SME challenges
On 11 November 2010, Venture Finance hosted a panel of corporate finance experts from banking, private equity and government, as well as the professional services and advisory sectors. Their task was to address how the finance industry can help Britain’s small and medium-sized companies access the funds they need not only to survive and thrive but also to help sustain the UK’s economic recovery
In the second ThinkTank session, the panel addressed discussed the challenges and facing SME businesses in the current trading environment.
When the ThinkTank panel reconvened for the first of two afternoon sessions, Allan Laing, Chief Executive of Pentagon Chemicals (Holdings) Ltd, stressed the positive side of running an SME business. “It’s challenging. It’s dynamic. It’s great fun,” he said. However, he was equally keen to address the concerns that he and other managers must confront.
Although each business faces its own set of challenges, Allan pinpointed “customer uncertainty”, specifically “second guessing what our biggest customers will want to do next”, as one of two major issues that affect Pentagon Chemicals.
The second major issue was cashflow management, in particular the credit terms stipulated by customers. “I think, generally speaking, the bigger the customer, the longer they want to take to pay,” said Allan. Cashflow management can’t be seen only in terms of the time lapse between raising an invoice and the customer making good on the payment. In the case of Pentagon Chemicals, raw materials are bought and imported long before the company fulfils its customers’ orders. “The cash-to-cash period can be as much as 180 days,” said Allan.
The recession has done little to improve credit terms. When questioned for Venture Finance’s own annual Credit Check survey, almost four fifths (78%) of accountants have seen debtor days increase by 14% or more in the last six months.
As Allan explained, long payment terms need not be a given, pointing out that as suppliers develop long-term relationships with customers they are often in a better position to negotiate improved terms. David Smy, a Senior Policy Adviser at the Department for Business, Innovation and Skills, also pointed out the need for SMEs to push for the best possible deal. “We think it’s very important that people can do that,” he said. “I think confidence is important, as is encouraging small businesses to go out and negotiate.” David sees late payment as an equally pressing problem. “From talking to small businesses, the problem that is heavier than, say, 90-day payment terms is a 60-day payment that doesn’t arrive on the sixtieth day,” he said.
“The growth agenda is the leading priority of the coalition government,” added David. “There’s a huge emphasis on trying to get the overall business environment right and the business environment for SMEs right. In terms of that overall business environment, I think we are making steps forward. We’ve committed to creating the most competitive corporation tax regime in the G20 on the tax side. And on the regulation side, we’ve got a policy where if we bring in new regulations then we want to pull out other regulations at the same time, so the overall cost of regulation decreases rather than increases.”
Accrued debts
While debtor/creditor and related cashflow management issues are seldom far from the minds of business owners and managers, the evolving recovery has produced its own set of challenges, not least the problem of accrued debts.
One of the surprising features of the 2008/9 recession was a lower than expected number of insolvencies, which many commentators have partly attributed to the leniency of creditors, including landlords, banks and HMRC.
Arguably, HMRC played a crucial role in helping businesses stay afloat, simply by making it known that they were prepared to accommodate cases where businesses were not in a position to pay their taxes on time (usually PAYE and VAT). Typically, when a payment came due, the taxman would defer and restructure the payment over a period of months.
In the short term, HMRC’s Time To Pay (TTP) scheme provided a lifeline for many SMEs during the recent economic storm. However, as Kate Sharp, CEO of the Asset Based Finance Association, pointed out, deferred payments of this nature potentially store up problems for the future. Indeed, mounting tax bills could reverse a trend of falling insolvencies (also noted by David Brockhurst, a senior manager in KPMG’s Mid-Market Debt Advisory Group). “I think we are going to see a lot of businesses become insolvent because the taxman wants his money back,” said Kate.
For those companies striving to turn their businesses around and take advantage of the expected recovery, the TTP hangover represents a potential double whammy. On the one hand, a mounting tax bill represents a drain on available cash. On the other, the prospect of a spike in insolvencies in the near future adds to the economic uncertainty discussed by the panel in the opening session.
Opportunities
The panel was keen to underline the positive factors at work in the economy, not least the opportunities afforded to exporters by a drop in the value of the pound. “With export-led businesses, the dollar and the euro have moved to benefit export-led businesses significantly,” said Allan Laing. “Since the middle of 2008, when the euro was about 1.4, the dollar was about 2 to the pound and there were lots of exports coming out of Europe into the UK. That has flipped, and is now working to the benefit of UK companies.”
As Oliver Woolley of the British Business Angels Association pointed out, many businesses that survived the recession are in a stronger position now than they were before the downturn. “Some of our clients are beginning to reap the benefits of competitors going out of business,” he said. “That is helping them to grow their turnover. I think the point is they have really gained the confidence to continue investing in their business.”
Read Part Three: Smart Solutions
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