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December 16th, 2008
Inflation falls to 4.2% in November
Inflation in the UK fell in November, but not by as much as analysts had predicted.
The Consumer Prices Index fell from 4.5% in October to 4.1% as falls in the cost of food and fuel kicked in but many economists had thought there would be a sharper fall.
The Retail Prices Index - which also includes house prices - fell from 4.2% to 3% as the housing market continued to plummet.
The Bank of England has slashed interest rates to just 2% in recent months in the belief that inflation will continue to fall.
It currently remains far beyond the government’s target of 2.0% but there are fears that it could eventually fall so low that deflation becomes a serious threat to the economy.
August 14th, 2008
Inflation rises to 11 year high
UK inflation soared to 4.4% in July, taking it to the highest level since the current measure began in 1997.
The rate of inflation rose by 0.6% in July alone, the biggest single increase over the same period.
A major factor for the increase is rising energy and food prices, which have now increased 13.7% year-on-year on the back of a surge in the cost of meat.
The Bank of England’s quarterly inflation report warned that before inflation dropped it was likely to rise to 5%.
The data will scupper any hope that the Bank of England will cut interest rates for the foreseeable future and raises the possibility of a rise in a bid to bring inflation under control.
However, analysts expect commodity prices to stabilise by the end of the year, meaning interest rate cuts may once again be a genuine possibility.
August 7th, 2008
Bank of England holds interest rates at 5%
The Bank of England has held interest rates at 5% despite growing evidence that the UK is heading for recession.
Business groups the British Chambers of Commerce (BCC) and the British Retail Consortium had argued for a rate cut to boost high street spending but with inflation likely to top 4% when the next set of figures are released, the monetary policy committee (MPC) decided against a cut.
“The MPC cannot ignore the fact that recession threats have worsened,”
said the BCC’s economic adviser, David Kern.
“While the near-term rise in inflation is unavoidable, it is also temporary as weaker growth would clearly push down inflation sharply next year. Limiting the threat of a major recession must be the priority.”
Manufacturing group EEF also warned that a cut would be needed “sooner rather than later” if the UK was to escape a full-on recession.
Many analysts expect inflation to hit 5% next year as rising energy prices kick in.
July 31st, 2008
Small firms plan staff cuts
Companies intend to lay off staff and freeze recruitment as the impact of the credit crunch takes its toll, according to the quarterly KPMG business confidence survey
The majority of businesses are now planning to reduce staff levels in a bid to remain profitable in the wake of the global credit crunch.
A business confidence survey carried out by KPMG found that the number of companies planning on making staff redundant had doubled since the start of the year from 29% in the first quarter to 53%.
A similar figure (52%) said they would stop recruiting new staff in a bid to keep costs down.
Most (60%) of the businesses polled thought the downturn would last for a further one or two years, but a more pessimistic 20% predicted it would continue until 2013.
“The clouds that were on the horizon when we first conducted this survey back in early spring are now right overhead, with businesses now feeling the impact of this so-called ‘perfect storm’
of rising inflation, tightening credit conditions and plummeting consumer confidence,” said Malcolm Edge, regional chairman for KPMG in the north.
In a separate survey, the organisation also warned that small businesses would continue to be hit hard by larger companies taking longer to settle invoices.
The study found that 49% of companies with turnover ranging from £250m-£20bn intended to negotiate longer supplier payment terms, which would inevitably filter through the supply chain to smaller companies already struggling to make ends meet.
The clouds that were on the horizon when we first conducted this survey back in early spring are now right overhead, with businesses now feeling the impact of this so-called ‘perfect storm’
“Adopting the same old blinkered approach of squeezing your suppliers and delaying payments is a zero sum game where only a few winners will emerge,” said Andrew Ashby, KPMG advisory director.
“Companies need to be more focused on gaining improved visibility and control of cash, and to work smarter across the supply chain to create win-win opportunities that reduce the cash cycle for all participants.”
The research found that 75% of businesses are already experiencing with late payment and the same number has reduced access to credit. This compares to figures of 23% and 14% respectively in the US.
July 18th, 2008
Recession fear for small businesses
Businesses face a potentially lethal combination of falling sales, cashflow problems and rising inflation as the UK heads towards recession, a survey of small businesses suggests
The UK is at serious risk of recession over the next few months, according to a survey of 5,000 small businesses by the British Chambers of Commerce.
The research found that orders and sales had slowed over the past quarter, with many companies suffering cashflow problems as a result.
The service sector, which includes restaurants, gyms and travel companies, was particularly hard hit, the survey found, as consumers tightened their spending and struggled to cope with rising fuel and food costs.
“We are now facing serious risks of recession,” said David Kern, chief economic adviser to the BCC. “The outlook is grim and we believe that the correction period is likely to be longer and nastier than expected.”
A recession is usually defined as two consecutive quarters with negative economic growth.
We are now facing serious risks of recession. The outlook is grim and we believe that the correction period is likely to be longer and nastier than expected
There was further bad news for the small business sector with the revelation that inflation had hit an 11-year high in June, rising from 3.3% to 3.8% and making any further cuts in interest rates highly unlikely in the near future.
But the BCC warned against any interest rate rises, claiming this would be a “serious mistake” if the Bank of England decided to tackle rising inflation by raising rates.
“Further increases in consumer price index inflation, to levels above 4%, are inevitable in the next few months whatever the monetary policy committee decides to do,”
said Kern.
The British Retail Consortium revealed that like-for-like sales were down by 0.4% in June, which will go some way to easing the inflationary pressure. But big rises in the price of fuel, food and non-alcoholic drink were behind the jump in inflation.
The FTSE 100 index recently dipped into a bear market, finishing 20% lower than its previous peak in June 2007.
July 3rd, 2008
Dangerous times for Accountants
The credit crunch has changed everything. And not for the better. Suddenly everybody is trying to shift the blame.
Bank managers are nervously looking at the easy loans they all too readily sold over the past few years nervously.
The promise that the real estate security that backed it is “as safe as houses” now rings rather hollow. Will the client still pay the loan when his house has negative equity? Suddenly the accountant’s certificate, so cursorily skirted over when the loan was first issued, is being dug out of dusty drawers and pored over.
If the client can’t pay, can the accountant? Surely the accountant certified that his client was good for the loan. Accountants look like an increasingly attractive target for litigation, backed as they are by the deep pockets of their professional indemnity insurers.
However not every loss will justify a claim. Not every error will sound in damages. An accountant is judged both in contract and tort against the standard of the reasonable care and skill that might b expected of an accountant of ordinary competent experience. An accountant will only be liable if he falls short of that standard.
To know how far that duty goes, one must ask what the accountant was contracted to do? One must remember that there is no such thing as a general retainer for an accountant. So the starting point is what the accountant has been employed to do under the engagement letter. Or what he was requested and he agreed to do. And what fiduciary duties he may have had. Moreover, unlike an auditor, an accountant can further limit his liability to some extent by using exclusion clauses and disclaimers.
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June 12th, 2008
Factoring and Invoice Discounting Uncovered
Asset-based lending is the phrase on everyone’s lips when it comes to discussing effective business finance. But what is driving the success of ABL as a funding tool for UK businesses?
Twenty five years ago, little was known about alternative business finance. Companies needing funding went to their banks and negotiated an overdraft facility. The recession at the end of the 80’s and the banks’ tightening of credit acted as a spring board for factoring. Unfortunately, this generated an image of being the lender of last resort which has taken some time to shake off and, in fact, there is still a general lack of knowledge about the scope of factoring and its benefits – partly, perhaps, because the terminology can be confusing. So before we look at the subject in detail, let’s set the record straight.
FACTORING means selling your invoice to a Factor who will then be responsible for collecting payment of the invoice from your client. You will receive up to 90% of the value of the invoice immediately and your factoring partner will assume full responsibility for the sales ledger.
INVOICE DISCOUNTING offers the same basic facility as factoring in that it provides immediate working capital by releasing cash that would otherwise have been tied up in unpaid invoices, but without the sales ledger and collections service. In this case, your funding partner advances your business cash against the value of outstanding invoices, but you retain the collections in the usual way.
INVOICE FINANCE, RECEIVABLES FINANCE, SALES FINANCE, DEBTOR FINANCE are all generic terms referring to the range of products that release upfront, the cash value of trade debts. Whether it’s factoring or invoice discounting, the basic premise is that the financier provides you with a significant percentage of your debtor book up front, releasing the remainder, less a percentage fee, once the debt has been paid.
ASSET-BASED LENDING is lending against assets on the balance sheet, debts (invoices) are now recognised as one of these assets and therefore funding can be leveraged. Other assets may include stock, plant and machinery and property.
Whichever label is given to the facility, there is always a place for factoring and invoice discounting. These two funding mechanisms have been the catalyst for the innovative and wide-ranging funding vehicles available today and will continue to drive the market forward.
Until recently factoring was considered only appropriate to SMEs and invoice discounting was reserved for medium to large sized, profitable businesses
. It’s still true that factoring is an excellent alternative for small, young or start-up operations. Further, it often makes sense for SMEs to hand over the management of their sales ledger to a third party in return for immediate cash; which may be more efficient and cost effective than hiring a full time employee. This is also the reason larger firms originally dismissed factoring in favour of invoice discounting: whilst they needed the cash, their in-house teams meant they didn’t need the add-on services.
However, with the flexibility of both options their popularity has sky-rocketed, blurring the lines between SME and larger businesses so that both groups have come to utilise the benefits of each.
Beneficial Features include the level of financing being determined by the future potential of a business rather than past performance. Further, both recognise the need for flexibility, allowing funding to grow as the business grows and both are responsive to its changing needs; when compared to the overdraft or loan, factoring and invoice discounting provide open-ended, long-term relationships that don’t come with a fixed repayment structure and the finance is tailored to the specific needs of the business rather than an off-the-shelf package.
Users agree that any costs involved are far out-weighed by the benefits. By providing an immediate injection of cash, they can facilitate growth and development, free up working capital and provide an excellent opportunity to negotiate discounts with suppliers or invest in equipment, people and new markets.
With popularity has come competition and a cross-over of services. Previously, only businesses with a turnover in excess of £1m qualified for invoice discounting. Today, provided a business can demonstrate sound management practices and effective collection of its own invoices, any size company can utilise this service.
As expectations of business owners have increased, so providers have had to respond with wider and more diversified product ranges: bigger clients have meant factoring providers have had to become more professional, better organised and capable of bigger deals, which has driven the factoring industry to evolve and include not just invoice discounting in its portfolio, but broader asset-based lending activities as well.
As businesses of all sizes have embraced the concept of using their assets as a means of funding their operations, invoice discounting has overtaken factoring as a preferred funding mechanism. In June, the ABFA indicated that nearly 48,000 companies in the UK were using invoice finance and ABL funding, and that the trend for larger companies to use the products to help fund mergers and acquisitions was on the rise.
As the market continues to mature, providers are developing strong niches where their customers can benefit from greater added value services by outsourcing their receivables. So, whilst there is a strong demand for invoice discounting, there is still a great need for factoring.
Factoring is evolving as a relationship-based service and it is this approach that has helped providers develop their understanding of specific industries that have historically been outside of their remit. Traditionally, factoring has only been suitable for businesses where transactions are clearly defined – like manufacturing and services. But, as providers become more innovative, they are investing the time to understand how to finance more complicated payment structures, like those prevailing in the construction industry.
Whilst new industry sectors are awakening to the benefits of factoring and invoice discounting, the most powerful attribute these options have to offer is still their service driven approach. They offer entrepreneurs access not only to cashflow but also that most valuable commodity, time. So, as invoice discounting overtakes the overdraft as the primary source of mainstream funding for SMEs, factoring will further develop as a value added proposition, seeking new niches and delivering that invaluable element of time back into the schedule of management teams across the UK.
Evette Orams
Director
Hilton-Baird Financial Solutions
www.hiltonbaird.co.uk
April 23rd, 2008
Bank bailout is good news for business
The Bank of England’s decision to inject £ 50 billion into the financial system is good news for small business owners. But with fears over the impact of the 10p tax rate abolition, these remain troubling times.
News that the Bank of England is to inject £50bn into the financial system by lending banks money in exchange for potentially risky mortgage debts should be welcomed by business owners throughout the UK.
Under the proposals, banks and other financial institutions will be able to exchange mortgage debts for secure government bonds, with the intention of freeing up cash so banks can begin lending to each other again.
The government’s primary aim is to prevent another Northern Rock fiasco, where a company’s business plan is rendered useless by its inability to secure funds for home loans. But by injecting such a large amount of money into the system the hope is also that the Libor inter-bank lending rate will also come down.
This would mean banks are able to reduce the mortgage rates they offer customers, and begin to pass on the interest rate cuts implemented by the Bank of England.
Abbey has already cut its two-year tracking and flexible mortgages by 0.1% while the government reduced the standard variable rate on its Northern Rock offering by the same amount, although both these are substantially less than the recent 0.25% cut in the base rate.
The effect on small businesses owners is two-fold. For those businesses directly reliant on the housing market such as lawyers, estate agents or removal companies, this should provide a boost to the housing market, where confidence has now reached its lowest point in 30 years.
Even for those not directly dependent on the housing sector, cheaper mortgages will mean those taking out new loans or coming off fixed-rate deals should have slightly more money to spend
Even for those not directly dependent on the housing sector, cheaper mortgages will mean those taking out new loans or coming off fixed-rate deals should have slightly more money to spend, hopefully boosting the general economy. Home furnishing stores, carpet retailers and DIY outfits all depend on a buoyant housing market for their own success.
The second effect is that banks may once again be slightly more willing to lend money to each other for other purposes, such as business loans. No bank is likely to be taking too many chances in the next few months so it will remain very difficult for start-ups to receive funding in the current climate.
But those businesses that are on a solid footing and can demonstrate an effective business plan may now find it easier - and slightly cheaper - to gain access to finance.
Yet there are also signs of further storm clouds on the horizon for small business owners. The furore over the abolition of the 10p tax rate - which will see single people earning less than £18,500 lose up to £232 a year - is likely to lead to demands from staff for pay rises at just the time when they need to be keeping costs firmly under control.
And in the rush to repair the damage now the full extent of Gordon Brown’s last Budget as Chancellor has become clear, there have been vague promises that the government will somehow make this up to low-earners.
One theory is that this will be through raising the national minimum wage, which is already set to rise to £5.73 an hour from October, which will be bad news for many business bosses.
April 1st, 2008
Staying on top of your company cash flow
Small companies will have to cope with late paying customers as well as high interest rates, declining orders and an economic slowdown. But there are ways you can improve your company’s cashflow
Almost half of small companies struggle to get customers to pay on time and over a quarter regularly ask to extend credit terms, according to research.
The study, conducted by business finance firm Hilton-Baird on behalf of the Asset-Based Finance Association, concluded that cashflow problems are likely to increase as the impact of the credit crunch, high interest rates and soaring energy prices hits the UK economy.
“This is likely to result in many UK small companies having to tighten their belts, particularly with customers continuing to pay late,” said Alex Hilton-Baird, founder and managing director of Hilton-Baird Financial Solutions. “If they haven’t already done so, companies should review the way in which they currently finance themselves.”
Hilton-Baird offers the following tips on how to make the most of your cashflow:
Get on top of credit control
Make sure that your terms and conditions are reviewed on a regular basis and that invoices are raised on time. The sooner you raise an invoice, the sooner you are likely to be paid. Make sure signed delivery notes are collected. That way you reduce risk of disputes, delayed payments and the debt not being paid
Put effort into overdue balances
The cost of financing outstanding balances can be substantial as the longer a balance is outstanding, the higher the risk of it becoming a bad debt. Make sure you invest time and resource to reduce your risk. It is worth bearing in mind that there are funding facilities which can release the cash tied-up in your ledger and help your cashflow
Motivating the sales team
Consider incentivising your sales teams to sell to customers that will ultimately pay. While increasing turnover is important it shouldn’t be at the expense of profitability
“This is likely to result in many UK small companies having to tighten their belts, particularly with customers continuing to pay late,” said Alex Hilton-Baird, founder and managing director of Hilton-Baird Financial Solutions. “If they haven’t already done so, companies should review the way in which they currently finance themselves.”
Credit checks
Develop a habit of credit-checking customers before making the sale as it pays in the long run. Also put key customers and suppliers on constant review. This will alert you to any material changes to their business, such as the late filling of accounts, change in directorships, downgrading of credit ratings, change of address or change of advisers, which are all initial indicators of instability
Share information
Don’t be afraid to talk to your competitors about their experience of selling to customers, particularly ones that you may share. Are they experiencing problems collecting money? If so, you may wish to consider your stance on supplying that particular customer. What are they doing to address the situation?
Review funding arrangements
Ensure you review existing finance agreements with your funders. Make time for a detailed check of loan agreements to see what facility terms are and what security has been pledged
Shop around
Benchmark your existing funding facilities to see if you are getting the best deal. You might be surprised at what deals are available
Correct funding
Make sure that you are funding the correct assets with the correct finance facility. You’d be amazed how often this is not the case. Also, ensure that your chosen funding facility is sufficient to meet your current as well as future needs
It pays to talk
Funding providers don’t like surprises. So keep them abreast of good or bad news. They will appreciate your honesty and you will build trust, allowing you time to work through the options
Take advice
If you are unsure about your next step in the wake of the fallout from the recent credit crunch, then seeking independent advice is recommended
March 18th, 2008
The ACCA guide to surviving the slowdown
With the UK economy taking a downturn there is never a more important time to ensure proper financial planning . ACCA (The Association of Chartered Certified Accountants) gives best accounting advice through their 20 top tips to prepare your business for a slowdown
The global credit crunch has hit the UK economy hard, meaning it’s a worrying time for business owners and directors throughout the country.
“Small businesses need to keep a tight rein on cashflow, make sure they can pay and be paid on time and keep a dialogue open with their bank,” says Allen Blewitt, Chief Executive of ACCA. “While it’s tempting to worry about the global situation, a level and sensible approach is needed during these difficult times.”
But while there’s not much you can do about customers spending less than they did last year, there is still plenty you can be doing to ensure that your own business is in as good financial health as possible.
ACCA offers the following 20 best accounting advice tips to reduce the impact that the credit crunch and economic slowdown may have on your business:
Good financial planning is crucial. Don’t be scared of facing and making difficult business decisions and putting them off until tomorrow.
Start questioning early your credit facilities with UK retail banks
Maintain a regular and meaningful dialogue with your bank and also with your accountant if necessary to ensure you receive the best accounting advice.
Review your bank charges. Maybe you could switch accounts and find a better deal with a new bank? Could your current bank give you any special deals as a loyal customer?
When it comes to rolling-over banking facilities, beware of hidden charges and factor those into your financial planning
Review all your direct debit arrangements for the business and for your personal finances
Small businesses need to keep a tight rein on cashflow, make sure they can pay and be paid on time
Try to clear credit card debt. But if you use them, try to pay without incurring interest and pay off balances before charges are incurred
Chase your cashflow and if you can’t make payments, then let your creditors know why and when they can expect a payment
Pay special attention to cash flow forecasts and to monitoring cashflow. Ensure management accounts are up-to-date, and that all key financial reconciliations are done, reviewed, and outstanding items cleared
Tighten up credit control, cash collection procedures and treasury management
Look carefully at your forward sales book, and the timing of future orders
Consider carefully current and future customers and their ability to pay - do not simply rely on credit ratings
Pay particular attention to investments and major capital expenditure. Appraise rigorously and consider the extent to which such items can be rescheduled
For those businesses which import / export, consider foreign exchange hedging and where this could be relevant to your business
For December year-ends, be clear about stock and work-in-progress valuations and get early audit agreement to valuation principles. Do the same for all ‘’fair value’ items on your balance sheet
Look critically at staff requirements/recruiting strategy. Instead of taking on new staff, you could consider paying for more paid overtime
Consider, where relevant, temporary or fixed-term assignments but make sure you have weighed up the pros and cons against full-time recruitment
Be cautious in awarding pay rises and in setting up staff incentive schemes. Ensure such schemes relate as much to profitability and cash generation as much as to growth. Be alert for performance distortions related to incentivisation schemes
Critically evaluate directors own financial drawings from the business. Are they appropriate in the light of current and future profitability and cash generation? Cars? School fees? Home improvements? Holidays? Insurances?
Revisit the Risk Register as a matter of priority. Are all risks included, particularly financial/liquidity? Are risk mitigation measures still valid? Are mitigation owners being proactive in their responsibilities?
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