A Life In Numbers

If you have yet to attempt to complete an online Annual Return for Companies house then you may need to set aside a good chunk of time and have a few painkillers to hand.

If you have a business that is a simple private company with just a few shareholders and only one issue of shares all at the same price then you shouldn’t have too much trouble.  However, anything more than that and you could find yourself facing some serious frustration.

With good reason, Companies House is encouraging companies to submit their Annual Returns online and the cost for doing so is half that of a paper submission.  And, to their credit, some good changes have been made such as allowing more that 99 shareholders to be added (a limit not made explicit until you tried to manually enter the 100th and found you just couldn’t any further and then needed to repeat the process on paper) or the inability to handle low nominal values for shares (compounded by an inability to understand this was an issue) which has now been fixed.  However, I’m also hearing of instances where paper forms are being rejected because online ones have been started and this means the online version has to be useable and practical.

Where are the major issues now?

Firstly the requirement to update your directors details with the Country/State of Residence.  Not too complex in itself but it feels like repetitive information which is already included in the address.  When you select the country then you are prompted for a “date of change” which is not abundantly clear as most of your directors will not have had any change.  The answer here, according to Companies House, is to put the date of the Annual Return.  Also, although there seems to be an implication that you will also have to complete a 288c for this change, I’m assured that this is not necessary (as there’s been no change!)

The next challenge comes by way of the “Amount paid up on each share:” which has clear notes stating “The amount should include the share premium.”  Unfortunately, if you are a company, as many are, which has had more than one issue of the same class of share at different prices (multiple financing rounds either up or down) then the single box allowed for the submission of this data seems woefully inadequate.  Now, admittedly there is a later note which says “Multiple amount paid and unpaid details within the same class of share.  This form is not currently able to capture multiple paid or unpaid amounts for the same class of share. This information can currently only be provided using the Software Filing service or by submitting the paper version of the form.”  and they seem to be adding this sentiment liberally across the site, so it is obviously causing some consternation. 

The main issue here is that it smacks of a set up that has not been fully thought through.  Unfortunately, it seems it’s also not been communicated clearly to the help desks at Companies House.  I’ve had two separate calls today where I was told “just put the paid up share premium” and when I enquired how I should handle multiple values I was told “just put the current one”; then “put the total share premium”; then “just put in what’s needed to pay it off”; then “I’m not sure I understand this” then “sorry the technical department is busy” and finally “we can’t give you guidance on this and you’ll have to take your own legal advice”.  Our lawyers have confirmed this is a complex issue.

A little more digging has confirmed that the BIS (Business Ideas and Skills department) of BERR (which once upon a time was the DTI) have identified this as an issue.  This link BIS Paid Up Capital explains a little more and they are referring people to ICSA ICSA Guidance for more guidance.  The ICSA essentially say do what you can to provide information but if it’s too complex then ultimately just dividing the total share premium account by all shares should do the trick. 

I understand Company Lawyers are currently advising clients to go the paper submission route and submit all relevant details.  Ultimately it looks as if there is a realisation that this aspect of the Companies Act 2006 needs a little more work and there is talk of a change being made.  If you’re stuck with the online (which you will be if you’ve selected the “Proof” option then you’ll probably need to follow the ICSA guidance.

The next challenge to be faced is the Prescribed particulars (of rights attached to shares) which provides a relatively small box for a whole lot of potential information. 

Here the challenge may come for small companies, where they only have Articles of Association and no Shareholders Agreement and they will have to pick their way through understanding what’s relevant and ensure they don’t include information relating to Directors instead of shareholders.  For companies with more complex structures and detailed Shareholders Agreements as well as Articles, it’s unfortunately not possible to just write “as detailed in the Articles”.  You have to go to through and select all the relevant information and cut and paste it into the boxes in some coherent format. 

I’ve seen indications that there might be a limit on the amount of data that can be input but I haven’t found out whether that is actually the case.

There have been some interesting questions as to the objective of this particular request, as excerpts from Articles and Shareholders Agreement will never tell the whole story and for any potential or existing shareholders they would be better off getting hold of the complete documents.  So for small and medium private companies this does seem an extra burden that serves no real purpose.

 The details that have to be extracted for each class of shares are as follows :-

(a) particulars of any voting rights, including rights that arise only in certain circumstances;
(b) particulars of any rights, as respects dividends, to participate in a distribution;
(c) particulars of any rights, as respects capital, to participate in a distribution (including on winding up); and;
(d) whether the shares are to be redeemed or are liable to be redeemed at the option of the company or the shareholder and any terms or conditions relating to redemption of these shares.

There are a lot of beneficial changes coming out of the Companies Act 2006 but there is still a need to make sure companies can operate and continue without being overburdened by bureaucracy.  For many SMEs it feels like government departments assume you have as many administrative staff as they do.  There’s still a real need to reduce these burdens on hard pressed SMEs, even more so at a time of cost reduction when many are doing their best to get by and keep their staff employed. 

The new Companies Act is a decent step forward in many areas and it’s helping to simplify matters but at the same time its brought in some extra demands that do need more consideration as to how appropriate they are for certain types of companies, especially when it comes to SMEs.

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.

I’m currently reading Wikinomics and it’s a great insight into how collaboration is driving new ways of working. It’s the driver behind Linux, Google, Flickr, Wikipedia and the whole blogosphere. And this week we saw Nokia opening up the old psion mobile operating system of Symbian to the developer community. Large corporates are grasping what the Web 2.0 community have already seen, that collaboration and community can drive significantly faster development and create size and value quickly. There are still some challenges in determining ways to make money from this but it will follow the quality and in an open market where everyone’s a judge and has an opinion, marketing and spin alone will no longer be enough.

The biggest challenge comes for SMEs and the associated investment community. One of the first questions many investors ask is how strong the Intellectual Property Rights (IPR) are. Traditionally IPR has been seen as a key component of value as a barrier to entry and a saleable asset in its own right. In a world of open source and collaboration the lines start to blur betwen who owns what and to focus too much on IPR could lead to missed opportunities.

When I’m dealing with companies that are starting or developing their business, I often find there is a high level of paranoia about their ideas and business models. The SME world is full of (largely unenforceable) Confidentiality and Non Disclosure Agreements. However, when you enter the Blogosphere you find a cornucopia of ideas ripe for business use that are freely available and open for anyone’s use.

More SMEs need to grasp the 2.0 philosopy of opening up to customers, suppliers, and the wider world of the internet. Allow your user base to help you grow and keep giving back to them. When you have a small, growing company you need all the assistance you can get and there’s plenty out there willing to help. It gives you more flexibility and more access to knowledge and expertise that an SME generally can’t afford.

I was emailed today by a friend who has just been called by a credit agency chasing him for outstanding payments on a sky account that he never opened and is at a completely different address. This is a classic ID theft scenario where the ID thief gets hold of your name, date of birth and current address and then opens an account in your name using a new address and saying they’ve just moved. They can run the account for a while paying the bills and building good credit and then disappear leaving a big outstanding bill. Your credit record gets a big black mark and the the first you hear about it is when the debt collectors come knocking at your door.

Unfortunately, there’s no easy way to prevent this. ID theft is something you just have to deal with after the event. You can use Experian to review your credit record and check for mysterious accounts and it can also be worth checking the other agencies Equifax and CallCredit.

Unfortunately, once it’s happened once, it’s more likely to happen again as you’re now on a list of good targets.

Recent reports have shown that the most likely victims of ID theft are middle class business owners and directors. There are plenty of places that show directors details and the chances are you’ll have a reasonable creidt record if you’ve been sucessfully running a business.

So if you’re a director of any company from SME to PLC you should check your credit report regularly.

You should also watch out for criminals using your company details in the same way. It’s easy for someone to complete a change of address form and send it to Companies House. They’ll just amend the records and then anyone wanting to get goods fraudulently delivered and tell suppliers to check the companies house address for confirmation (and most credit agencies will use this too). As a business owner you should regularly check your Companies House details before you find yourself on the end of a CCJ or a Winding Up Order.

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.

www.marshallkeen.com