SOS – Save our shops!

This Monday 4^th July was Independent’s Day. No, that is not a misprint. Shoppers are being encouraged by the British Independent Retailers Association to buy at least one item from a local retailer and celebrate diversity on the high street. A laudable aim and one that I hope the public will take note of and support.

As the sainted Robert Peston points out in his BBC blog, high street struggles are not just a problem for the shops themselves.  Retail landlords are facing the prospect of rapidly emptying properties and downward rent pressures. And that is before any interest rate increases kick in. It is hard to feel too sorry for landlords given the experiences that many retailers had with them during the good times. But there is an awful lot of bank capital tied up in retail development loans and a significant level of default on these loans will once again cast a cloud over the efforts to get banks lending to support economic growth.

Some will say that high street decline was inevitable given the inexorable rise of the internet over the past decade. But even the supremacy of the internet is not a given.  Recent stories tell of a reaction by consumers against online grocery shopping. Shopping remains as much an emotional and sensory experience as a technical and economic one.   

Also much has been made of the impact of the VAT increase at the start of the year. However I am not convinced. The VAT cut in 2008 made little real difference given the level of discounting that was taking place at that time and I suspect that other macro-economic inflationary pressures in the economy have had more impact that the increase itself.

Having clients in the retail sector has given me an element of insight into the current situation, and I can say that it is not all gloom and doom. Sure it is tough out there but strong brands who connect with customers are continuing to develop and invest in their businesses. Newly appointed Asda COO Judith McKenna has suggested that retailers can play their own role in improving consumer confidence.  The term “winners and losers” is made for the retail industry at present.

However the downturn in business facing many bricks and mortar retailers will not go away. And as stated above it is not just a problem for those retailers and their landlords, greedy or otherwise. It is a problem for everybody involved in the chain of supply. Indeed it is a problem for everybody that likes to “go out shopping”.

No industry has a divine right to survive, and there are plenty of good retailers doing the right things and continuing to thrive. The challenge remains for everybody involved in the industry to look at the way they do things and adapt. And perhaps occasionally for the public to realise that vibrant high streets are actually worth preserving and paying for.

Playing the numbers game……

My daughter is now old enough to drive and I have been doing the rounds of insurance companies to find out much it would cost us to allow her to drive one of our cars. The answer? A prohibitive amount that is how much. It is seemingly cheaper for her to buy an old banger and insure it herself.

I suppose I should defer to the insurers on this. They have the stats to back up their case. Clearly payouts on accidents for young drivers must be almost 20 times those of their older and allegedly better drivers or else they would not charge the premiums they do would they?

And yet I am slightly suspicious of the whole thing. My twenty odd years of working in finance has convinced me that you can do almost anything with numbers. By excluding this, or by highlighting that, a case can be made for almost any interpretation. It is one of the reasons why I am so cash focused when looking at any set of accounts.

Another example of the potential misuse of numbers could be the current approach to university fees. The argument being advanced is that statistics prove that students with a degree go on to earn oodles more than their contemporaries who are degreeless. They probably did in the past, but that was when, say 20%, of the working population had degrees. The next twenty years I would venture to suggest could be slightly different now you have almost 50% of school students now going into higher education. Based on a questionable interpretation of some numbers, a simple solution, higher fees, has been introduced rather than a more considered review of what higher education could and should be doing to provide what the country needs going forward.  

Whenever I look at numbers I am forever trying to read between the lines, as it were, looking for the story that is not being told. Cash behaviour is one pointer to what is really happening. The context in which the numbers are being presented is another. When I doing a credit check I don’t just look at the numbers. I look at the business, the website, the directors, anything that helps me get a fuller picture. If I don’t do this, and solely rely on the numbers, then there is a serious risk of a wrong decision being made.

Fortunately there are some more cost effective insurance options available and I am sure my daughter will be on the road shortly. However I do worry about how the attitude to young drivers now will affect driving standards in the future. Yes they will make mistakes and some of them sadly will be tragic. However there is no substitute for being out on the road, and if historical statistics are being used to deny young drivers the opportunity to gain that experience, the long term results could be far worse than those which the insurance companies believe they are trying to avoid now.

Understanding the good books…..

It seems that our friends at HMRC are using a trial scheme aimed at looking into whether SMEs are keeping adequate books and records to investigate other potential tax misdemeanours. A report in the Telegraph claims that far from being a pilot scheme designed to test out the checking process HMRC staff are already threatening to delve into the tax affairs of those it suspects of wrongdoing.

Naturally HMRC deny that this is the case. However the fact remains that once the pilot scheme is over HMRC will almost certainly be knocking on the door of tens of thousands of small businesses to check their accounting is up to scratch, and will no doubt seek to extract suitable penalties in cases where inadequate books and records have led to underpayment of tax.

Is this a cause for alarm? Hmm, that depends doesn’t it? If you have been keeping proper books and records you should have nothing to worry about, right? Well up to a point m’lud, up to a point.

It has been a constant source of amazement to me how poor some of the bookkeeping and accounting that I come across has been. As a part time finance director I normally start to get involved in a company some time after it has started to trade, and much of my initial work often involves unpicking a number of historical accounting and bookkeeping errors, in order to ensure that meaningful management information is available and that a clean compliant set of books exist should an opportunity to raise further funds or sell the business arise.

Well that’s understandable I hear you say. Entrepreneurs are rarely interested in bookkeeping and accounts. They are interested in finance (or raising it), they like cash and they have a reasonable idea of profit and pricing of their key products, but tidy books are not normally high on their list of priorities.

And yet that is not always the case. Many of these businesses have used bookkeepers and accountants from the start and they are still in a mess. To be fair, it is often the case that the management of the business simply do not listen to what their accounts team is telling them. However I think there is another key reason why problems arise in this area.

Bookkeeping is more than just maintaining books and records. Good bookkeeping and accounting requires an understanding of what those books and records are actually saying about how the business is performing and where it is going. Many businesses have their accounts prepared by people who simply do not have the ability to provide this support and advice.

Whilst it is clear that HMRC’s reasons for pushing this compliance review are tax revenue driven, there could be a positive side to all this. Ultimately it is in everybody’s interest to improve financial record keeping and reporting. Businesses that have good financial records and management reporting systems have a much better chance of survival. The benefits of doing so will go beyond keeping HMRC happy and off of your back.

Who cares….wins?

Many column inches have already been devoted to the situation at Southern Cross, the care homes operator, whose dire financial situation is threatening the future care of 31,000 "vulnerable elderly people" in Britain. Private equity barons, in the guise this time of Blackstone, are once again being accused of exploiting the lax financial conditions of the banking boom years to extract obscene amounts of cash from what many see as primarily a social service.

However the finance director in me did alight on one key quote in the Mail On Sunday from the ex CFO Graham Sizer who said “The company was making a big profit when I left. What changed was that occupancy fell from about 90 per cent to 80 per cent. That is why the company is in trouble”.

It is a frequent contention of mine that most businesses are fairly simple financially speaking, with a limited number of key profit and cash drivers. In the case of Southern Cross, if you find yourself with high fixed costs as a result of your properties being sold off and replaced by long term rental agreements, it becomes a question of filling your care homes to the brim at the highest price possible. If prices and/or occupancy fall then you are in trouble.

The Southern Cross business was thus highly operationally geared which meant that when room rates and occupancy were high, profits and cash theoretically flowed into the business. Indeed the aforementioned Mail On Sunday’s Midas column made them one of their share tips in those halcyon pre austerity times at the beginning of 2010. However as we now know these key indicators subsequently moved the other way leading to the current parlous financial position of the company.

In many ways this has been an accident waiting to happen. In spite of countless long term care reviews the authorities are still putting their heads in the sand and refusing to deal with the issue. The fact remains that we as a nation do not care about long term care, at least not enough to actually pay for it. That is one of the reasons why the private equity owners were able to manage the business in the way they did, extract their mountains of cash, and seemingly leave behind a vulnerable business caring for vulnerable people.

Actually we clearly don’t care about cash enough either. Blackstone did. That’s why they won in the past. We need to get our act together and understand the basics of this business if we are to win in the future.

Opening the Chamber of opportunities….

I am writing this from a meeting room overlooking the lake of Zürich. Last night I enjoyed an aperitif from a 5^th floor restaurant overlooking this picturesque Swiss city, enjoying some splendid views before listening to a quality speech from former EU trade commissioner Lord Brittan, somebody who clearly knows what he is talking about when it comes to international business. It’s a tough life.

It actually could have been a really tough life. Trying something new is always a leap of faith. It involves an element of risk and moving out of your comfort zone. Without forethought and planning it may be a disaster. Even with planning and help there is no certainty of success. For me, as a naturally cautious accountant, trying to promote our outsourced CFO offering in a new market was potentially a daunting task.

Fortunately I had some excellent help from the British Swiss Chamber of Commerce (BSCC) and the team based in Zürich. Aside from organising a great event, they furnished me with contacts and introductions, and allowed me to use their office to work in when I had some spare time. Their encouragement to visit Zürich for the AGM, at which Lord Brittan was the keynote speaker, was a real spur to get me to move my Swiss project forward.

The whole experience brought to mind another recent meeting at Canary Wharf (again with panoramic view – if I was a photographer this would be a great job) as part of my involvement in the London Local Chambers initiative. This is aimed at publicising the existence of the 20 plus locally based chambers of commerce within greater London, chambers that have a real feel for local business opportunities, and which offer good local contacts as well as engagement with local government on business issues. 

People often see chambers of commerce as networking organisations, there purely to provide sales opportunities. However their real value is more than being a good way of building contacts and relationships that may develop into opportunities in the future. They can also provide an opportunity to contribute to a wider movement dedicated to increasing business and trading opportunities for everybody, particularly on the international side. This mixture of international and local knowledge and presence is a major reason why well run chambers continue to be the first port of call for organisations looking to develop new markets.

Was it worth the visit? Ah that would be telling, but there is a clue in the fact that I am really glad that I took the opportunity of visiting Switzerland for the BSCC AGM. You have to take a chance if you want to develop something new. However moving out of your comfort zone does not mean you have to take silly risks. There is a lot of help available and existing networks to work with. These are clearly no guarantee of success, but they make it a lot more fun trying, and who knows where it will lead to one day.

Growth through Dividends……

Dividends are the forgotten element of successful investing. Like the proverbial Aunt Sally, they are often derided as unimportant. Capital gains are much sexier, the stuff that creates the wealth of dreams. They of course enable investors to ride off into the sunset to enjoy their remaining years, or not, as the case may be.

And yet surely some cash in the hand has to carry some value? There are so many tales of the destruction of the share price by ambitious “highly incentivised” executives that a promise of jam tomorrow should be treated with a healthy degree of scepticism. Certainly equity income funds are quite popular in some quarters at present. However I leave it to my Enterprise Britain colleagues John Greengrass and Jon Levinson to comment on how dividends affect investor sentiment in the wider economy and markets.

My own focus is dividends in smaller, primarily owner managed, businesses. Even here there is an element of misunderstanding as to the real value of dividends. They are either dismissed in entrepreneurial circles as starving the business of investment cash or they are promoted by accountants as being a tax effective way to extract income from the business, always assuming that distributable profits are available to cover such income.

(A brief word of warning here. It is amazing how often businesses that pay regular dividends in lieu of salary forget this basic principal and end up paying them illegally. If you have been advised to take out regular dividends make sure you prepare some management accounts to ensure you are making enough post tax profit to justify your dividend.)

And yet regular dividend payments from sustainable business revenues are normally a good sign of a healthy business. A genuine dividend payment requires profits and cash. Old fashioned concepts I know, particularly in a world where business social networking site LinkedIn can be valued at 25times its sales revenues (that is sales not profits). However as a route to future growth and wealth they are concepts that are hard to beat.

I am certainly not advocating that dividends should be paid regardless of the cash needs of the business. However I do think that when businesses are planning for future growth, either for their existing owner managers, or to attract new investors, a little thought as to how much of the return will come from regular cash dividends could pay ..er.. dividends.