Friday 19 February 2010

Work? Well if you insist…….

A couple of interesting reports caught the eye this week on the future of work and employment.

The first from the New Economics Foundation suggested that the working week should be cut to 21 hours , saying that this would help boost the economy and improve quality of life by easing unemployment and overwork. They admitted that people would earn less, but said that they would have more time to carry out worthy tasks.

I am sure most entrepreneurs when they heard about this initially thought “21 hour days – that seems about right” but no, the authors really were suggesting that 21 hour weeks should become the norm, with a few additional hours no doubt to carry out some worthy tasks.

The second by Friends Provident suggested that by 2020 we would have an elite group of knowledge workers who, due to the their scarcity, would be able to demand higher salaries, better benefits and a greater degree of professional fulfilment. However, we would also have a growing underclass who would face poor prospects and limited expectations, which could leave UK plc facing a serious skills shortage.

Clearly working life is changing for many of us, and it is interesting to note that more and more young people are looking to control their own destinies, and expressing a desire to set up their own businesses. However the skills question keeps cropping up, and I suspect that personal development will need to remain a priority however many hours we work a week.

Given the above two reports, it is interesting that much of the comment surrounding the unemployment statistics for January focussed on the issue of underemployment, and how measures such as part time working had effectively kept the headline numbers down. Underemployment is one of the big issues of this recession, and many of the statistics quoted do not include those people who are setting up their own business or working as freelancers. Many of these people are working very hard to establish and market their business, but are underemployed in terms of actually earning real money.

All this reflects the changing nature of work and employment over the last decade, and many of the trends, such as flexible working and people starting their own businesses, will be accelerated by the current economic downturn.

Very exciting stuff of course, but what this move away from traditional employment will mean for the future tax take and our yawning public sector funding deficit is another issue, and no doubt the subject of another blog.

Monday 15 February 2010

Three sets of books? Well that makes everything clear then…….

I recently read an recent article in Accountancy Age (no please keep reading, it’s not going to be that bad), which railed against the proposals made last year by the Accounting Standards Board concerning the future of financial reporting in the UK . In essence big companies will need to use the full set of International Financial Reporting Standards (IFRS), smaller companies will use IFRS “lite”, and the smallest will continue use the Financial Reporting Standard for Smaller Entities (FRSSE). It is hoped that this will promote consistency in financial reporting and enhance global comparability and understanding of the numbers presented.

Still with me? Good, because here is the bit that ought to concern you.

There are going to be three ways of presenting your accounts, all of which involve theoretical approximations of certain economic situations e.g. financial derivatives, share option schemes, pension, most of which are not relevant to SMEs, and arguably none of which really explain how a business is performing, and what the end cash is likely to be. The last comment is pertinent because, as we all know, the value of any business is based on its cash flows to investors.

This all reminds me of that old story of a certain faraway country (OK you’re not that far away, are you Italy?) where each business used to keep three sets of books. A first set was given to the tax authorities, who would normally return them after collapsing on the floor laughing. They were then given a second more acceptable set. The third set, of course, were the real books used by the people that actually owned and managed the company to run the business.

It seems to be we are all being driven in the same direction as regards company reporting, although this time it is not the taxman being taken for a ride (not intentionally anyway), but anybody who wants to use their accounts to manage their businesses efficiently and effectively, and explain to investors what is really happening.

We will have a set of books which constitute the statutory accounts of the business, which are legally required and used by the wider investor community based on a combination of IFRS and FRSSE. We will then have internal management accounts with key performance indicators (KPI’s) reflecting whichever agenda the incumbent management have chosen to make them look good. Finally, we will have the cash focused set of books which really determine business success or survival, but will probably get hidden from the people who really matter.

As the accounting profession rushes to place emphasis on the former, and in house finance functions focus on management reporting, it does seem that we are all losing sight of what really makes the business live or die.

It is surely our responsibility as finance professionals to report financial issues in as clear and unambiguous way as possible. If we do not then frankly we are not doing our job properly. The message from company owners and managers needs to be clear. Show us where the cash has come from and where it is ultimately heading. Then we can know if the business is worth continuing with or not, and whether you, Finance Professional, are actually adding value.

Thursday 4 February 2010

Britain’s got (financial) talent….

Businesses fail because of bad financial management. And we are not just talking about businesses that go bankrupt here. We are also referring to businesses that do not make as much money as they could have done. Potential world beaters that get overtaken by seemingly less well resourced businesses.

And yet if you look at most business plans or proposals, while they will provide full details of the sales, marketing, creative and operational talents within the team, there is often very little reference to the finance talent that will be required to manage the money, and provide the financial returns that are faithfully promised to potential investors and finance providers.

In the heady atmosphere of developing an exciting business idea, it seems that financial management is almost an afterthought (as opposed to finance, which of course is seen as vitally important, especially when it is provided by somebody else).

I can recall all too many instances where financial management skills have been reluctantly brought in at the last minute in an attempt to avert a catastrophe. I say reluctantly, as the management still seems to want to haggle over the cost, as if you are a burden rather than the one thing that stands between them and financial oblivion. And yet this is the same management that has probably splashed out vast sums on the other talents in the team (and themselves) with almost carefree abandon. That is of course until the money has almost run out.

So entrepreneurs, if you want the money men to be interested in you, and achieve the best result for yourself, you need to make sure your have somebody in your team at a very early stage interested in looking after their money. Britain really does have financial talent – make sure you use it and value it.