A Life In Numbers

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’s good to see that there’s some consolidation in the market for part-time FDs. The recent merger of FDUK and FD Centre shows that there is more interest than ever in the use of flexible finance resources by large and small companies.

As the credit crunch bites and companies come under more pressure to manage their cash, more and more CEOs and MDs are finding that they have more than enough to occupy their time without having to look after the company finances too. Operations that could be handled in a growth market now become much more challenging. And it doesn’t take much of a shift in the finances of a business to take it from healthy and prospering to wounded and struggling.

The continued growth of companies providing the services of a part time FD or CFO, shows how a good management team can make a great decision when they bring on an experienced finance professional. And there’s lots of choice, from the independent providers to the multiple franchise services. And between those two there are specialist organisations, like us, which bring a very focussed service to their clients.

A recent survey showed that the majority of Finance Directors in the top UK companies are now being paid over £1m a year. And most good FDs in both public and private companies are now commanding salaries of over £100,000 a year. And those are being paid because of the value that they can bring to the companies. Of course not every one brings an equivalent value, but if you have the right person in the role then the worth they can bring will be many times their salary in terms of value created and costs saved.

For an SME, £100k or £1m is most likely a step too far, unless they’re very cash rich or extremely well backed. This is why the flexible and part time FD is becoming more popular. When you consider that a full time FD on a salary of £120,000 is going to cost you at least another £90,000 in bonus, pension, employment costs, NI and recruitment fees. Not to mention share options and notice payments. And after all that, they may not even stay if they get a better offer elsewhere. Also, they won’t be working on your finances all the time you’re paying them once you take into account holidays, sick leave, training, general downtime and all the time they spend getting drawn into matters other than finance.

So is a good FD worth the money? My friend Tony told me a recent survey said that 9 out of 10 of companies believe it is. And 100% of the top performing companies think so. When you consider a good FD can bring at least 10 times their cost in added value to the company then the answer becomes very clear. The biggest challenge for a business owner is really going to come down to the commitment to the cost and the risk that they may not need all the time, all at once.

Will we see a part time FD being paid £1m, like the ones in the top UK companies? If they can bring £10m of value then it still seems like a good deal. Would you pay £100,000 for someone worth £1m? It would be hard to see why not, if you could afford it. What’s it worth to see your business protected from ruin? What’s it worth to see your business sustained during a period of economic crisis? What’s it worth to have your business prepared for the growth that can be achieved both during the current climate and in the future? When you look at it this way, you can see why companies are turning to FDs they can trust.

And that’s why I believe we’ll continue to see significant growth in the flexible and part-time FD market. Because smart CEOs and MDs can see the value they bring. And they like the flexibility and advantage of having an independent resource that can be called upon when its needed and dialed down during the quiet periods. And that’s definitely worth something.

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.

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.

There was a great article by Jonathan Moules in the FT this weekend explaining how entrepreneurs will often try and run a business without anyone to guide them on their finances. It was titled “First find a finance director, then run the business”. It gives me a perfect opportunity for a blatant plug as well as some useful pointers.

The article describes how many business owners have found they’ve struggled through worrying about their accounts, cash and finance becoming distracted from the main focus of running the business. It also highlights that many are put off by the perceived high cost of a finance director.

The reality, as many have found, is that a good finance director can easily increase the value of the company by more than their cost through identifying savings in expenditure and improving margins and contracts. They’ll also free up your time to run the company and provide new insights and ideas for developing the business.

For a growing business, more and more companies are turning to a part time finance director in the early stages and benefiting from the financial knowledge and experience they bring. Another article in the FT last week also described how a part time fd can work for a business.

It’s good to see so many people realising how effective this sort of service can be for their companies and to see entrepreneurs understanding that they can do much more with their business when they focus on what they do best.

There seems to be an element of suprise at the recent departure of the Flickr founders, Stewart Butterfield and Caterina Fake, from Yahoo. They sold the company to Yahoo 3 years ago and they’ve now fulfilled their earn-out, taken the cash and moved on.

This is a very common scenario for any acquisition. And it makes total sense. An entrepreneur is invariably someone who has chosen to leave the corporate world and make it on their own. They go through the challenges and obstacles of starting their own business, raising funding, generating sales, marketing and promoting the products or services. And throughout that process they have to make fast decisions, all the time knowing that the buck stops with them. They don’t postpone a decision awaiting a feasibility report. They don’t assign a manager to run an investigative project to analsye outcomes, they don’t schedule endless meetings to discuss the possible ramifications of the decision. They look at the facts and take action. If they don’t, their business quickly stalls.

It’s challenging, it’s exciting, it’s scary and it’s satisfying. When it works it feels fantastic and when it doesn’t work it’s excruciating. But there’s no time to dwell on either outcome because when you’re running your own company you have to keep moving. Spend time patting yourself on the back or kicking your own rear end and the competition will take you out. It’s all about fast paced, quick thinking, flexible, dynamic, focussed decisions and actions.

And then you sell the business. After the flurry of excitement, anger, trepidation, joy and pain that is the exit (especially due diligence and the interminable wait for lawyers to agree contracts) you find yourself somewhere new. Your company feels the same, and the same people are still there but something’s changed. Now you have to report to someone. You’re no longer in charge (although you’ll try to kid yourself you are). You’ve spent a good portion of your recent life growing your precious business and now someone else owns it.

And so you swallow your pride and wait for them to tell you what they want you to do. You know you’ve got some earnout targets (and hopefully you’ve negotiated smartly to make sure you’re in control of achieving them) so you make sure you do what’s needed to complete those. But you think there must be something more that the new owners want to do with you.

So you start asking and probing and pushing. And you begin to find that the new owners hadn’t really thought past the point of acquisition. Buying your company seemed like a good idea at the time and it certainly stopped anyone else getting their hands on it but now they’re in a bit of a quandary. You work in a different way, and they’re worried that changing that might harm the business. Equally, they don’t want you causing too much change in their business in case that ruffles feathers. The management team of your new owners are all a teeny bit jealous because, whilst they now own your business, it’s you who’s actually getting the cash. And although there’s a grudging respect for what you’ve done they can’t help feeling that it should have been them and you’ve just been lucky. This always causes a somewhat strained relationship.

And as all this continues, you begin to wonder whether it was all a bit of a mistake. Selling up and getting the cash was great but the sense of dynamism seems like it has gone from the business. It feels a lot more like a job now. And that was what you were trying to get away from in the first place.

So you make a decision. You decide to focus on the earnout, earn your extra cash and move on. You’ve already done the hardest bit, which was letting go of the business when you originally sold it. So now moving on is a lot easier, especially with the buffer of an earnout bonus. Now you’re free to begin the whole process again.

This scenario recurs over and over in the business world. It can run at different timescales but it’s always a common theme and it’s indicative of the entrepreneurial nature. It pushes against the boundaries and is stifled by being caged. It shouldn’t be taken as a negative indicator on the acquiring company, although they do need to make the most of what they’ve bought whether the founders stay or go.

Whether you’re an entrepreneur or an acquiror, you should expect that this will be the way of things and plan accordingly.

In the case of Yahoo and Flickr, there are a whole lot of issues going on with Yahoo but the Flickr founders would have gone whether those issues were there or not.

I met someone this week who was telling me about how they lost their last business because they ran out of cash and couldn’t pay the bills. What galled them most was that they were paying a lot of money to accountants who they thought were looking after their business.

This is not the first time I’ve come across this scenario, and I’m sure it won’t be the last. The issue here is not that the accountants were doing anything particularly wrong, it’s just that the entrepreneur thought he was getting a different service.

Often business owners assume that because they’ve engaged an accountant (and that’s a very wide ranging term) they will get someone who fully understands their business and will be looking at it from a commercial perspective on a regular basis. In most cases, what they actually have is a bookkeeper or tax advisor who performs a very specific task and won’t generally go outside of that remit unless they are explicity asked.

When it comes to your business you need to understand specifically what you are expecting people to do and make sure that they know your expectations. And the tough part is, that if you want a higher level of service then you’re going to have to pay for it. And if you don’t pay for it up front, it could cost you a whole lot more in the long run.