Update. Our guide to coping with the cuts marks the beginning of a new age of austerity

Transcription

1 Update Our guide to coping with the cuts Credit crunch, double dip, quantitative easing... just some of the keywords that have epitomised the last few years of economic woe. After years of debt and spending, 2011 marks the beginning of a new age of austerity, with a plethora of tax rises and spending cuts introduced by the Coalition Government, as Britain tries to claw its way out of economic despair. How will these measures affect your business and what can you do to protect it? 2011 marks the beginning of a new age of austerity

2 Looking back at saw a new era for British politics on a number of levels. The formation of a Coalition Government, born out of the marriage between the Conservatives and the Liberal Democrats, coupled with the task of dealing with the largest structural deficit in Europe 1. It seems Britain has spent significantly more than it raised in taxes, borrowing 1 in every 4 in 2009 and currently spending 43 billion on debt interest, leaving a budget deficit that currently stands at more than 10% of GDP. The budget deficit equated to 934 billion in September 2010 and is predicted to hit the 1 trillion mark by summer The Coalition Government has responded with a comprehensive spending review, announced by the Chancellor in October 2010, setting out savage spending cuts and tax rises that will affect all of us. How might the cuts affect your business? The consequences of the spending review will affect businesses in a range of different ways. The most wide ranging impact will be as a direct result of the many spending cuts and tax rises, likely to affect businesses and individuals alike, particularly the hike in the standard VAT rate to 20% in January Your business may also be affected by cuts to Government budgets. A large number of SMEs rely on their products and services being bought by Government departments and it is projected that almost one in ten UK SMEs risk going out of business if they lose their contracts with public sector clients. One of the key challenges that businesses currently face, however, is lack of cashflow and access to finance. Since the start of the economic downturn, and particularly since the collapse of Lehman Brothers, business lending has fallen by a massive 28 billion. Our own research shows that this, in particular, is one of the larger issues impacting on our clients. Such has been the effect of this recession that most businesses are still being rocked by its aftershocks. Debt recovery is a challenge, profit margins are still in decline, cashflow is an ongoing concern and funding remains scarce. Since the start of the economic downturn... business lending has fallen by a massive 28 billion 1 George Osborne s Comprehensive Spending Review speech, 20 October 2010

3 So, what can you do when the banks say no? Identifying the right type of finance SMEs are the engine room of the UK economy so to ensure the market is able to carry on with business as usual it is vital that economical growth is encouraged and supported by Government and lenders alike. There are many types of finance available out there so identifying the right one for your business is the first step. It could be your business is best suited to incur debt, sell equity or a combination of the two. Choosing the most suitable will depend on the nature of your business and what the money is needed for. Debt finance Overdrafts and bank loans are the most common sources of finance. Even in these difficult times there remains strong competition between the banks so remember to shop around and compare interest rates and always focus on the Annual Percentage Rate (APR). guarantees or property with sufficient equity, allowing them to take charge of the property and protect their position, if necessary. Equity finance This type of finance enables the raising of share capital from external investors in return for a share of the business. Venture capitalists (VCs) and business angels (BAs) are the two main providers of equity finance. Investors expect a higher rate of return due to the risks involved and their return is usually paid back in dividends which, of course, depends on growth and profitability. BAs are individuals who tend to invest in businesses in the early stages of growth. They invest between 10,000 and 2 million and can offer their own experience, contacts and skill sets. VCs, however, lend large sums of money for shares in a business and usually choose products or services with a competitive advantage and a track record. Although VCs do not usually get involved on a day to day basis they bring a wealth of higher-level expertise to a business. There are many types of finance available out there so identifying the right one for your business is the first step It is, however, no longer a simple process to access this type of finance and you will need to prove to the lender that your business can generate enough money to pay them back. Interest and fees can be high and all too often lenders require personal You may find it prudent to speak to us when considering how to obtain finance. We may be able to introduce you to providers and we can certainly assist you with the application process and comparing offers. Government-backed initiatives Business Link ( is a Government-backed business support service that provides detailed and impartial advice and guidance on all aspects of business including sourcing finance. Enterprise Capital Funds (ECFs) address a market weakness in the provision of equity finance by using Government funding alongside private sector investment. An equity gap arises where businesses with viable investment propositions are unable to attract investment from investors or venture capitalists. In bridging this gap, ECFs aim to alleviate what would otherwise present a significant barrier to enterprise and to productivity growth. For more information go to Alternative lenders are specialist lenders that offer an alternative to banks and building societies. Co-operative & Community Finance invests in employee-owned business, social enterprises and co-operatives; Community Development Finance Institutions provides loans to start-up and growing enterprises located in or serving disadvantaged communities; Islamic finance provides finance that must be ethically invested and the giving or receiving of interest is prohibited; and Credit Unions, financial co-operatives that are owned and controlled by their members, offer savings and loans.

4 Access to finance: what can you do to improve your chances? For those of you who have weathered the storm, now is the time to ensure your business is in a strong position to make the most of the opportunities that present themselves in a more, albeit slightly, optimistic economic environment. The ease with which you will secure finance does depend on market conditions. Drawing up a solid, comprehensive business plan does, however, help potential lenders or investors understand your business vision and goals. Recent research suggests that 46% of SMEs do not have an appropriate plan in place 2. For those that do, only 54% have planned for the next months and only one in ten (11%) had planned for three years or more. Our business plan review service If you already have a business plan our business plan review service provides you with the benefit of our expertise at no initial cost. We will review your business plan and provide feedback to you within three working days, free of charge. If you then decide to engage us as your business advisers, we will be able to help you finalise your business plan and introduce you to potential investors. We can also provide you with advice on different funding options to facilitate the development of a business opportunity and assist you by advising on tax, valuation and structural issues or simply acting as a sounding board for you during the process. For more information on how we can help, visit the Services section on our website at or contact your local UHY office. In order to ensure your business is a credible investment, your business plan should incorporate the following: an executive summary of the main points of the plan to grab the attention of the investor; details of key personnel - you may find it easier to draw up an organisational chart showing individual responsibilities; an industry and competitor review showing how your product or service fits into its marketplace; a detailed marketing plan showing how you will get your product or service in front of potential customers; financial information from the last three years of trading, if available, showing key accounting ratios; a cashflow forecast predicted for the next three years (or until a profit would be made) showing how much money is needed and why; a financial forecast predicted for the next three years showing potential financial difficulties; and how investors will get their money back - show here how credit, expenditure, stock and debtors will be managed. Improving cashflow Cashflow is the primary indicator of how healthy a business is. Your business is likely to be able to survive without profits for a limited period of time, however, without cashflow, it will rapidly get into serious trouble. As it is usual for production and delivery of goods to take place in advance of receiving payment by customers, careful monitoring of cashflow and working capital is essential. 2

5 What else can you do to avoid the pitfalls that hinder business survival? Watch your credit control Ensure you run credit checks on potential customers failure to do this is very risky especially if your debt collection strategy is ineffective. Aim to prevent late payments Have an effective invoicing system in place and make sure your key payment terms and conditions are clearly stated. Include, for example, cost, delivery arrangements, payment terms full or part, advance or arrears, credit periods, etc. If your credit period is not specified the legal default period is 30 days. You have a right to charge interest on late payments and claim compensation for debt recovery costs. Ensure you fulfil your orders If you do not fulfil your orders on time or to specification you simply will not get paid. Ensure your internal systems and controls are efficient in order to measure quantity and quality of stock. Avoid ineffective marketing If sales are falling perhaps you need to revisit your marketing strategy. Look at your existing marketing channels (direct, via an agent, overseas, etc). Are they effective, do they need to be broadened or even pared back? The more channels you use the more customers you are able to reach but remember that each channel costs. Think about how and where your customers want to buy your products and make it simple for them. Consider taking advantage of Time to Pay arrangements Good news for ailing businesses - HMRC s Time to Pay scheme has been extended for another five years. The scheme, which allows businesses to pay their tax over a period that they can afford, means cashflow can be better managed. Do not resort to credits cards or bank loans if you are struggling to pay your tax bill. Seek complementary sources of debt finance Another way in which you can improve cashflow is by raising capital against unpaid invoices, otherwise called debt financing. The following are a number of different methods: Debt factoring involves selling invoices to a factor - an independent or subsidiary of a major bank or financial institution. It provides a fast repayment against your sales ledger to increase cashflow and working capital. The factor, who typically pays an advance of around 85% on approved invoices, then works on managing the sales ledger and collecting money owed by customers. Once an invoice is settled the factor will release the remaining balance less fees. Invoice discounting works in a similar way in that money is drawn against invoices, however, your business would maintain control over the administration of sales ledgers. Export factoring allows for factoring companies to offer finance for international sales, which involves them working with overseas agents to collect payments owed by customers in the country to which your business is exporting. Supplier finance is when a business provides low-cost finance to its suppliers, as part of a flexible settlement system. It is particularly used in manufacturing production, and improves cashflow for both buyer and supplier. The Enterprise Finance Guarantee (EFG) is a debt finance Government intervention scheme which was introduced in January 2009 and is set to continue until March The EFG facilitates additional bank lending to viable businesses which lack collateral to secure a normal commercial loan. The Government, who works with all the main lenders, provides a guarantee to the lender and charges the borrower a premium rate. Speak to us It is important that you enlist our help to ensure your business survives the cuts. We act as general business advisers to the majority of our clients and can help you review the current state of your business, assist you in seeking sources of finance, prepare cashflow and profit projections as well as advise you on any appropriate cost reduction plans. Our range of business advisory services are there to free you from a whole range of tasks letting you get on with what you do best.

6 2011: what s next? It is predicted that the UK economy will slow in 2011 with the British Chamber of Commerce (BCC) downgrading its growth prediction for UK GDP from 2.2% to 1.9%. Some of the headline news shaping the year ahead will obviously be the spending cuts as well as VAT rising to 20% and the weakened housing market. The squeezed middle, already feeling the pinch from the child benefit cuts, will be further affected by the higher rate tax band being lowered from 44,000 to 42,500. However, according to Nariman Behravesh, chief economist at global economic think-tank HIS Global Insight, the global recovery should pick up steam in the second half of the year, as some of the worst-hit sectors (housing and autos) rebound and as consumer and business confidence improves (source: It seems the UK s economy is robust and the BCC is optimistic that the austerity measures will improve Britain s medium-term prospects. Further quantitative easing looks unlikely to be needed and, off the back of this, sterling has recovered some ground. However, there is no escaping the Coalition Government s four year fiscal squeeze campaign beginning in 2011 so, even though the recession may be over, the battle for recovery has only just begun. UHY Hacker Young Associates Limited is a UK company which is the organising body of the UHY Hacker Young Group, a group of independent UK accounting and consultancy firms. Any services described herein are provided by the member firms and not by UHY Hacker Young Associated Limited. Each of the member firms is a separate and independent firm, a list of which is set out above. Neither UHY Hacker Young Associates Limited nor any of its member firms has any liability for services provided by other members. The UHY Hacker Young Group is a member of UHY, an international associated of independent accounting and consulting firms. This publication is intended for general guidance only. No responsibility is accepted for loss occasioned to any person acting or refraining from actions as a result of any material in this publication. UHY Hacker Young UHY Hacker Young Group offices are at: London UHY Hacker Young Phone london@uhy-uk.com Birmingham UHY Hacker Young Phone birmingham@uhy-uk.com Brighton & Hove UHY Hacker Young Phone brighton@uhy-uk.com Chester UHY Hacker Young Phone chester@uhy-uk.com Jarrow UHY Torgersens Phone info@uhy-torgersens.com Manchester UHY Hacker Young Phone manchester@uhy-uk.com Nottingham UHY Hacker Young Phone Phone (Chilwell office) nottingham@uhy-uk.com Sheffield UHY Wingfield Slater Phone info@uhy-wingfieldslater.com Sittingbourne UHY Hacker Young Phone sittingbourne@uhy-uk.com Sunderland & Newcastle UHY Torgersens Phone info@uhy-torgersens.com York UHY Calvert Smith Phone info@uhy-calvertsmith.com Scotland Campbell Dallas Aberdeen Phone aberdeen@campbelldallas.co.uk Glasgow Phone bearsden@campbelldallas.co.uk Paisley Phone paisley@campbelldallas.co.uk Perth Phone perth@campbelldallas.co.uk Stirling Phone stirling@campbelldallas.co.uk Wales Abergavenny UHY Peacheys Phone solutions@uhy-peacheys.com Newport UHY Peacheys Phone solutions@uhy-peacheys.com Wrexham UHY Hacker Young Phone wrexham@uhy-uk.com