, “relationship manager”) and start asking them for security? I look forward to the day when we start saying “I’d be happy to deposit our funds with you but we’ll need personal guarantees and covenants over your property and assets”.

Remembering the old adage of chaos theory that says when a butterfly flaps its wings in one country it can cause storms in another. I wonder if there’s any connection between the switching on of the Large Hadron Collider in Switzerland and the collapse of Lehman Brothers on Wall Street.

It’s just a theory!

I was at the BusinessLive08 exhibition yesterday and during a very interesting discussion on “Are we talking ourselves into a recession” (the answer was “yes we’re in danger of it, but we don’t really think we’re in one”), someone made an interesting observation.

He was selling IT consultancy and he said the response he was recently getting from prospects was “can we just wait a few months?”. In essence, they were saying “can we defer the decision?”.

It seems to be the default position of many people in business to go to “no decision” mode in the event of uncertainty, crisis, fear or worry. In fact, many people operate in “no decision” mode for much of their career. They tend to base this philosophy on the erroneous view that making the wrong decision could get you sacked, so making no decision at all could save your career.

The reason I moved away from big corporates and into the SME world is because I found far more willingness in SME directors to make decisions quickly and confidently. No protracted meetings, no bulky reviews or reports, no consensus debate. Just a straight “yes we will” or “no we won’t”. It saves so much time and it’s invariably much better for the business.

Unfortunately, I’ve recently seen more indecision creeping into the SME market. There’s more “can we wait and see” and “I’d like to think about it for a bit longer”. It may be a factor of the times, with fears of a recession abounding even if there’s no actual recession. As Dennis Turner (Chief Economist, HSBC Bank, who was very entertaining) pointed out, we have had 63 quarters of positive growth, we have historically low unemployment and interest rates and we still haven’t had one quarter of negative growth, let alone the 2 needed to define a recession.

If you make a decision then you can move forward. It frees you up and clears your mind. And maybe it will be the wrong decisions sometimes but then you have 2 choices, you can decide to do something else or you can focus on taking the actions that will make the decision right.

I really hope that the SME world doesn’t catch the indecision disease that seems so prevalent in the world of endless meetings, reports and discussions that so often defines large corporates.

If in doubt, make a decision. You’ll feel much better for it.

With all the talk of the credit crunch and recession in the news, it’s easy to start to feel nervous about the future. Here are a few tips to make sure your business can ride out any rough waves.

1. Watch your cash closely - make cash and cashflow the priority in all your deals. You might be about to win the deal of your lifetime but if it means commiting serious cash and relying on income streams from the future you may not be around to enjoy it. Think about how you maximise cash in, and minimise cash out in everything you do.

2. Create reliable cashflow forecasts - make sure you know if things are going to get tough in the next few months so that you can prepare for them.

3. Look at where you’re spending and consider the value. Many companies gather a lot of little recurring costs and expenses along the way and they’re forgotten about. You can save a lot just by reviewing where your cash is going in the business.

4. Look closely at your working capital. In tough times, your customers will try and stretch out their payment terms and your suppliers will push for early payment. Keep to the contract terms and try and negotiate for improvements.

5. Credit check your customers. You don’t want to be caught out by a customer going bust while still owing you a chunk of money. Keep close tabs on any poor payers.

6. Review your marketing. Are you still using marketing messages designed for a fast growth boom market? Perhaps you need to reconsider the current economic climate and take a leaf out of the recent M&S “a meal for 2 for under £10″ campaign.

7. Watch your fixed costs. The hardest thing in a recession is to manage your unavoidable fixed costs. The longer you’re tied in, the less flexibility you have. Look at where you can improve flexibility in your expenditure.

8. Watch out for fraud. With rising fuel and living costs the temptation for staff to take a little extra increases. It certainly won’t be everyone but internal fraud is still one of the most common factors impacting business. You need to have strong controls and robust procedures to prevent losses.

9. Broaden your customer base. With the potential for companies to go under or reduce their spending, reliance on one or two large customers could be fatal for you if one of them fails or cuts back their purchases.

10. Look at your financing. As the market contracts, you need to be careful about breaching your banking covenants or finding that the facilities you were relying upon are no longer there. You cannot wait until you need the money to arrange new facilities and you must make sure that you have a Plan B in the event that your current lines of credit are squeezed.

It’s not the first time things have been rough in the economy and it won’t be the last. There are many companies that thrive and survive in these kind of markets whilst others go to the wall, so just make sure you’re in the right crowd by following these tips.

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