IN THE NEWS
As part of his work for the ICAEW Manufacturing Advisory Group, Nick co-presented a webinar for the ICAEW in June 2022. Entitled Navigating a Manufacturing Business in Inflationary Times, this attracted over 200 participants.
Read Nick’s advice on Navigating the Business in an Inflationary World at ICAEW Insights
News on Business Board grant funding for a local Vineyard from Cambridgeshire and Peterborough combined authority
Featured in an Institute of Chartered Accountants in England and Wales (ICAEW) article: Business spotlight: how to juggle a portfolio (19 June 2020)
Latest Blog – November 2023
WISH YOU WERE HERE
OR – THE PERILS OF MODERN BUSINESS PROCESSES
Modern business processes can be very slick, accessed through online portals with logins and MFA codes sent through by email or to mobile phones. You can access them 24/7 and they work extremely efficiently – except when they don’t.
One of my clients was nearly brought to its knees by an unplanned absence. A senior employee in the finance team had to take emergency personal leave to deal with an urgent family crisis, and on top of that their mobile phone malfunctioned.
I stepped in to provide some temporary extra resource and saw just how problematic things can be. Key tasks could be executed, but only if I had access to them.
Like most companies, we had a number of employees with suitable bank access and separation of data entry and approval, but other services were more problematic. Payroll, HMRC services, credit card transactions and foreign exchange contracts all caused major issues. You might have online trading platforms or shops. Common questions included:
- Who do we use for each service?
- What is the web address for each service?
- What is the login ID?
- What is the password?
- (If any) where does the MFA code get sent?
I tried telephoning but many organisations have very poor customer service. Responses included:
- “It’s all on the website”, but nowhere covered the absence of a key individual
- “We can’t take instructions from a director, only from the main contact”
- “We’ll send an access code [to the absent employee only]
All these things could be overcome in time, but it took hours of effort to achieve the simplest tasks.
So what can you do about it, given that you also want to retain security and limit access to sensitive areas of the business? I suggest the following:
- For each business process, have a second person trained as a backup, with their own logins
- If that isn’t possible, have a list (in an Excel or Word document) of logins and passwords under password access protection. Keep the password in HR to be released to an employee having to cover the task during absence.
If you think this won’t ever apply to you, consider how it might: hospitalisation from an accident, serious injury or illness; problems while overseas on holiday (phone/internet access, theft of devices); or even sudden death could happen to one of your key employees. Putting simple precautions in place now, with periodic review and updates, could help you later.
Previous Blog – October 2023
PLEASE (RE)LEASE ME, LET ME GO
This month’s blog is inspired by Englebert Humperdink (1989), or do I mean Elvis Presley (1970), or Dolly Parton (1963), or Eddie Miller (1949)? The list of people who sang this song is pretty long and mirrors the popularity of leasing – a financial solution for spreading purchase payments over time.
While only some businesses will buy specialist manufacturing equipment, or fork lift trucks, many will find they need to buy vehicles from time to time. The majority of business car and van purchases are on lease rather than cash purchase, giving the following benefits:
- Spreading the cashflow cost over the use period of the vehicle
- Indirect access to the bulk buying power of the leasing companies
- Certainty of future payments (*)
- Removal of the risk of future residual values
(*) There can be additional “end of lease costs” if the vehicle condition is not acceptable and there will be charges if the vehicle is over-mileage.
During the last three years, second hand vehicle values have been rising, which can reduce the cost of a lease. However, new vehicle prices have also been increasing and interest rates have gone up. There are also concerns about future second hand values, particularly of electric cars as future technological improvements will make current vehicles relatively obselete.
Leases are usually taken out over 2-4 years, and are linked to a mileage allowance. If you find you are using a different mileage level to the lease, you could swap vehicles between drivers or ask to renegotiate the lease.
For the most common 3 year lease, the payments used to be “1+35” or “3+33”, meaning that you paid 1 month up front and then 35 monthly payments, or 3 months up front and then 33 monthly payments. However, lease companies have realised that people’s eyes are driven to the headline monthly figure. I recently saw a 2 year lease priced at £400 pm, but with a “9+24” profile, meaning a total of 33 x £400, equivalent to 24 x £550. That’s £13,200 over two years, not the £9,600 you might have expected. So watch the small print and look at the totals, and check the over-mileage rate.
Like most purchases, it is worth shopping around to see what different lease companies will quote. Sometimes they can buy a vehicle at a special price from a manufacturer, so you can ask an open question like “what looks good value at the moment” rather than asking for an orange Peugeot 2008.
That’s it. I haven’t even mentioned VAT or corporation tax on leasing!
Previous Blog – September 2023
KNOCK KNOCK, WHO’S THERE?
Imagine the scene. It’s a late summer Friday afternoon, people are feeling a bit warm and tired in the office, and are looking forward to a weekend off. One of your finance team finds an email popping up in their inbox. It’s from the MD/CEO/whatever you call them in your business.
“Please can you set up an urgent payment of £30,000 today? I have negotiated a good deal with a new supplier but we don’t have credit terms set up yet, so we need to make a payment up front.” And it goes on to list the bank account details.
How would your staff member react? You would hope that they would consult a colleague, or even phone the MD to check the request is genuine. But it is late on a Friday, not many people are in the office, and they don’t want to ask a senior person when he or she has just been so clear that they need it done urgently. It is highly likely that the very important person is probably not in the office on a Friday afternoon.
This is, of course, an email from a criminal, trying to execute an impersonation fraud.
Years ago, this would have been written with bad spelling, from a rather obvious Gmail account or similar. But now, the people doing this are much more sophisticated. They will have professional looking email footers with the right company logos etc. They may have studied emails written by the MD and copied their writing style. They might even attach a genuine-looking proforma invoice so you have a document to work from.
If you have dual authorisation processes at your bank, you would hope that your second approver would undertake a sensible check. But then again, it appears to be an urgent request from that very important person, whom they might not want to interrupt.
A few percent of the time these scams work, and the criminals get the money. Your bank will try to get it back, but it’s not guaranteed.
What can you do?
Be aware that these emails may arrive.
Train staff in the whole business to be aware of them.
Never take anything at face value.
Have a culture where it is a good thing for someone to phone and check that a payment request is genuine.
Report anything suspicious to the Action Fraud team by emailing firstname.lastname@example.org
Previous Blog – August 2023
Most people have heard of this, but assume it doesn’t affect them. So what is money laundering?
Simply, this is the process by which criminals change “dirty money” or assets (the direct proceeds of their crimes) into other assets or currency, usually multiple times, to hide their tracks and make the money seem legitimate. They don’t want law enforcement agencies to find evidence of their crimes, or trace those stolen assets and seize them. They accept losing some money along the way as the cost of cleaning the funds.
The United Nations estimates the level of money laundering as between $1,000 million and $2,000 million a year, so it’s a big thing!
They also describe the process in three steps:
- Placement – taking the assets/funds away from the crime scene
- Layering – moving the funds in a series of apparently legal payments
- Integration – turning those funds into an end product (luxury goods, property, investments)
The crimes that start this process can include theft of assets (e.g. cars), money obtained through theft, fraud or deception, or old fashioned cash from activities like drug dealing. Often the layering will take place in several countries/jurisdictions and can flip between cash, bank deposits and physical assets. The end result is that the criminals build a portfolio of apparently legal assets, or they fund illegal activities like drug dealing or terrorism.
People running legitimate businesses can be targeted most often in the layering process.
Typically, a new customer wants to buy some of your more expensive products. They are happy to pay up front using a credit card or a bank payment. Then they will take delivery and sell the goods on in a second-hand market (like EBAY) or they will cancel the order and ask for a refund. They might also pay more than the sum they owe (perhaps a duplicate payment) and then ask for it to be refunded. Or you might be offered loans that you didn’t ask for.
There are some warning bells:
- Why those products? Would you use them together?
- Only high value items?
- Invoices from companies you don’t recognise
- Offers of loans from entities that don’t look like banks, or on unusual terms
- If the customer wants to pay a large sum in cash!
- Payment from an overseas bank for a UK customer
- Asking for a refund to be sent to an overseas bank
You are not committing a crime unless you know that it is stolen money, but it wouldn’t be pleasant to have a visit from the police tracing illegal funds through your business. You can report anything that doesn’t smell right to the HMRC Fraud Hotline. Find it on gov.uk.
Previous Blog – July 2023
MANAGING HIGHER INTEREST RATES
9 months ago, I wrote a blog about changing interest rates (and exchange rates). The “stickiness” of UK inflation has caused the Bank of England to raise interest rates beyond what was expected back then.
The news headlines have extensively covered the various increases in the Bank of England’s base rate, but how does that affect businesses , and their employees?
The easiest example to understand is a residential mortgage on a house or flat. If you have bought a property with a mortgage, you would have faced a choice between a floating (called a variable or tracker) rate, or a rate that is fixed for a period, usually 5 or 10 years. If that mortgage has been taken out in the last decade, you would have noticed that the floating rate had the lowest rate, with the 5 year rate being more expensive and the 10 year rate higher again. Many people then opted for the floating rate, as it was “cheaper” and didn’t fix to protect against possible future increases in rate. Fixing interest rates should be about managing (or tolerating) risk, not about “making money.”
The long term rates being higher indicated that the market expected interest rates to increase, but when? Actually the fixed rates reduced from 2013 to 2020, while the floating rate stayed pretty flat. Then there was an increase in floating rates in 2019 before the Covid pandemic saw short term rates become more volatile. Then everything changed.
The commodity and energy price booms following Russia’s invasion of Ukraine led to central banks around the world raising rates quickly and repeatedly. The cost of all debt (short and long term rates) rose sharply, but now we are at a point where the variable rates are higher than the new long term rates. This is because the market expects inflation to fall, so interest rates will fall accordingly.
Some businesses have no debt, so they can just worry about employees being able to pay their mortgages, and whether the economy avoids a recession.
Other businesses have mortgage-like debt on their commercial property, or long term bank loans. These might carry a floating interest rate or be at a fixed rate. Leases, overdrafts and invoice discounting also carry an interest cost. Obviously, the size of this issue is directly related to the size of the debt. Focus on the big numbers.
You may want to take out a new loan, or get to the end of the fixed period on an existing loan, and hence need to choose an interest rate strategy. Do you go fixed as it is “cheaper”, or take a floating rate in the hope that the cost will reduce in a year or two, but carry more risk? Also, beware charges for redeeming a fixed rate product before the end of its term.
What should you do?
I can’t advise you, but the words of a very wise former colleague are ringing in my ears. “Do half of one and half of the other, then you can only be half wrong”.
Previous Blog – June 2023
TRY SELLING AT A LOSS SOMETIMES
The basic aim of a business is to make a profit, right? So why am I suggesting the opposite?
There can be occasions when selling at a loss makes good business sense, but only in specific circumstances. You might like to consider these ideas to boost your business:
1. The “Free Sample”
You may actually generate new customers and new business by offering a “free sample”. You will see this in different forms:
- Small portions of food, like cheese, so customers can find out if they like the taste
- A “winter checkup” for your car, hoping to identify faults that need to be mended
- A free loan of a piece of equipment to see if you want to hire or buy it
- A diagnostic interview for a service business, identifying areas to improve
- A free drink at a hotel or restaurant to allow you to experience their ambience and service
The idea is that customers will engage with a free activity, decide they like it, and choose to buy more. The important point is that the “free” business activity must not be the bulk of your work.
2. Free Publicity
You might help a local charity or event (like a village fete) by providing goods or services for free, and in exchange become visible to a large number of potential new customers. This could include giving some time as a charity trustee or director. This might improve your business’ CSR reputation when it comes to potential employees or other local companies you might trade with.
3. The Clearance Sale
Although we think of this in the context of shops, lots of businesses sell physical products to consumers or other businesses. This means that you have to tie up your cash in stock, which has to be stored and insured. If you analyse what you own that is old and slow-moving, you could decide to sell this below your normal selling price, and even at a loss (less than it cost you to make or buy). The logic is that you are getting nothing for it while it’s sat on your shelf, and if you turn it into cash you can generate some more space and use the money for something better. The alternative is to keep paying to store it when it still isn’t bringing any money in. There are different ways in which you can do this:
- Sell it to a discount wholesaler, like TK Maxx in the retail world
- Offer it on an online platform like EBay (but beware of the time needed to do this)
- Send a mailshot around your existing customers with a special offer to buy it at a discounted price
- Offer a “package” of a new product with one of these old ones at a combined price, if applicable
- Sell it cheaply or even donate it to a charity, school or other organisation that could use it. (This could be combined with the publicity angle above)
You need to be careful that you don’t undermine the market price of your current and future goods through this discounting activity. Some companies refer to “seconds” or “ex-demonstration” to segregate their offerings. You might also want to check that you are keeping enough old parts to support service and repair activities for products you have previously sold.
If you can generate good new customers and/or clear some space in your warehouse, you will realise that selling a loss can be a good business strategy when done correctly.
Previous Blog – May 2023
THE CORONATION AND ROI
The Coronation is getting wall to wall news coverage not just here, but around the world. This is a very effective marketing exercise for the Royal Family, for British traditions, and not just for UK tourism but for goods and services perceived as British around the world. This is one of the main arguments used to support the continuation of this supposedly anachronistic institution, that it generates a net profit for the country, even after all of its costs. The other argument is that all other alternatives are actually worse – but enough political philosophy.
Effective marketing has a strong “return on investment” or “ROI” – also the French word for King. That means that you make enough profit (not just sales) from customers being motivated by your marketing to spend money with you that it far exceeds the money you spent on the promotion activity.
Measuring ROI on marketing in business is one of the hardest things to do, but it is valuable to aid decisions on how much to spend in the future and on what activities.
Take a really simple example of paying for an advertisement in a magazine with a specific discount code for customers to use on your website when placing an order. You know what the advertisement cost to place (not just the magazine’s fee, but salaries in your marketing and design teams), and you know what customers bought using that code, and what profit you made on that, hence the ROI. Except it’s not even that simple. How many of those customers would have bought from you anyway, even if they hadn’t seen the advertisement? And how many people saw the advertisement, didn’t buy anything that day, but remembered your company and bought from you later (not using the code). You will never know what your sales would have been if you hadn’t done the marketing.
For businesses who don’t trade mainly on the web, it is even harder to measure ROI. Does an ice cream seller have a better day because of some advertising on the local radio, or because the weather was hot and sunny?
As ROI is so hard to measure, you could instead set aims for your promotions like generating 1,000 new users on your website. But then do you need a condition about how much they spend in a time period?
One sage business acquaintance once said to me “I know 10% of my marketing works really well, I just don’t know which 10%!” Being able to measure your ROI effectively would solve such a conundrum.
Vive le roi!
Previous Blog – April 2023
THOUGHTS AFTER THE BUDGET
When the latest Chancellor of the Exchequer stepped forward to present his budget in March, I realised this was 40th year when I had followed such announcements.
Some elements always catch the headlines – what increase will there be for duty on petrol, diesel, beer, wine and fags? Other key ingredients lie in the group of “rates and allowances” – how much do I earn before it is taxed, and at what rate, or how much tax is added to what I buy?
Then you have fine-tuning of other regulations, the introduction of new incentives and reliefs to encourage certain activities in a politically-attractive way. New taxes are added at intervals, and then become part of our normal lives, like insurance premium tax. Eye-catching announcements are made, like a super-duper-computer to support research into AI (meaning Artificial Intelligence, not Artificial Insemination).
While you can listen to an hour or so of speech-making, followed by pre-prepared criticisms made by people who wrote their replies before knowing what the content was, you could instead wait for a day or two, and then read one (or more) of the many professional summaries of events.
Scrolling through some of these, the key themes that commentators have focussed on are:
1) An increase in the corporation tax rate from 19% to 25% for “larger” companies
2) Improved tax reliefs for capital investment
3) Changes to pension limits, to try to retain senior health service workers
Corporation tax rates had been 30% for the decade leading up to the “banking crisis” recession on 2008, and we lowered progressively to 19% by 2017. The increase back up to 25% will assist the Treasury to repay some of its borrowing during the Covid period, but only makes a difference of £60,000 on a profit of £1,000,000. The rate of 25% is also just below the average for the G20 group of large global economies. But for the huge number of small companies, with under £50,000 annual profit, the rate stays at 19%.
The improved reliefs for capital investment will mainly help larger companies dealing with physical assets, like manufacturing and power generation. Small companies in the service sector will see less change.
The pension reliefs were painted by opponents as helping only the wealthy, but if it helps senior GPs and consultants to stay in full time employment for longer, instead of working part time or retiring, this should benefit all users of the NHS.
In conclusion, at a time when the government has huge debts to repay, and has to balance growth and inflation with taxation and the burden of interest costs, the Chancellor was only going to make some carefully judged tweaks, which he probably has achieved. The tax-take in 2023/24 will be high as an overall percentage, but may reach the high water mark before the purse strings are relaxed going into the next general election period. Time will tell.
Previous Blog – March 2023
SPOTTING TRENDS IN YOUR BUSINESS
During February we had a short spell of warm weather and people started asking things like, “Has Spring come yet?” or “Do you think it will stay warm for a while?” Of course, a few days later the colder weather returned, with overnight frosts, as is normal in February. If anything, the weather felt even colder after a brief spell of daytime temperatures “in the teens”. But if we overlooked the day-to-day variations through the month, could we detect any overall trends?
To identify if there was a trend in February temperatures, you would need to analyse actual historical data sources to find out if average temperature in February was going up or down over time, and even then the pattern would be variable and you would need to interpret the scatter of results with some statistical analysis. By choosing different start dates (colder and warmer years in the past) you would get different results for average temperature increases over time – or even possibly decreases. In short, there is mileage in the quote (attributed to Disraeli), “There are three kinds of lies: lies, damned lies and statistics.”
In business, we notice variation in data in all sorts of things. In a retail business you would perceive different levels of footfall, and measure daily takings. In farming you see tonnage of crops, or in a manufacturing or distribution business the level of orders, or shipments, sales, or exports – or many other things. There is a temptation to see a moving result and deduce that a trend is happening. One business guru told me:
“We will always have two or three disappointing months in a year, but that will be balanced out by better months. If we have two bad months in a row, I have learned to ignore that, but if we have three in a row I will assume it has become a trend.”
If your gut feeling is telling you there is a trend, you should try to measure it and then understand any reasons causing it. If your cafe takings are down 30% on last year for the last 3 months, and a new cafe opened next door to you 3 months ago, you probably have a good understanding of why.
If a negative trend is happening to your business, you may need to take steps to address the consequences (like reducing staffing), and, if possible, to reverse that trend. If the trend is positive, you may need to address the consequences (like increasing staffing), and, if possible, maintain that trend. Therefore, you need to understand the root cause: how the behaviour of your customers is changing, and monitor this as you make your changes in the business.
Measure what is important and review regularly
Do not over-react to short term variation
Spot when variation becomes a trend
Find the root causes for the changes
Take action to improve or mitigate the situation
Measure the outcomes
Previous Blog – February 2023
There has been much discussion in the media about the inflation rate and how salaries are (or are not) keeping up with it. Businesses are under a number of market pressures and cost pressures, and then they have to recruit, retain and motivate their staff. So this is an important challenge, but reporting tends to focus on the percentage increases awarded.
Depending on where your business is located, and what skills you need to employ, you will have differing perceptions of the labour market – both in terms of availability of good candidates and the salaries that they will be seeking. One new external hire at a higher salary can mean you have to revisit the pay for an entire team. This sounds expensive, but it may then remove a risk you hadn’t been aware of previously.
Many things will influence an employee’s desire to stay or leave, including: training; career opportunities; working hours; working environment; holiday entitlement; quality of management; pensions and benefits, as well as absolute pay. There is a danger that in focusing on the salary figure, you forget about these other elements.
In classical theory, you need to pay each person £1 more than the salary at which they would leave. The trouble is you cannot know this level. This underscores the idea that being underpaid is a demotivator, although the corollary of this is that being overpaid is not a strong motivator for most people.
Around the start of this century (or millennium), there was quite a strong fashion for “flexible employment packages”, where people could trade salary for other benefits, like more holiday, more pension, or less. The “salary sacrifice” process tended to focus on the savings in national insurance, but it is worth remembering what it was trying to do. Different people at different stages of their careers and lives have differing priorities, like saving for a wedding, buying a first home, travelling, caring for children or older relatives, or planning for retirement. One size certainly doesn’t fit all in terms of how fixed salary packages address these, and with a more diverse workforce you will have more diverse needs and preferences.
I suggest you might like to revisit how you structure and present your remuneration packages, giving your staff some flexibility to emphasise the elements that are most valuable to them, so you both get more “bang for your buck”, and don’t just focus on your percentages.
Previous Blog – January 2023
FIVE FINANCIAL NEW YEAR’S RESOLUTIONS
As a business owner, you will be conscious of all your responsibilities – to your customers, your staff, your suppliers, the taxman and even the wider public. Hopefully you will have had some breathing space over the Christmas period, and have maybe even made some New Year’s resolutions in your private life. Perhaps you want to exercise more, lose some weight, go on holiday, or make more time for family members? What are the equivalent resolutions you could make in the financial management of your business? Here are my top five contenders for you to consider:
- Thoroughly analyse your customers
Are you reaching the people you want to reach? Are there some who are always a pain – paying late, wanting more discounts, clogging up your business with last minute changes? Not all customers are good customers, and you could choose to eliminate any that are simply wasting your time and focus on good ones.
- Look at where you need to improve your business
We all know the areas that could be better, but have you told the people responsible what you expect and when? Be clear in what you want, ask for properly thought-out plans, and add resources to make it possible.
- Re-evaluate the financial information you receive
Whether this is weekly order intake reports or monthly management accounts, ask yourself if these are telling you what you need to know. If you aren’t using something, stop doing it or make changes to it.
- Look at where cash is tied up in your business
It might be equipment, so should you lease this in the future instead of buying it outright? Are your customers slow to pay, or do you have a lot of stock? Make sure you measure these things and review them regularly, and make changes to your business processes to improve the situation.
- What are your own plans for the future?
Do you want to pass the business on to the next generation, or sell it and retire, or do something else? Preparing for these seismic changes could easily take three years, so it pays to look ahead.
You might gain from discussing these ideas with your senior management, or with an external “pair of eyes” like the accountant who prepares your statutory accounts, a non-executive director, or a business coach.
Happy New Year.
Previous Blog – December 2022
A SEASONAL LOOK AT FRAUD
Increased online transactions at this time of year mean that consumers can be more likely to become victims of fraud. Businesses can also be subject to successful fraud attacks and you won’t be enjoying a happy Christmas if this happens. While you might get your money back eventually from your insurers or your bank, you will feel rather foolish and may lose trust in the world.
Fraud can be carried out by someone inside your business (e.g. an employee) or by an external person, who may need the (possibly unwitting) co-operation of one of your staff members to succeed. The measures that you can take to prevent fraud may also prevent innocent mistakes that could also cost you money.
What are the main fraud types?
Cyber fraud – spyware
Software will be installed on your computer that records what you do, including the passwords that you use to access secure sites, and then uses those passwords to gain unauthorised access. They might make payments, or change your access rights and passwords, or they might delete or damage your data, or hold you to ransom. It’s a bit like you leaving the key in your front door when you go out.
Cyber fraud – hacking
Here a criminal will guess a combination of user ID and password to gain access to a network through your firewall and then carry out similar activities to the section above. Perpetrators could include a visitor, or a cleaner after hours, if you leave login and password information lying around on post-it notes.
Imposter fraud or MD fraud
The criminals will send an email request for a payment that looks like it comes from someone senior, like a Managing Director. The idea is that the employees are too frightened to ask, and just make the payment. Any reply to that email would go to the criminal, who would confirm the need. Very often these are sent on a Friday afternoon, and for amounts that might be just under an approval level, like £9,000, £24,000 or £49,000.
False change of bank details
In this case criminals will send in a letter or email saying that a supplier’s bank details have changed, substituting their own bank account information. It is surprisingly easy to identify suppliers by watching vans and lorries delivering, or seeing signage put up by contractors. If you ring the number on the letter or write to the email address provided, you will only get through to the criminals, and they will confirm the change.
False bank details on invoices
Here the criminals will intercept an invoice while in transit and modify it to show new bank details. This is even possible on a pdf document that you thought was secure. The same points apply as the change of bank details above.
Invoices are sent in for goods and/or services that have not been ordered by the company and probably haven’t been received. These may be accompanied by a threat of court action if not paid, to see if that can bypass the normal approval channels through haste. The more successful ones are often of lower value, so people simply pay them to get rid of the problem, as it is so small.
Making fraudulent bank payments
Payments will be set up against false suppliers, or the payment details on real suppliers are changed for a payment run (and then possibly changed back to cover their tracks).
Either extra payments will be made to a genuine employee, or a “ghost employee” will be set up who is perhaps a friend or relative of the fraudster.
Excessive expenses/personal expenditure
Here people may use a company credit card for personal items, or pay for travel for family members, or simply reclaim expenses that are inappropriate business expenditure.
An employee may be paid personally by a supplier for giving them business, which might also be at inflated prices or simply not the best supplier for that business. Or they might be selling your confidential company information to them.
Theft of physical assets
Not fraud, but also a risk to your business. Can people steal stock, materials, or IT equipment from your offices easily?
So what can you do to prevent all of these frauds?
You need to implement suitable systems, train your staff to use them, and have a culture where people can ask questions. The exact methods will depend on the size of your organisation.
IT systems-based approaches will include your IT installations, network access and password protocols. These are fundamental, as is physical security for your building, like locks, alarms and CCTV. Equally, lock computers when not attended and never leave login and password information lying about.
Segregation of duties is a fundamental principle. The same person shouldn’t order something, approve the invoice and make the payment. One person should prepare the monthly payroll, and a more senior person should review it and approve it. This doesn’t mean you don’t trust people, but you are removing the possibility that one hacked account (or rogue employee) could push this all through.
The process for approving bank payments needs a minimum of two people, one to set up a payment and one to approve it, with a third approver for larger amounts. While this might work for your main bank, what controls are there on internet-based portals for foreign currency?
Security processes around bank details are important. New suppliers and changes of bank details need to be verified. The supplier should be telephoned using the number on their website, not the one on a letter or email, and verbal confirmation should be obtained. You can also try sending a small test payment to verify the validity of any new bank details.
Exception reporting is useful, if your systems allow it. These may have different names like audit logs, or reports of changes of standing data will flag up any unusual activity, and probably who was responsible.
Most importantly, give your staff the right to sniff out things that don’t look right and ask about them. Teach people IT security around how to check who an email is from, the dangers of clicking on links, and to be alert to poor grammar and spelling as potential clues of false information.
As a manager, be alert to any staff members who might be acting suspiciously. Some people are driven to fraud by personal problems like the threat of losing their home, or addiction to drugs or gambling. If you have a supportive welfare approach, people might be able to ask for help instead of turning to crime.
Previous Blog – November 2022
GETTING PAID ON TIME – 10 TOP TIPS
Some businesses receive payment before they have to supply the goods or services concerned. However, for most of the business world we carefully design/make/assemble/deliver/install the goods or services then hope we get paid. Effectively we give everything away, make a loss, and then hope to land all the income and profit at the end. If the customer doesn’t pay, we stand that loss ourselves. If the customer can’t pay you on time, perhaps they are in difficulties and might go bust. The more you let them pay late, the more money you have at risk. So getting paid is really important.
Getting paid on time is also very important. While there is an interest cost on providing credit facilities to your customer, that is small as it is over only a short time (hopefully!). The real problem with late payment is that you might need the money for something else, like paying suppliers, paying wages or paying HMRC. If the business hasn’t received the money in, where are you going to get it from?
Here are some top tips for getting paid, on time, in full. The fine details will vary from business to business, but the principles are the same:
- Get the deal right
Make sure you understand what the customer wants, where they want it and when they want it. Then do that, and nothing different.
- Get the terms right
Make sure you agreed the price, the credit terms, and anything related like warranty terms up front. Ideally you send a quote covering this, and when the customer sends in their order you check the details are right before sending back your order acknowledgement. If anything is wrong, ask them to re-issue their purchase order as this will save time later.
- What is the credit-worthiness of the customer?
The customer may have been on your ERP system for years, but when did you last do a credit check? It is quite normal for credit terms to lapse if an account has been inactive, and you may need to ask them to re-apply for an account. Ideally the customer signs an agreement to your credit terms in this process.
- Get the paperwork right
The despatch note and the invoice need to contain all the correct information. You may also need a Certificate of Conformance or other documents. Make sure that addresses, order references, and prices are all correct. If anything is wrong here, the payment process may be delayed at the customer’s end.
- Monitor, measure and record
Regularly review your aged debt reports. Chase any overdue sums and record the contacts. If a customer is always late, consider revoking their credit account or put them on hold.
- Build a rapport, check on progress
Your credit controller (or equivalent) should build a rapport with your larger, or more erratic customers. Call once or twice a month to check on progress. If you always call, your invoices will normally be paid earlier. If an invoice is large, or the customer is unfamiliar, you should telephone (not email!) the customer and ask to speak to their accounts payable team. You can ask if the invoice has been received and authorised, and when it is scheduled for payment.
- Be nice
Firstly check if there is anything your business has done wrong. Then remember it is the customer who has failed to pay you on the date they agreed. You can help them fix that problem: nicely, firmly, persistently. If you are struggling to speak to anyone who can help you, ask your salesperson who looks after that account to find you another contact to work on.
- Offer a settlement discount
You can offer a settlement discount if invoices are paid early (before due date, often on 15-21 days?). 2.5% is a typical discount. While this does reduce the profit you make, you can consider charging slightly more in the headline price to make up for this. Some people will take the discount when paying late, so you may end up arguing a few times.
- “Account on hold” can work
If your customer has recurring business, putting an overdue account on hold can result in pressure being put on their accounts team by the people who want the next deliveries.
- You can always bin a customer
If someone always pays late and is hard to deal with, and despite your best efforts they don’t improve, then consider binning them. You don’t need bad customers. Let them buy elsewhere and become someone else’s problem.
If you follow all the above advice, you should have less overdue debt and lower bad debt costs.
Previous Blog – October 2022
CHANGES IN INTEREST RATES AND EXCHANGE RATES
Since the banking crisis of 2008/9, we have had a long period of low interest rates and low growth. Businesses and business-people have become used to relatively stable interest rates and exchange rates, even with the external shocks of the Brexit process and Covid providing limited changes at first.
Catalysed by the Russian invasion of Ukraine, over the last year we have seen rapidly rising inflation, leading to increasing bank base interest rates across the developed world, and the rapid increase in value of the US Dollar against other currencies. The Pound has lost 20% against the US Dollar over the last year, as compared with around 4% against the Euro in the same period.
The Bank of England base (interest) rate was cut to 1% in early 2009, and has been at or below 1% until June this year. It has just been raised to 2.25%, which seems high to us now, although it averaged about 5% in the decade leading up to 2009. The rate is expected to increase further, to around 3.5% in the year ahead.
What does this mean for businesses today?
Higher interest rates clearly mean higher borrowing costs on loans and other financial products such as leases. You can protect yourself against future volatility by agreeing a fixed rate, but that rate will be higher than the floating rate in the short term, as interest rates are expected to rise further. On the flip side, your loan balance will reduce over time, so future (higher) floating interest rates will apply to lower capital balances and this will reduce the impact. Your decision should be based on how important the stability is to you.
If you have surplus funds, the interest rates on deposits are starting to increase, albeit from a pathetically low base of under 0.5%. But please remember the 2008 banking crisis when some Icelandic (and other) banks went bust. Who are you lending your money to when you put it on deposit, and will you get it back? Would you do better to buy stock that you use in your business (if prices are rising), or pay suppliers early in exchange for a settlement discount?
Higher interest rates mean higher government bond rates and higher corporate bond rates. These numbers are used in calculating pension fund valuations, so if you have an old defined benefit pension scheme you should see the deficit starting to come down. In time that should mean that the pension fund contributions may also reduce. This does not apply to current defined contribution schemes (e.g. auto-enrolment or stakeholder schemes).
If you are buying products in from abroad, or buying products denominated in US dollars, you are likely to have increased buying costs. You can take out forward contracts so you know what dollar rate you will be paying, but you can’t escape the market rate in the long term. Beware as well if you are buying in GBP but the purchase price is driven by the dollar, as you may have a false sense of security.
As imported goods become more expensive, you have an opportunity to find UK sources of supply to replace overseas ones. Not only may this save you money, you may gain environmental and lead time benefits from shorter logistics chains, fewer language issues, and remove foreign currency complexities.
Exporters will be able to reduce overseas prices to make gains in overseas markets, or keep foreign prices stable and reap a higher margin when that income is translated back into pounds. You need to revisit your export pricing strategy so you have a clear plan, and probably support that with more forward contracts to lock at known future exchange rates.
Finally, overseas residents travelling to the UK will find it cheaper, so it would be a good time to invite key customers or suppliers to visit your business and build stronger relationships in person after all those Covid-era video calls.
Previous Blog – September 2022
CARRY ON BUDGETING
Events of the recent past have made many people question the wisdom of budgeting. Who managed to predict Covid lockdowns, energy prices more than doubling, and rapid growths in inflation and interest rates? But that is to miss the point of budgeting.
In my world, budgeting is not setting rigid limits to constrain spending activities, it is a form of planning. You are not trying to predict the future exactly, instead you are trying to lay down a pathway of what would happen, given a set of clearly stated assumptions. I can pretty much guarantee that your assumptions individually will be wrong, but in aggregate they can often end up to be pretty close to the end outcome, once you are experienced at this process.
So, when the next unexpected thing happens, you can return to your budget and say, “if that is now different, where would it lead us?” You can use the budget as a starting point, and then add a deviation. Your assumptions were clearly stated and understood, so you can work out the change easily. This will be much quicker than having to start making a new forecast from scratch.
In terms of terminology, I like to have a fixed “budget” that you started the year with, and then a series of “forecasts” that you make as the year develops to estimate your final outcome. Some companies like to “re-budget”, often half way through the year, as well.
So I would encourage you all to prepare some clear assumptions, and then a budget, for your next financial year, and track your progress against this budget. You will gain useful feedback and become better at the process of budget preparation for the year after.
Previous Blog – August 2022
The media focus is currently on the Conservative leadership contest, which has now boiled down to the last two contenders to be our next Prime Minister. This started me musing about what leadership looks like for your finance team, and where I look to political buzz-phrases for inspiration:
“Getting the job done.” Your finance team needs to get the basics right:
- Recording transactions quickly and accurately
- Obtaining correct authorisations for expenditure
- Processing payroll on time and correctly, first time
- Making payments to suppliers, HMRC and employees on time
- Managing customer credit so you get paid on time by your customers
- Operating with the appropriate levels of confidentiality in all data
- Ensuring business processes are improved to meet new needs
- Managing currencies, insurances and other support processes
- Making sure the company doesn’t run out of cash.
“Education, education, education.” The finance team need to:
- Help other colleagues understand the business’ financial controls and processes
- Help other colleagues understand the financial performance of the business
- Help other colleagues understand the financial impact of potential business decisions
- Provide continuous training and development for the finance team staff.
“It’s about the
economy service, stupid”. The finance team is fundamentally a service department:
- Enabling other business activities, not obstructing them
- Seeking to understand the needs of colleagues in other teams
- Explaining the context and purposes of business processes
- Helping identify waste and inefficiency in cross-business processes
- Seeking and enabling continuous improvement.
Previous Blog – July 2022
RETURNING TO THE GREEN AGENDA
You cannot watch the news without the media adding the word “crisis” to whatever is going on, to make it sound more newsworthy. The “climate crisis” is now old news as they focus on the “cost of living crisis”. However, the unusually high level of fuel and energy prices should encourage companies to revisit the steps they can take to reduce direct and indirect expenditure on energy, and tackle both these “crises” at the same time. What are the practical steps you can take to reduce energy consumption and costs both at work, and for your employees travelling to work on business?
- Revisit the business case for solar panels at work, if you have suitable premises and lease arrangements. While these might have had a payback period of 15 years when you last looked at them, now that could be closer to 6 years.
- Don’t leave lights on when they are not needed. Either be disciplined about turning them off, or add movement-detector switches to suitable areas (like corridors).
- Don’t run heating or air conditioning units when you aren’t using those areas.
- Don’t run air conditioning at all – consider encouraging a more informal/comfortable dress code, like wearing shorts in hot months and jumpers in cold months.
- Don’t leave equipment on standby if you could turn it off.
- Consider a car-share scheme, where you encourage people who live near each other to share lifts and slash their commuting costs. You might need to synchronise working hours and guarantee a back-up service if a driver has to rush home for an urgent family issue.
- Offer a “bike to work” scheme so staff can easily buy a decent cycle to commute to work if they live locally.
- Provide covered and secure bike parking at work.
- Buy one or more “pool bikes” so people can use them at lunchtimes for local trips.
- Install or improve shower and changing facilities so people can freshen up after cycling (or lunchtime running/exercise activities.
- Give practical advice on reducing car running costs – removing excess weight, checking tyre pressures, removing roof racks, and perhaps driver training on economical techniques.
If you need to borrow money for any of these ideas, ask your bank about subsidised loan rates for environmental projects.
These measures will reduce costs for you and your employees, and your leadership on sustainability issues should appeal to customers and employees alike.
Previous Blog – June 2022
JUBILEE PARTIES AND MORE
We are all recovering from the strangeness of a four day weekend that wasn’t Easter, and which led into a full five day working week. We were celebrating the achievements of a monarch who has served for 70 years in her main job, when most companies rarely experience employees serving half that time. Most of all, we have probably been at, or watched the televising of, a party, and that is almost starting to feel normal again – without face masks.
The folk at HMRC are not often thought of as party animals, but they are really our nation’s biggest party planners. Did you know that every business can hold an annual function (it doesn’t have to be at Christmas) once every tax year, costing up to £150 per employee, and there is no benefit-in-kind tax? Clearly that budget can provide quite an amusing evening, and even if your staff each bring their partner or other close guest (which HMRC allows), the sum of £75 per head is still pretty decent.
Now we have all remembered that it’s quite fun being in the same room as your colleagues, and as you try to find ways to retain and attract staff, please remember it’s not all about pool tables and bean bags. You could give your staff more parties and team outings during the year. This isn’t banned by HMRC, but their generosity does not extend to a tax-free second or third party, and you can’t carry any underspend on your £150 limit into another date.
So, if you want your staff to enjoy a summer garden party or team bowling night, you probably then don’t want to put the cost onto a P11D and invite them to pay the tax arising in 12 convenient instalments via payroll. You want to pick up the cost for them. But you need to do it correctly.
You need to set up a “PAYE settlement agreement” or PSA for short. You can search for that on Gov.uk and it’s quite well explained. You just need to pay attention to the calculations, as you don’t just pay the tax for them: you have to pay the tax on the tax, the NI on the tax, and the tax on the NI. It’s known as “grossing up” – working out how much pay they would have had to receive to retain the net sum after tax to match the benefit. In short, a £300 event will end up costing the company over £600 if you have mainly 40% tax payers. But when you see the happy smiley faces of your employees, you know it’s worth it.
Your accounts team will love running the PSA process, which has its own rules and deadlines to adhere to, as it is an interestingly technical exercise. Why don’t you put that idea to the test?
Previous Blog – May 2022
BUILDING A BETTER BUSINESS
Deploying Your Business Strategy
This is the long-awaited follow-up to February’s blog about developing your business strategy, delayed by urgent reflections on inflation issues and understanding resulting customer behaviour.
You have a clear understanding of your shareholder strategy, including their long term aims and their attitude to risk and return. You have developed a fabulous business strategy to give your customers what they want in a profitable way, with a clear understanding of your opportunities, risks and funding requirements. Now all you need to do is deploy it.
- Communicate clear objectives
Ideally you have involved key people in the business while developing new ideas, so these won’t come as a big surprise. You should present the plans as a team to your workforce, and explain clearly how each area of the business can feed into supporting the overall strategy. You can flow down the top-level strategic objectives into department/team objectives, and work out how to measure the progress you are making. You can even put individual objectives into staff members’ appraisals/development reviews, so that all the objectives align with the overall plan and everyone is pulling in the same direction.
- Measure progress
You worked out how to measure progress, so do it! These measures (could be called KPIs) can be tracked, probably monthly, and feedback given to all areas of the business.
- Monitor risks
You identified the risks when developing your strategy, so review these (monthly or quarterly) and review if any new risks arise over time that need to be added.
- Identify blockers
Where you are not making the progress you expect, work with your teams to identify what (or who) is preventing you from moving forwards. You may need to add resources to key areas, or refine some details of your plan.
- Communicate about progress
You will achieve your strategy through your people, so inform them on the progress you are making. A monthly staff meeting is an ideal environment, and I would recommend you use graphs or pictures to present your information, as most people can understand a visual representation better than a table of numbers.
- Celebrate success
Much of your time in business is focussed on today’s problems, so take time to capture what has been done well. Identify which teams have achieved their goals, record it, and share that good news with the staff.
- Do it all again
You should revisit this whole process of strategy setting every year, probably in the last quarter of each financial year so you can flow the results into your budgeting for the next year.
Previous Blog – April 2022
DON’T GET LOST IN YOUR DATA
For the second month running, I am not giving you the blog I promised back in February. How to implement your business strategy will have to wait another month again!
Imagine you are up a mountain and thick fog envelopes your group. What data do you have to help you? A map will tell you a lot about the area, and more if you know where you actually are. An altimeter will tell you how high you are, and a compass will tell you in what direction you are facing, but none of them will give you a safe route down on their own. Even a GPS system might not be enough.
I was visiting a company recently whose order book is usually around £2.0m. They were very proud that this had risen to over £3m, surely a sign of improving business to come? This is the equivalent of one instrument on its own when you are in thick fog. Actually their customers, worried by rising prices, have started ordering further ahead to fix future costs. When you look at when the deliveries are required, the old order book of £2.0m delivered over 2 months gave £1.0m per month of revenue. The new order book of £3.2m is better, but delivered over 4 months is only £0.8m per month of revenue. Please do not draw false comfort from apparently better numbers until you truly understand what they mean. Pick at the data until you can see the real picture.
During times of higher commodity price rises, companies need to protect themselves. If you are quoting a fixed price several months forward, you are at risk of costs rising between now and then, and your profit getting squeezed. You need to either hedge your costs by fixing your materials costs forward, or revisit the terms and conditions that you offer your customers. Instead of quotes being valid until accepted within a time period, consider pricing being valid for product deliveries being made until a certain date, and rules for how the price would change beyond that (for instance on published indices – that’s the plural of index).
You could have informed discussions with your customers, as they may well face the same problem again selling to their customers. Can you provide a win-win by agreeing to buy key materials stock early against a commitment from your customer to buy from you? You might gain some competitive advantage here.
You have to be quite old to remember when costs rose as fiercely as this post-pandemic period, so maybe you could ask the older people in your company what they remember from the 1970s and 1980s. You might learn something, not least how to get down that mountain safely.
Previous Blog – March 2022
SUPPLY AND DEMAND
And What You Can Learn From Them
I had promised to follow up last month’s piece with some words on the deployment of business strategy, however in the light of recent events I have decided to consider some topical issues.
The news is full of stories about oil and gas prices, and the Russian incursion into Ukraine. These stories are also linked, as the balance between supply and demand is being upset. There are plenty of pressures behind the current high prices, which also have implications for your own businesses.
Firstly, we are starting from a base of low oil and gas prices. Lower levels of travel and business activity during the Covid pandemic reduced supply and hence prices. As the prices have risen sharply, the media have used the increases as headline material, although the prices are still below the absolute maxima reached in 2008.
The economic bounce-back has generated an increase in demand generally, whereas the oil and gas refineries and infrastructure have had to rebuild capacity.
Environmental concerns have reduced the burning of coal for electricity production (in Europe at least, if not in China), which has caused an increase in the use of gas. Germany’s decision to phase out all its nuclear power stations by the end of 2022 has compounded this problem.
Increasing numbers of electrically-powered vehicles have caused a relative increase in gas consumption (for electricity) versus that of oil-based road fuels. The addition of ethanol to petrol seems, perversely, to have increased petrol consumption as fuel efficiency has been reduced.
The balance of use of fuels derived from oil has changed, with heavy oils for shipping up, aviation-grade fuels reduced by lower activity levels, and a gradual switch from diesel to petrol for cars (although diesel is also used for home heating).
The Russia-Ukraine effect is complex. There is a reduction in the availability of Russian oil and gas, there is a resistance to buying it as sanctions bite, and there is a fear that future supplies will be further eroded. The market is therefore over-reacting, anticipating future events.
In your business, you will notice an increase in energy bills. Look further, and see that supply and demand are affecting housing costs, salary levels, and other products such as metals and building materials. These are feeding inflation, as a result of which the Bank of England is increasing interest rates (incorrectly, in my personal view), which affects loan interest costs.
You can respond by buying, selling or fixing forward when these issues are not in the headlines, hedging your position into the future to protect against future uncertainties. In the long run you have to consider how to price your goods and services, and how to operate efficiently. Not so different, after all.
Previous Blog – February 2022
BUILDING A BETTER BUSINESS
Developing Your Business Strategy
One year ago, I wrote a blog about developing a shareholder strategy. Then in April I suggested ways to adapt your current strategy in response to pandemic issues. Now we are returning towards normality, and particularly as we have the perspective of 2022 stretching out in front of us, it would be a good time to revisit your overall business strategy.
You should have your old shareholder strategy from early 2021, so you should revisit it and check if it is still true. Sometimes life events such as bereavement, illness or divorce can bring radical changes of priorities, but so can the birth of children/grandchildren or moving house. External events nationally or in your industry might also change your long-term plans.
So now you are at the right starting point, you need to choose the end point. You could fill a library with all the books written about strategy, but I will suggest a very straightforward set of steps you can work through. You need to assemble a representative team from the business covering all areas. This might be your existing management team, but you could also bring in a few helpful individuals from lower levels in the business if you think they will engage well with the topic.
The list below would probably best be covered in 4-6 sessions of 2-3 hours each:
- Where are we now?
- What goods/services do we provide?
- Who are our customers?
- Why do they choose to buy from us?
- What are the major trends in the market?
- What are our stengths, weaknesses, opportunities and threats (“SWOT”)?
- Where do we want the business to be in 3-5 years’ time?
- What new goods/services will we provide?
- Who will our customers be?
- How will we win new ones?
- How will we retain good old ones?
- How will we get rid of bad ones?
- What new resources will we need to get there?
- Quantify what that performance will look like.
- What will our sales be?
- What will our costs be?
- What will our balance sheet look like?
- Will we need more money from banks or shareholders to achieve this?
- What are the main risks?
- How can we mitigate them?
Once you can decide on your strategy, you can move to deploying it. That will be next month’s blog.
Previous Blog – January 2022
ARCHIVING IN A LARGELY DIGITAL WORLD
It’s that time of year again, when we set ourselves goals to do more exercise, reduce weight, tidy up the house/garage/shed, reduce our carbon footprint, or similar lofty objectives.
A business has a legal duty to keep its books and records for six years after each year end, and HMRC has the right to come and inspect these. However, once you go over six years you are allowed to dispose of these. (Please note, different rules exist for other documents, including insurance certificates, design records and personnel/HR files.)
I recall many Januaries, dressed in old clothes, clearing out archive boxes containing seven year old invoices. I tried not to get too distracted by reading some of them and reflecting on how the world had changed in most of a decade, and usually remembered to lift the boxes correctly. The old records went into a skip or to confidential shredding, depending on what they were. The slightly damp, slightly musty smell of old paper gave a textural edge to proceedings. Then you tried to squeeze the latest year into the space vacated, but seven years of business growth usually meant it was a tight or impossible fit.
As many records have moved into the digital world, you may think that archiving is no longer necessary.
My mobile phone routinely takes 30MB photos, even though this is ten times the size I require. While scanned documents are smaller, when you have thousands of them the space requirement will still add up. While storage space is relatively cheap, when you think of those servers chewing megawatt hours of electricity, and the air conditioning units consuming almost as much power keeping them cool, you realise that there is a benefit in reducing the storage of un-needed data. The IT industry already produces more CO2 per year than aviation (even before Covid reduced air travel levels), and it’s only increasing as we store ever more, ever larger data files.
So, I suggest that during January you don your virtual old jeans and jumper and do a clear-out of old and un-needed accounting records over six years old. It may lack the satisfaction of musty old paper, but you are less likely to put your back out!
Previous Blog – December 2021
CASHFLOW MANAGEMENT – WITH SUPPLY CHAIN DISRUPTION
I will never apologise for writing about cashflow. There is a famous saying: sales are vanity, profit is sanity, but cash(flow) is reality – and it is still very true today.
Today’s business environment also brings significant challenges in the forms of:
- rapid changes in customer behaviour
- supply chain volatility
- price inflation
Your business probably had predictable seasonal patterns (even if that meant predictably flat) in the past, but as customers are behaving differently now (more online purchasing, worrying about shortages), the timing of end-user demand may well be changing.
As supply chains have been stretched, and delivery services are creaking (fewer flights, lack of container availability and driver shortages), many companies are ordering further in advance, expecting longer lead times. I have observed that lead times are often not just longer, but they are more variable and hence unpredictable. You may therefore choose to buy more than you need, as a buffer against uncertainty. If you bring in purchases when you don’t need them, or can’t use them, you create higher levels of stock. This needs to be stored somewhere, and you need to use up your cash resources to fund it. The variability also brings a risk that the stock is unusable – you might have the equivalent of 100 jars, but no lids to go with them. Even if you supply services, you may find your customer requirements change if their overall plans are affected by physical delays.
You may be used to storing 1,000 units of stock and still plan to do so. However, if that tied up £100k last year, it may require £130k this year if the price has increased significantly. So even the normal level of stock may require more cash than you expect.
For businesses who use invoice financing, you have another volatility to deal with. Staff absences from Covid or other illnesses cause a capacity reduction, and you may not get all your orders despatched out on time. If we have another lockdown, your sales line may well be affected for a period. These will instantly reduce your stream of cash receipts in, while you still have to pay for last month’s purchases.
So what can you do to manage this?
- Send your goods (or supply your services) when your customer wants them
- Get your customer invoicing right first time – no excuses for them to pay late
- Collect your customer payments in on time
- Plan your stock-holding well
- If you are ordering ahead, state in what time window you want to receive the goods so you don’t receive them before you need them
- Keep communicating with your supply chain so you understand what’s going on
- Incentivise your sales force to shift stock that isn’t moving, even if it’s at a loss. You’d rather have cash than “dead stock”
- Make sure your finance team is monitoring and forecasting cash 3-6 months ahead
- Raise any new bank finance well before you run out of funds
Previous Blog – November 2021
PRICING – HOW TO GET IT RIGHT
There is much coverage of inflation in the press at the moment, so you may be wondering how cost increases affect you, and whether you may need to increase your own prices. Pricing is one of the most important decisions that you make in your business. Price too high and you won’t generate enough sales. Price too low and your customers might be happy, but you will be “busy fools”.
Marketing strategy helpfully reminds you to manage your “Four Ps”: Product, Place, Promotion and Price. You have to have a harmonious balance where you are offering your products or services to the right people, via the right channels, presented in the right way, at the right price. The price needs to be consistent with the other three Ps. However, the marketplace changes and evolves, and pricing is not static.
Most companies do not like putting up prices until they have to. They allow cost increases to erode their margins and profits until it becomes too painful, then they reluctantly put prices up later. This is bad business! So let’s consider how different businesses tackle pricing.
At one extreme you have airlines and hotels who operate “dynamic pricing” for their services, with prices being updated many times a day to reflect demand levels and competitor actions. Petrol stations change prices almost daily. Some businesses publish a product catalogue (often also a website) with set prices, but there can be discounts and offers which reduce these for short periods. Others create a price using a methodical process based on estimated time and material costs (like a builder).
6 top tips, plus one more for free:
- Understand which of your costs are changing, and by how much. This will give you a minimum level you need to achieve to maintain your profit margins.
- Remember why your customers buy your items. What value or benefit do they perceive? That will determine what price they might pay, not the cost to you of producing it.
- Be aware of what your competitors are doing, both in terms of levels and timing. This is valuable market intelligence, and you should revisit your “Four Ps”. You need to make a conscious decision about how to price relative to your competitors.
- If you are dealing with repeat customers, explain in a politely worded letter or email why your prices need to increase and justify this. Whether you are selling B2B or B2C, humans will be processing your request for a higher price and you can influence their reaction.
- People will be more receptive to your price increases when they are hearing about other price increases. Do not wait until after you are suffering from cost pressures, you may “miss the boat” on customer acceptance.
- Tie in a pricing/discounting benefit to increased purchasing levels. Offering price breaks on volume, or “5 percent off your next order”, may encourage the customer to buy more from you, which will generate more margin overall, even if you have to concede a little on price.
- If you want to disguise a price rise, try repackaging the offering. Sometimes referred to as “shrinkflation” with chocolate bars and the like, you reduce the size/cost of the offering but the headline price may stay the same or even reduce. Or you offer a different “bundle” of products and services, so they can’t be directly compared on price. Adding a free element may have little cost to you, but add value to the customer.
Previous Blog – October 2021
A SHORT HISTORY OF NATIONAL INSURANCE
There has been much media coverage of the recent government announcement of a new “health and social care levy” of 1.25 percent for the year 2022-2023, so I thought you might like to read about the history of National Insurance (“NI”). Separate processes exist for employed and self-employed people, but I will focus on the employment arrangements below as they cover the bulk of money raised by NI.
Both employees and employers pay NI, so it has been called “a tax on jobs”. The word “tax” does not appear in its title, but it is a tax by any other name. Paying NI gives people the right to certain benefits: state pension is the most obvious, but also SSP and some unemployment benefits.
NI was introduced in 1911 to support two parallel schemes covering unemployment benefits, healthcare and pensions. An employer would buy fixed price stamps weekly at a post office and affix them to each employee’s record card. This practice gave rise to the phrase “paying your stamp”, and in the event of losing your job, being “given your cards” as you took them with you to your next employer to maintain. In 1948, these two schemes were combined. In 1975 the flat weekly fee was replaced by an earnings-related measure that was also integrated into the PAYE collection process with income tax.
So how much NI do people pay? At the national living wage of just under £9 per hour, £17,600 of annual salary generates roughly £1,000 of employee contributions and £1,200 of employer payments (c. 5.5 percent and 7 percent of pay). Rising to the average UK salary of £30,000 these figures become £2,500 and £2,900 (c. 8 percent and 10 percent). As the employee contribution rate falls after £50,000, by £80,000 the figures are £5,500 and £10,000 (c. 7 percent and 12 percent). The extra 1.25 percent next year applies to both the employee and employer figures, so adds £100/£110 per year for the NLW, £225/£265 at the average wage and £880/£890 on a salary of £80,000. In total the new 1.25 percent scheme should raise about £15bn, contributing towards the government plans to spend an extra £36bn on health and social care in that year.
In the tax year 2019-2020, NI raised a total of £145bn for the government. They spent £150bn on the NHS in the same year, about £100bn on state pensions, with SSP and unemployment benefits on top, so you can see that the NI is “making a loss”. There is no magic pot somewhere containing our future benefits, unlike a private pension scheme. We are relying on a future government having income with which to pay us.
It would be convenient to combine NI and income tax into one system. They currently have different rates, thresholds and reliefs, and NI is not charged on unearned (e.g. investment) income, whereas income tax is. As there would be many winners and losers in such a radical change, it is unlikely that any government is going to want to alienate the losers, so we will probably have NI for the foreseeable future.
Previous Blog – September 2021
REFLECTIONS ON WORKING FROM HOME
As a portfolio finance director for most of the last decade, I used to find my working pattern was roughly 70 percent working at clients, and 30 percent working from my own office, which happens to be in my home. Client work was generally hands-on, coaching and meetings, whereas working from home covered planning, marketing and single in-depth pieces of work.
Before the pandemic hit, most of my clients had finance teams who worked “in the office”. The computers were there, the scanners were there, the printers were there, the files of paper records were there – all conveniently in one place. If people worked from home, it was usually to undertake a large and complex piece of work in peace and quiet, or to fit around the delivery of a piece of furniture or similar.
When we were asked to work “from home if possible”, my clients had very different responses. Some IT systems and financial software were well suited to remote working, and others were not. Some offices were more paperless than others. Some went home, some stayed in the office, and some did a bit of both.
Now we are at “back to school” time of year, it seems strange that some finance teams are still working from home. Some never left the office, some have drifted back over time, but some remain resolutely at home. What will it take to get them back into the office? Or should we consider home working as a sensible long-term working method?
If you ask a more senior person in your organisation, they will probably say that working from home worked well. But that really means “well for them”, as they were familiar with the needs of the business and had a pleasant home office to work in. If you ask someone who has more recently joined the workplace, you may hear a different story. Cramped living conditions, sharing communal areas, and limited access to good wi-fi would always make home working difficult. Some younger people have even given up and moved back in with their parents. Formal training may have taken place on screen, but the informal learning you do from interacting with colleagues has been absent.
One of my clients found they were working extra hours and still running late in producing monthly accounts. To justify some recruitment, they analysed the number of transactions processed. Astonishingly, the transaction count was lower but the performance was slower. Here was evidence that working from home clearly accounted for a reduction in productivity.
I know of several R&D projects which are running even later than usual, not wholly accounted for by component shortages and other supply chain issues.
The evidence therefore suggests that while personal productivity may have improved for some people in some roles, team or collective productivity has worsened while working remotely. I recommend more returning to the office, a reduction in hours spent in Zooms and Teams, more talking and less drowning in emails. And people bringing cakes into the office.
Previous Blog – August 2021
It’s finally holiday season, so I thought I would reward my loyal readers with a seasonal treat.
One of my favourite memories of my old maths teacher (John Durran) actually has very little to do with numbers (and I love numbers). If we had been very attentive and studious in our lessons, he would sometimes tell us a joke. These jokes were often strikingly similar, and revolved around a group of people who had to solve a problem using their unique skills. So, here we go.
Once upon a time there were three people standing outside a church: a mathematician, a physicist and an engineer. A man arrived and said, “if anyone can tell me the height of this church tower, I will give them £100. The only equipment I can give you to use is a barometer, and fortunately I have three of them.”
I can guess that you are as excited as I am, as I type this fond memory, although the plot is already rather unlikely.
The physicist went first. He took the barometer reading at the bottom of the tower, climbed the steps to the top, took another reading, and walked down again while processing the data in his head. “About 120 feet,” he said, breathing hard from his exertion.
The mathematician went next. When he reached the top of the tower he took out his watch, and threw the barometer clear of the parapet, watching it plunging to the ground, breaking into many pieces, and narrowly avoiding hitting the other men. After checking the duration of the fall, he computed as he descended the tower and, after catching his breath, pronounced:
Meanwhile, the engineer had walked off and was knocking on the vestry door. A churchwarden opened it and asked how he could help.
“Ah, very nice to meet you,” said the engineer.
“If you can tell me the height of the tower on this lovely church, I will give you this elegant barometer in its beautiful burr walnut case.”
“You’ve asked the right man,” said the churchwarden, “I have written the official history of this church. The tower is 134 feet tall and it was completed in 1841.”
As usual in his stories, it was the engineer that won the contest, and by his normal slightly underhand tactics. Perhaps inspired by this, I later became an engineer, and then an accountant. I suppose that today all three would have googled the question on their mobile phones, and there would have been no joke.
To conclude, there are often several ways of solving problems. Not all will give you the right answer, and they will involve different resources, expertise, time and effort. In your businesses, your staff will each have their own way to solve problems, and by allowing people to find their own route, you may end up with the best answer.
Previous Blog – July 2021
THE RETURN OF THE COMPANY CAR?
I’m an accountant who likes cars, so I find this topic very interesting. And as discussed previously, the tax treatment of items affects people’s behaviour, so fasten your proverbial seatbelt and come for a spin.
A quick history lesson: in the last decades of the 20th century, sales reps had functional cars to help them travel (and sell), while managers could run a “nice” car with a small tax bill. The taxable benefit was based on the list price of the car, multiplied by a factor reflecting how much the car was used for business. Company cars were a tax-efficient part of a remuneration package.
When politicians started warming to…global warming…the basis of taxation was changed to reflect the official CO2 ratings of cars, whereas vans were subject to a totally different regime. So you might have seen a company bigwig parking up in a rather agricultural double-cab pick up truck! As the noose tightened on CO2 ratings, and the tax bills went up, the “free” car became less and less attractive and many staff took salary instead (as “car allowances”) and paid personally to run their own cars.
Into the pandemic era, and high-mileage sales reps became work-from-home staff, mostly “driving” nothing more exciting than a laptop with Zoom or Teams. Physical travel is poised to make a comeback, even if it is reduced.
So is the company car dead? Far from it.
The government is committed to ambitious net zero goals, and is heavily promoting the use of electric vehicles. These are expensive to buy, which can be off-putting for private buyers, so the company car sector is being stimulated. If you run an electric car as a company vehicle, the benefit-in-kind tax rate this year is just 1 percent and is only planned to rise slowly. Compare this to around 30 percent for a traditional “ICE” vehicle with a small petrol or diesel engine. The employee will also pay a lot less in running costs for electricity compared to fossil fuels. Even if you don’t like the car, it’s a big saving. It makes no sense to give an employee salary, taxed at 40 percent plus, for them to run one personally.
On another front, companies running electric car fleets can demonstrate (very visibly) their environmental credentials.
The rate of technological change in batteries is so dramatic that companies would be wise to lease the cars, and let others take the residual value risk. And once there are enough silicon chips to make the cars, manufacturers will be promoting their leasing options pretty hard.
So expect 2021-22 to see the return of the company car. Prepare to listen to sales reps boasting about their battery capacity and range!
Previous Blog – June 2021
WHY WE FAILED IN EUROVISION 2021…AND OTHER THOUGHTS
I’m an accountant, so what do I know about music and Euro-politics?
The failure of the UK entry to score any points in last month’s Eurovision song contest was not because nobody liked it, it was because of the scoring system. And it teaches us two important issues for our businesses. Let me explain:
When 41 countries each rank 26 entries, and award points to the top 10, then 16 do not score any points at all. There is a difference between votes and points. So if you produced a truly average song, finishing 13th in every poll, you would receive no votes. If you produced a polarising song, which half the countries loved and half hated, you would score large points (say 8) from 20 countries and score 160 points instead of zero – even if you were only 13th in the total number of votes cast. The scoring system awards variation of opinion, and as such reflects real customers for your business.
- If you offer an average product or service, who will choose it over a competitor who offers something more attractive/appealing/tailored to that customer?
- You need to offer something distinctive that your target customers will respond to passionately.
We also learn the old adage “what gets measured gets done” is very true. You need to make sure you are measuring the important things, recording them accurately, and providing feedback to your staff. Not all of these will be financial measures.
If you reward your sales team on revenue, won’t you expect them to discount prices heavily to achieve volume over margin?
Other examples you might think about. Do you measure and follow up:
- Sales, or sales where the invoices are paid on time?
- Quotes made to customers who do not place an order (failed quotes)?
- Number of customer complaints, or complaints AND positive feedback?
- Number of accidents at work, or near misses (that help you prevent problems)?
- The time taken to respond to the customer, or the time taken to solve the customer’s problem?
So get measuring and reporting, but only if they are the right measures that will fuel the right outcomes, and make sure you offer memorable and distinctive products and services!
Previous Blog – May 2021
“You are an accountant,” people say to me. “Can you help me to pay less tax?”
It’s funny how that is the thought that many people have about accountants. Some are tax specialists, but most accountants work in businesses, or with businesses to help them grow successfully. This will include financial recording and reporting, raising finance, budgeting, forecasting, developing strategy, managing cashflow, chasing debtors, managing people, and helping non-financial colleagues make financially-sound decisions.
But back to the tax question. I can guarantee to help you pay less tax: simply reduce your salary and less tax will be deducted every month on your payslip. Was that what you wanted? Did it solve your problem? Why not?
Of course, what we have here is an example of someone trying to solve the wrong problem. You don’t want to pay less tax, you want to have more profit/salary/earnings after tax. Buying some equipment primarily to get the 19 percent corporation tax relief is like buying clothes in a sale “to save money”. You have to need the equipment, or the clothes, for this to work. Otherwise you have just wasted money.
So please, please, think about what your business needs to do to become a better business. It might be recruiting a great individual, launching a new service or buying that piece of equipment to improve efficiency. And then think about whether there are any significant tax effects.
As the government goes about collecting tax revenues to pay back the debt incurred in fighting Covid-19, it may well have to increase certain types of taxes. So you may need to think about the tax you will be paying, but don’t let the tax tail wag the business dog. Try to think of paying tax as a sign of a successful business.
Previous Blog – April 2021
LICENCE TO INNOVATE – DEVELOP A BOLDER STRATEGY
For those businesses that had a written strategy document for 2020, I’ll hazard a guess that very few forecast the disruption of a global pandemic and the lockdowns that arose from it. Most strategies would have talked about incremental change, gradual expansion, and maybe introducing one new product or service to market.
I am lucky enough to work with a portfolio of 12 businesses who were all very differently impacted by the events of the last year. These spanned a wide range:
- A care organisation had to focus on resources and processes (staff, PPE, safe working practices)
- Factories introduced ring-fenced shift patterns
- R&D activities and many office roles moved to working from home
- A tourism business saw a 90 percent + cut in revenue
- A hotel, and a chain of shops both had to close for several months
- Restaurants became essential food retailers and takeaways.
While government support measures have plugged some of the costs, that was not enough on its own. Necessity truly was the mother of invention. Nearly all of these businesses rapidly dreamed up and implemented dramatic changes to their business strategies in very short timescales. Changes included:
- Shifting retail sales from physical to online
- Revamping web sites and introducing online purchasing portals
- Introducing new physical delivery services
- Bringing out new products for growth markets (barriers, food packaging)
- Changing marketing emphasis from exhibitions and trade shows to e-mail blasts, social media advertising, and even traditional letters.
The take-away learnings from this last year are therefore:
- You can often achieve the unthinkable, but only if you think of it first
- It is hard to give up the status quo in favour of new ideas unless you have to
- It is OK to try a new idea that fails, as long as you limit your losses
- You are always licenced to innovate, and develop a bolder strategy.
Most of these businesses are not going to revert to how they were when restrictions are ended, they are going to pick the best elements of past and present and see how they work together.
Perhaps in the future we will allow more wacky ideas and innovations to be tried out, and see how it goes. That is likely to be very interesting – for the businesses and for their customers.
Previous Blog – March 2021
10 TOP TIPS FOR RAISING BANK FINANCE SUCCESSFULLY
For most owner-managed businesses, if you need more money you can only find it in two places. One is for you, the business owner, to invest more yourself. You may need to re-mortgage your house or sell other assets to provide the cash. The alternative is to borrow it. You could tap up your friends and relatives, but this can end in tears. Or you could go to your friendly Bank manager.
Banks tend to get a bad press, famously “renting umbrellas to people, except when it is raining.” You need to see it from the Bank’s perspective. They make money by lending money to businesses – as long as you pay it all back. They are looking for reasons to lend to you, but watching out for warning signs that they might not recover their loan in full. So how can you help them to lend to you?
Here are our 10 Top Tips for brilliant Bank borrowing:
- Don’t be a stranger. If you can cultivate a relationship with your Bank manager from the beginning, when you want to raise a loan you will already be at a better starting point. Make time to explain the business to them, and (Covid-permitting), show them around.
- No dirty laundry. Impressions count. You need to make sure that your Companies House filings are on time, you are not late paying VAT and PAYE, and you have no CCJs hanging over you. Old debentures should be scrubbed from the Companies House records. Anything else paints a bad picture of your business.
- Have good management information. You should be able to show that you produce timely management accounts and keep track of your business’ performance. This should include a balance sheet and ideally a cashflow, not just a profit and loss statement.
- Have a compelling reason to borrow. Banks like to know where their money is going, and investing in growth is more compelling than replacing losses (apart from the current Covid-response CBILs loans, where the opposite is true).
- Demonstrate affordability. The Bank manager has to show their Credit team that you can pay back the loan, with some headroom. Show them these forecasts, with reasons why the results will improve.
- Understand security. The Bank will usually want some security for their loan, whether that is a mortgage on your building, a charge on assets like book debts, or a lease on some equipment. You want to avoid giving a personal guarantee, if possible.
- Help the Bank manager do their job. They have to make a narrative report to the Credit team, so why don’t you write the story for them? This includes explaining clearly what the business actually does, the journey you have been on, and where you are going.
- People lend to People. Explain who the key people are in your business and how they will help deliver your future success. Photos will make them seem more real and approachable, and you can explain their expertise and experience.
- Gift wrap it. Putting the above points into a business plan format will make a good impression. Be available to help on the phone or by e-mail if there are last-minute queries.
- Don’t be afraid to haggle. Once you receive a loan offer, you may be able to negotiate down the charges, or the rate, or some of the terms. Probe to see which items may be flexible.
If you are struggling, you can always ask your friendly accountant to help you.
Previous Blog – January 2021
NEW YEAR, NEW HORIZONS.
DEVELOPING A SHAREHOLDER STRATEGY.
The start of a new year is a good time for a business to plan ahead and develop a new business strategy. However, if you do not start “at the beginning” you may not get to the right end point. You may deliver a good business, but not one that the owners wanted. It is vital to understand what your shareholders want, and to build up a shareholder strategy which will shape the business strategy that comes later. Different kinds of businesses have very different shareholder groups and expectations:
- Owner managed – the MD/CEO owns and runs the business, possibly with other minority shareholders;
- Sole trader – the manager is the business, there are not shareholders as such;
- Family owned – some family members (sometimes plus some non-family members) run the business, and another group of family members (possibly the same group) own the shares. This could involve family trusts or other complex ownership structures;
- Part of a bigger group – a remote “head office” owns the shares and sets aspirations and/or targets for the business to perform financially;
- Charities and similar organisations – here there are not conventional shareholders but there are trustees who oversee the organisation, and charitable objectives/purposes that need to be met.
The first objective of any set of shareholders is that the business does not fail or “go bust”. Beyond that, the shareholders may want to:
- Grow a business and then sell it;
- Grow a business and keep it for generations to come;
- Keep the business at a comfortable size so that their lifestyle is accommodated;
- Generate sufficient revenue to keep themselves employed.
Some businesses may even have a finite life; for instance a company set up to carry out a one-off purpose (a joint venture, or to create a building, or a film) and the aim is to wind it down in an organised way and distribute the proceeds.
You therefore need to understand the shareholders’ approach to:
- Return – how much do they want the business to grow its profits?
- Risk – how speculative is the management allowed to be in achieving this?
- Linearity – can you make a loss in the early term to generate bigger profits later?
- Funding – are they happy to borrow money from banks to fuel the growth of the business, or to put in more money themselves?
- Dilution – are they happy to issue more shares to other people to grow the business?
- Anything else of importance. Some owners might want to meet personal ambitions such as to have an overseas office, or to meet an arbitrary size target. You need to know this.
Only once you have ascertained these needs can you go on to create the strategy of the business to meet them.
Previous Blog – November 2020
10 TOP TIPS FOR HOUSEKEEPING YOUR FINANCIAL SYSTEMS.
If your business is working at less than full capacity, or if you are coming up towards your year end, now is an ideal time for some simple housekeeping of your financial data. Some of these will improve your quality of life, others may stimulate more business.
Here are our 10 Top Tips for timely tidiness:
- Check your system for any incomplete or unposted transactions. Sometimes these can be left “in limbo” and need pushing through to the right places. Any older unpresented items on your bank reconciliations need investigating and resolving.
- Review your aged debtor report for overdue invoices – are you owed money you haven’t collected? Can you chase for payment? Are they an indication that you are failing to provide satisfactory goods and services in your operations? Do you need to inform your credit insurers? Are they about to be excluded from your invoice discounting facility? Do you instruct a debt collection agency or start proceedings? Can you claim VAT bad debt relief? Do you need to provide for these or write them off?
- Review your aged debt report for old unmatched credits. Have you failed to produce an invoice, or posted it to another customer account? Is your customer owed a refund – could you tempt them to spend it on a new order?
- Review customers who haven’t bought from you in a while. Can salespeople contact them to understand what has changed in their business and try to rekindle the business? Do you want to reset their credit limits in case their circumstances have changed? You might want to flag them as inactive if your system allows.
- Review your aged creditors for old invoices. If you actually owe these, why isn’t the supplier chasing you for payment? Have you actually paid them another way, for instance by credit card, or a cash book / nominal ledger / proforma payment? Is this a duplicate that needs removing? You can ask your supplier for a statement or account history to check this.
- Review your agreed creditors for old credit balances. Have you paid the supplier but not received the VAT invoice and recorded the expense? Do you need to chase this down? Or have you overpaid and you are owed money you could ask to be refunded?
- Review old outstanding Purchase Order lines. If you haven’t received the goods or services, check whether you actually need them and see if you can cancel them down.
- Review old “goods received not invoiced” items. Have these been booked in mistakenly? It is unusual for the supplier not to have chased for payment. Trace these through to see if you have any systematic failings.
- Review your fixed asset register. Do you still have all these items, or have you disposed of some? It might remind you of things you own, but don’t use, and could sell.
- Check your payroll-related balances. Your Nominal Ledger balances for staff pay, PAYE, pension and other deductions should be clearing to zero after monthly payments. Check your HMRC online tax accounts to see if they think you owe what you think you owe – you might have overpaid and be due a refund!
Once you have finished this list your work should become easier and you should have improved your business’ position.