Don’t Give Up…..?

Whisper it but it has been a relatively benign economic slump to date. Obviously not for those who have lost their businesses and jobs or have seen inflation and low savings rates ravage their income and living standards. But anybody who can recall the previous slumps of the 70s, 80s and 90s will probably agree that we have been let off relatively lightly so far.

Insolvencies have still to really take off as the poor results from Insolvency practitioners show. Unemployment, whilst at its highest level since 1995, has not reached the emotionally fraught level of 3 million. Repossessions are minimal. Low interest rates are playing their part in all this. Equally, even if the banks aren’t actually lending enough, they are at least not pulling the plug on businesses in the way that they did 20 years ago. Owners continue to dip into their pockets to keep their businesses afloat.

Entrepreneurs are by their nature eternally optimistic. They will solve their problems. A new opportunity will emerge to for them to exploit. Yes the business may be “technically” insolvent, but this order or that cash injection is just around the corner. The wages will be paid. Key suppliers will be paid. Even HMRC will be paid…eventually. There is no need to seek insolvency advice just yet. And indeed they are often right, the business does get through its sticky patch and is still around many years after it was “technically” insolvent.

This is an approach to business that would cause those of us of a more pessimistic (or realistic) nature sleepless nights. It was certainly a real culture shock to me when I entered SME land from the cosy cocoon of corporate life where there was a treasury department that made sure cash was flowing into the right places (like into my bank account at the end of the month). This though is the attitude that ultimately builds winning businesses.

Having said that, it is also an attitude that can sometimes lead to broken lives and seriously out of pocket creditors fighting for their own business survival. I have observed many businesses that have been, how shall we put it, in fragile financial health. Some have survived against the odds due to the energy and never say die attitude of their owners. Oh, and the fact that the financial difficulties were genuinely of a temporary nature. However I have also seen businesses that were too far gone, only continuing because their owners were in complete denial about their situation to the detriment of both their wealth and their health.

Of course this could all be the calm before the storm. Interest rates will eventually have to rise. There sadly will be casualties. There will be business owners who will have to give up. Make sure that you don’t fall prey to false optimism. Better still make sure that you have the necessary financial systems and controls in place to ensure that you know about your problems in good time to do something about it.

In rude health...

This week’s blog by necessity is slightly shorter than usual due to a scheduled encounter with the NHS. However it was a good opportunity to observe first hand the largest organisation in the UK, and the following are some random unscientific thoughts from a paid up member of enterprise Britain.

The patient facing staff are by and large amazing. When you think of all they have to put up with (including a stream of agency staff who cost multiples of what they earn coming in to plug frequent staff shortages) their attitude and willingness is impressive. The NHS is fundamentally a people business and it is good to see that people skills are there in abundance.

I am amazed though at the number of people who appear to be employed by the NHS that wander aimlessly around NHS premises. I am guessing they are employees (or contractors) as they have all the accoutrements of employment such as uniforms, passes and keys. I am sure that they have valuable roles but they don’t appear to be patient facing so it is difficult to work out what they are actually doing.

£20 a day for parking is totally unacceptable as the people who invariably have to pay it are those who are receiving the more serious treatment. It is something that particularly penalises parents with hospitalised children who of course are going to stay with their offspring as long as possible. Yes I know that you can ask the nursing staff for a reduction but I suspect they (and you) will feel that dealing with such trivialities is not really a good use of their time.

During this short engagement with the NHS important paperwork went walkabouts twice. This led to us waiting around for many hours. The speed of the pharmacy in fulfilling prescriptions left a lot to be desired. The catering also seemed unable to cope with the diets required by the patients following their operations which meant that relatives had to run down to the M&S café to get the correct post-operative food.

This lack of joined up back office support is the one area that stands out. I think part of the problem of any public sector entity (or any large organisation for that matter) is a budget fixation. The belief that there is not enough tends to create a “can’t do” rather than a “can do” attitude.  

Entrepreneurial small and medium sized business know that if they want a budget to do something they have to create it, normally by selling either products and services to customers or a bright future with great cash returns to investors.

Part of me would like to work in the NHS one day. It would be a fascinating challenge and an opportunity to make a real difference. But I know it would not be easy and you have to respect those that have to deal with that challenge every day of their working lives.

Irreplaceable or what…..?

Pity the poor directors at Easyjet. OK don’t pity them that much as they are well rewarded for what they do. But unlike every other major quoted company they have Sir Stelios Haji-Ioannou on their back. Whether it is about strategic direction, buying new planes, or as in this case executive pay, invariably Sir Stelios has a view and, as a very major shareholder, clearly he has every right to that view.

Presumably this is what Vince Cable has in mind when he set out his plans for the role that shareholders can play in curbing excessive executive pay.  He believes that like Sir Stelios, and all SME business owners, they should be treating the company’s money as their own in terms of monitoring how it is spent. It would be nice if those in government also thought in such terms.

However perhaps the more incendiary part of this story is Sir Stelios’ comment "I know as shareholders we could easily replace them with talented executives and experienced non-executive directors who will cost half as much in bonuses."

Wow! One of the arguments for high executive (or any other) remuneration is that you need to pay it to get the best people. These people are apparently so rare in the global economy that their pay has gone up exponentially over the past couple of decades. Football agents and clubs also use it, although even allowing for massive TV deals, there is absolutely no financial justification for footballers’ salaries at current levels. Now it seems that Sir Stelios has woken up to that old cliché that graveyards are full of indispensable people.

Perhaps it is the vast sums of money involved that makes logic fly out of the window on this. Record labels have almost bankrupted themselves on multi album record deals for artists who they thought were sure fire winners. A salutary reminder that, as far as people are concerned, like investments, the past is not necessarily a guide to the future.

Vast sums sadly are rarely available to SME owners to enable them to keep hold of their key people. They have to find other ways to hold onto them, ranging from share schemes to providing a workplace where people feel they are valued and enjoy working in even if the money is not the best they can get.

Actually the problem is not really that key people are irreplaceable because of course they are. It is more that the process of replacement is a real hassle. Mind you if you are currently having to find someone to replace the irreplaceable, don’t despair. You might end up with someone even better at a lower cost. Well that’s how multi-millionaires like Sir Stelios think…..

All the nasties……?

Oh dear. It seems that one in four small business owners are so depressed by the state of the economy that they want to give it all up and revert back to being salaried employees again. Apparently they have lost their enthusiasm for being the boss and crave the relative stability of working for somebody else.

Yes, frustrations with increasing regulation are being blamed, but I tend to think it is the constant worry about where the cash is coming from to pay suppliers and wages and the efforts involved in trying to win new orders and deal with ever more demanding customers (i.e. the travails of everyday business for which the buck stops with the business owner) that is the real culprit. No wonder eyes are cast enviously towards the idea of a no risk monthly payment into their bank accounts that enables them to leave their work at the office when they go home every evening.  

Make no bones about it many of these business owners did extremely well during the boom years of the last decade. Equally they have had to dig deep into their pockets over the last few years to keep their businesses afloat during the downturn. Therefore their trepidation at the prospect of another year or more of austerity is understandable.

Of course risk free salaried work is also not what it used to be. There is a noticeable increase in the number of job adverts that quote an OTE (On Target Earnings i.e. minimal salary plus commission) figure rather than a fixed salary. Or what were once jobs with a wage, such as van drivers, are now “self-employment” opportunities. The business owners who remain are clearly looking to shift the performance risk back onto their employees, much as many big employers have been shifting their pension risks for a number of years.

It seems that now the good times have well and truly gone and the banks are no longer handing out money without due care and attention, the attractions of running and growing your own business for lots of hassle and uncertain reward are diminishing rapidly.   

This ought to be of real concern to a Government that is relying on the private sector to take up the slack of job creation now the public sector jobs bonanza is over. Therefore it seems an odd time to focus on the excesses of capitalism, as represented by unjustified executive pay, rather than what can be done to really support those brave enough to take on the responsibility of building a business in a financially responsible way.

At its best capitalism provides motivated imaginative individuals with good sustainable business ideas the freedom to get on and create wealth and jobs. We need to be careful that the justifiable attacks on nasty capitalism that are being indulged in at present do not crowd out the benefits that the nice version provides.

Too small to succeed…..?

So that’s that then. Tesco isn’t. Too big to fail that is. Britain’s mightiest retail steamroller has finally come a cropper according to its recent trading figures. Big helpings of schadenfreude all round. Furthermore one of their senior executives managed to (legitimately) offload a batch of shares just prior to the announcement being made and the double digit percentage drop in the Tesco share price that followed. You can almost feel sorry for CEO Philip Clarke. Following a retail superstar like Sir Terry Leahy was never going to be easy, although I suspect he is paid enough not to need our sympathy.

We can ponder endlessly as to what this means for retail as an industry and the British economy in general. However from a company perspective, logic dictated that it had to happen eventually. When you are so dominant in a market place, unless you are a virtual monopoly, there comes a time when real growth is just not possible.  

Sooner or later bigger companies start to believe they can no longer achieve significant organic growth. That is normally when they start looking at cost cutting exercises and/or acquisitions and/or overseas expansion. Good news for executives, corporate finance advisors and travel agents. Often not such good news for shareholders and employees.   

Unless they are in a really niche market, smaller businesses, whatever the economic climate, will always have an opportunity to grow organically. Moving from say 5% market share to 6% market share (i.e 20% growth) is much easier that moving from, say, 30% to 36%. When you only have a minute share of a market the potential is always there to grab more be it through innovation, aggressive selling or weak competition. Of course growth targets must include profit and cash as well as market share but fundamentally the principle is sound.

Too many smaller businesses get into the habit of thinking themselves small. It’s too difficult to grow in this market place. I need this or that or the other. The competition is too tough for us. Tesco have just proved that you can never be too big to fail. Maybe that will convince these smaller businesses to stop thinking that they are too small to succeed.