Keep a weather eye on the global climate

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Clouds gathering over the global economy have implications for all businesses. From small wholesalers to the largest corporates, no business is fully immune to the effects of a global downturn.

I’ve cautioned for some time that another economic slump could be on the horizon and there are a number of significant challenges for nations across the world to contend with.

Recent ripples emanating from China have pushed this train of thought to the fore as the Asian giant’s stock market slide on “Black Monday” caused markets all over the world to wobble.

China looks vulnerable for the first time in years. Could growth be over stated? Might the stock market and currency be overvalued?  Only time will tell.

Earlier this month, The Independent reported that Samsung is to cut 10 per cent of its staff at its South Korean headquarters and the outlook of SMEs in Singapore has hit a three-year low with weaker sales predicted across all sectors according to the Singapore Business Federation.

Closer to home, the Greek crisis is far from abating as the country plans snap elections later this month, which could have profound consequences on the European economy if the third bailout deal is reversed.

Add to such concerns uncertainty over the UK’s place in the EU – and questions over the timing of interest rate rises – it’s plain to see that a lot could go wrong over the months ahead, any of which could have adverse effects for SMEs.

I was intrigued as to why the noises from the Bank of England discount the impact of volatility in the Far East and focus on the threat of inflation above 2% domestically. I do wonder if  this is simply talk to prevent excess rather than a real desire to raise rates. Who knows?

I believe that there is underlying inflation masked by weak oil prices. However, when unmasked, demand may drop due to overseas forces. This could dampen down inflation by another means. For my money a rate rise would need to be small and cautious if it comes at all this year.

Preparing for the worst

Homing in on the market for SME funding, there appears to mixed signals about how they are faring amid this macroeconomic fog.

The Bank of England reported in June that loans to non-financial businesses decreased by £5.5 billion on an annualised basis.  This marks the biggest drop since the bank started collecting data in 2011. Probing the data further, it reveals that lending to all SMEs actually remained flat, while the contraction took place among larger companies.

Yet flat lending figures appear to have done little to dampen the confidence of SMEs in the UK. The Federation of Small Business (FSB) recently recorded the highest ever number of firms planning to invest in their businesses. The FSB Small Business Index found that “nearly one third of businesses (32%) plan to increase capital investment over the next 12 months.”

Ultimately this means there is a mismatch between SME perceptions and reality as, based on the BoE figures, we are not really seeing the kind of increase in business lending that could likely sustain the significant spending and investment they anticipate.

The squally economic and regulatory weather means that SMEs will be well advised to be careful who they borrow money from. Larger funders have a habit of doing the hokey cokey when it comes to the SME lending market. They’re in when it’s all good and out when the sun stops shining.

Credit appetites are being stretched and margins compressed, and this is a sure sign that when growth slows the economic impact will be painful. The longer things take to turn, the more painful things will be. Working with relationship-based funding partners with track records of growth during recessions is where SMEs will fare best.

Only time will tell how this melting pot of global challenges will impact SMEs. It’s for this reason that businesses should hope for the best and prepare for the worst and this involves making sure their cashflow is in order, sooner rather than later.

A new opportunity

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Last week, I was appointed as Global Chief Executive for Bibby Financial Services.

I first joined BFS in April 2012 as UK CEO and since this time I have been consistently impressed with the determination, commitment and spirit of the people within this business.

In the announcement of my appointment, I commented that BFS was a progressive company with fantastic people and genuine commitment to delivering market leading service to our clients.

I meant all of this.

Having been in the financial services industry for 37 years, I have worked for and with a number of leading businesses, but BFS is undoubtedly the most client centric of them all.

Over recent years, we have grown significantly, but at all times we have remained true to our promise to deliver leading products that suit the needs of SMEs, coupled with personalised service, helping these businesses to survive and thrive.

While there is change and uncertainty on the horizon for many businesses across the world, including the economic downturn in China, US presidential campaign and the UK’s EU referendum debate, there are also an abundance of opportunities.  In order to take full advantage of these opportunities, SMEs need to ensure that they have funding partners that offer support, guidance and expertise.

I believe that BFS can offer this support to SMEs across the world.

While we may not yet have brand awareness of the big four UK banks, or the shiny new-fangled novelty appeal of newer funders, we do have the financial stability and backing of our parent group, the Bibby Line Group, and established funding, coupled with a stoic determination to deliver for our clients.

To ensure we continue to meet the changing needs of our clients, we are developing new products and investing heavily in improved digital access. This truly omni-channel approach will allow clients to transact with us how and when they wish.

What will continue to set us apart, however, is our local knowledge, ability to shape a facility and our brilliant team who care passionately about our clients.

Mind the skills gap

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SMEs recognise that the UK economy is suffering from a prolonged skills shortage. The CBI recently warned that this is a barrier to recovery, with 2 in 3 businesses saying they expect their need for staff with higher level skills to grow in the years ahead.

The skills gap is seen as one of the main reasons for the UK’s productivity woes, particularly affecting sectors like engineering and construction. The Institution of Engineering and Technology (IET) found that over half of companies said that a shortage of skills poses a future threat to their businesses, while the Federation of Master Builders said a similar proportion of construction SMEs are struggling to recruit bricklayers, carpenters, joiners and supervisors.

As these gloomy studies indicate, there is a clear need for a skilled workforce. However the question that we really need to address is: how do we convert an abundance of low skilled, inexpensive labour into a highly skilled, productive workforce? Hiring low-skilled staff in droves, while reducing investment in training, technology and equipment, clearly lowers our productivity levels. The UK is woefully behind all of its developed nation counterparts on this key metric. According to The Economist, “a British employee produces a fifth less than a French one, but he or she is more than a third cheaper to hire.” British employers are choosing to hire more people, who are less skilled and less productive than workforces in other European nations.

Thankfully, small business owners and decision-makers appear to be taking a different approach by focusing on training and upskilling existing staff and turning away slightly from hiring. Our Quarter 2 2015 SME Confidence Tracker showed a steady increase in the number of SME employers investing in their staff, quarter on quarter. This is a positive development, but even small business owners could do more. Around a third are not investing in anything at all, suggesting that they are more uncertain about the economic environment than general business confidence trackers indicate.

Small businesses have a clear role to play in arming future generations with the skills they need to succeed as individuals and to contribute to the wider economy.  Government has a role, albeit perhaps not as significant as one might imagine. Government  initiatives can focus too much on one solution. The Government’s appetite for apprenticeships has been well-intentioned and largely benefitted SMEs. There is talk of an apprenticeship levy for large companies, which could have unintended consequences for the little guys. If large companies shun apprentices due to cost, that could bring the whole Government-backed scheme down. I agree with the CBI that the apprenticeship levy should not be used to subsidise apprenticeships for small businesses.

Apprenticeships in and of themselves will not solve the skills gap – we should look to tailor strategy and tactics to specific industries and sizes of business, because what works for a large corporate may not work for a sole trader. In the absence of a specific policy answer to this problem, SME owners must do more to increase the appeal of working for them. Working for a small business clearly has unique benefits: employees have a bigger voice in the direction of the business, more exposure to a variety of different business areas and a direct line to the Founder and CEO.  Young people are struggling to find work, with the latest unemployment figures at 15.9% for 16-24 year olds. It’s time for UK small businesses to really sell the unique aspects of working for an SME to the youth of today, if we are to tackle today’s skills gap – and tomorrow’s.

The Government should avoid chasing start-up numbers and nurture aspiring businesses

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According to the Department for Business Innovation and Skills there were 5.2 million private sector businesses at the start of 2014. This reflected a record annual increase of 330,000 businesses and the first time the business population exceeded 5 million.

The political and business landscape is awash with calls of support for aspiring entrepreneurs and StartUpBritain – a Government backed initiative to “accelerate enterprise in the UK” – aims to create 600,000 new start-ups this year.

Of course, it’s important that we encourage and support entrepreneurship, but boosting the number of start-ups seems more of a crowd-pleaser than good policy. It is an arbitrary target predicated on perceived wisdom dictating that the UK will be a better place if there are more start-ups.

It’s a fact of life that many start-ups are unsuccessful, with insurer RSA estimating that as many as half of UK start-ups fail within the first five years. Would it, therefore, not be better for the Government to back initiatives that nurture existing firms and prevent more from failing further down the line?

I’m not suggesting that we redirect Government support from start-ups to more established businesses. My point is that we need to do more to develop initiatives that support not only the ‘new’ but also those looking to take the next step on the way to growth.

This means taking a hard look at the processes and practices that help firms transition from fledgling start-up to small business, examining the milestones along this journey and helping them to avoid potential stumbling blocks.

Identifying issues

To support these businesses, we must first identify the most pressing issues they face. A lack of research and preparation is the most common stumbling block for aspiring SMEs but owners can also fall foul of hiring the wrong staff, failing to seek advice or underestimating the importance of access to sustainable finance to help facilitate their growth. The decision to employ staff or buy more stock is a huge step and often such decisions can bring about a new company’s demise.

Many firms assume that getting customers through the door is the most important thing, but what happens when their largest customer consistently pays late? Or an important supplier goes into administration? Or the insolvency of a key customer means they’re unable to recover a substantial debt?

Businesses are often tempted to put their eggs in one basket by relying on a single customer, but this can be disastrous. Findings of our latest SME Confidence Tracker reveal that one in four businesses has suffered a bad debt over the past 12 months, with many unable to recover from such losses.

To counter this chronic issue, businesses should stabilise their finances and take measures to protect the enterprises they have worked so hard to create. As a sector, we talk often about the negative effects of late payment but we can do more to educate businesses on how to protect themselves against bad debt.

Guidance

Just as start-ups need backing to set-up and launch, businesses that have overcome these initial obstacles need guidance to grow and succeed. Guidance can come in the form of advice from local or central business groups, Citizen’s Advice Bureau or friends and family. This guidance can also come in the form of the business finance community and independent invoice finance providers that offer additional support services such as sales ledger management, credit control, multi-currency services and multilingual support for those trading overseas.

By all means, we should continue to promote entrepreneurship and educate our future leaders on the opportunities available in business. We must ensure that we do not neglect established businesses of the future.

It is these SMEs that will boost GDP output, create jobs and wealth, and ultimately return the UK to economic prosperity.

A change in supply-chain culture is needed to address the problem of late payment

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Late payment has been a barrier to growth for UK businesses for decades, in some cases threatening their survival. Putting this issue into context, in February, Bacs Payment Schemes (Bacs) reported that in excess of £32 billion is owned to SMEs in the UK.

Larger businesses are often blamed for the havoc this wreaks on SMEs, but are they really to blame? Sadly, the answer is frequently yes.

As an example, in January it was reported that household brand, Heinz, more than doubled the time it takes to settle supplier invoices.

Breaking supply chains

SMEs face the hard edge of a large corporate’s buying power. They have Hobson’s choice: either accept crippling payment terms or lose the deal. This situation is particularly harsh when payment terms change mid-term. One example I saw recently was of an SME having to cope with an extra 45 days before payment.

The construction industry is a particularly brutal arena and one where we have seen large firms withhold cash for so long that their SME sub-contractor fails. The larger business then claims liquidated damages and refuses to pay a penny. This causes real hardship for both the business and its employees, and simply cannot be in anyone’s long term interests.

All of this goes on despite the creation of the Government’s Prompt Payment Code, which sadly seems to have done little to curb the problem.

New measures

The current situation has led to new legislation that will come into effect in April 2016, requiring the UK’s largest firms to report and account for their timing and practices in relation to paying smaller suppliers. Yet further action is needed.

Business Secretary Sajid Javid’s creation of the Small Business Conciliation Service – which will settle disputes between small and larger businesses over late payment – is welcome news for many. But this will be a last resort for many SMEs, who will likely prefer to avoid biting the hands that feed them; instead, opting to resolve disputes directly with these customers.

So, while I welcome the creation of this service; it’s not a cure-all remedy and, fundamentally, it fails to address the root cause of this pandemic issue.

Trading partnerships – creating a new culture

To deliver real change, there needs to be a step-change in attitudes towards SMEs and a growing understanding of supply-chain relationship management throughout the country. We should support and promote the view that suppliers should make profit too; seeing the stability, growth and wellbeing of these suppliers as being intrinsically linked to our own success.

Instead of viewing suppliers as separate entities, larger firms must think of SMEs as an extension of their own businesses. And this ethos does exist in some pockets of UK industry.

At the Business in the Community Responsible Business Awards on 7 July, I heard a great example of this trumpeted. The Enterprise Growth Award recognises companies that work with local SMEs, engage with suppliers and thus drive growth in local economies.

This year’s winner was The East of England Co-operative, which has built partnerships with 140 local suppliers and judges commended the business for embedding a culture that emphasised the importance of strong supplier relationships. This is a fantastic example of how larger businesses can create partnerships with their smaller peers to offer tangible benefits to regional economies through output and employment.

While unlikely to happen overnight, this transformation must be championed by government but embraced and advanced by businesses throughout the country. Only when mutually beneficial trading relationships are common-place, can the situation of late payment – and its negative knock-on effects – become a thing of the past.