Government must extend National Insurance holiday to all UK businesses as research shows two-thirds of firms in the South East most likely to be under capacity.

Business confidence has worsened over the second quarter of 2010 suggesting that the recovery is still fragile and more should be done to support private sector growth, according to the FSB ‘Voice of Small Business Index’, published today.

In a survey of over 1,200 members of the Federation of Small Businesses (FSB), only a net four per cent of respondents believe that business prospects will improve in the third quarter of the year, down from 16 per cent in March.

The survey also suggests that almost 67 per cent of small firms are operating below capacity, with those in the manufacturing sector faring much better than service sector firms.

This further highlights how the UK economy is still some way from a full-speed recovery, with 64 per cent of firms in the South East likely to be working below capacity – more than anywhere else in the country.

With Government proposals to exempt the South East, London and the East of England from the National Insurance holiday for new businesses, announced in the Emergency Budget, the FSB is concerned firms in the region will not start-up and that existing businesses will not have the support they need to grow and take on more staff.

Key findings from the quarterly report show:

* Small business confidence has faltered each month since March with fewer small firms believing that business prospects will improve, down from 16 per cent to four per cent.
* The majority of small businesses are still operating below capacity, although the proportion of businesses has fallen slightly from 70.5 per cent to 66.6 per cent since the last report.
* Firms operating below capacity are more prevalent in the service sector than manufacturing and are more likely to be based in the South East.
* Revenue growth remains weak and is not expected to improve in the next quarter.

John Walker, National Chairman of the Federation of Small Businesses, said:

“The consensus view from small firms is that the recovery is far from secure and there are significant risks to business growth in the future. With this is mind, as well as the fact that almost 70 per cent of businesses report working under capacity, we encourage the Government to support small businesses to grow and expand.

“With small firms in the South East most likely to be working below capacity, this shows how wrong the Government is to not include this vital region, as well as the East and London, in its proposals for a National Insurance holiday for start-up businesses. While we support the policy we believe that it should be extended to be UK-wide and be available for existing businesses too.

“With 600,000 public sector jobs expected to be lost, stimulating private sector job creation, especially in small firms, will be vital to rebalancing the economy.”

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Total administrations in the UK manufacturing sector have dropped 46% for the first half of the year compared with 2009, according to data compiled by business advisory firm Deloitte. This is a far more positive outlook than six months ago, when Deloitte’s annual administration figures for 2009 indicated that manufacturing was the second hardest hit sector of the economy, representing 17% of total administrations for the year.

Ross James, manufacturing partner at Deloitte, commented:

“The manufacturing sector is certainly in a better position than it was a year ago, however demand has not increased to the level required to give the sector the boost it needs. While we are seeing order books pick up, businesses have tightened up operationally and are running with a lower level of working capital, so the significant ‘restocking effect’ that was hoped for has not happened. Corporate investment in capital expenditure also remains tight. While there are certainly a number of issues at play affecting UK manufacturing, end demand and business investment are the primary drivers and until there is a significant and sustainable increase in demand, the outlook for the sector will continue to be uncertain.”

Administration data from the first half of the year shows that the retail sector enjoyed the highest rate of decline with administrations down 57% year on year, followed by the manufacturing sector (46%) and property and construction (43%)

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The growth of fraud in the UK continues unabated according to BDO LLP’s six monthly update on reported fraud. For the first six months of this year fraud losses rocketed to GBP1.06bn and eclipsed previous half-year figures, and were almost the same as for the whole of 2008.

This is the first time fraud levels have soared above the GBPbillion barrier during the interim period in the seven years BDO has been conducting its survey. The average value of a single fraud has increased to almost GBP6m, from GBP5m last year.

It shows that fraud is on the increase and BDO fully expects this to be another bumper year. In particular, BDO expects more enforcement action by regulators in the financial services arena with enforcement action for insider dealing also becoming more prevalent.

Simon Bevan, Head of the Fraud Services Unit at BDO, says: “In the past we have seen a focus on procurement type frauds – that is public and private sector organizations paying too much for goods and services. However we are now seeing more ‘revenue dilution fraud’ – where management commits fraud by either setting up ‘companies within companies’ or diverting lucrative contracts away from the company to third party accomplices. Linked to this is an increase in insider dealing.”

Bevan predicts that competition between regulators to ‘act tough’.

“We have a combination of political pressure and the understandable desire, in a downturn, for the public sector and corporates to be seen to have a zero tolerance policy.”

From these interim results, BDO predicts that the average fraud will top GBP7m by the end of 2010.

Sectors and regions most at risk:

• The finance and insurance sector remains a dominant fraud risk with 49% of all fraud in this sector
• Mortgage fraud accounts for a fifth of all reported fraud and 36% of fraud in the finance sector

• Third party customers and suppliers are responsible for 17% of all reported fraud on businesses whilst internally management cooking the books have also caused 16% of reported fraud London and the South East continue to be the hotbed of fraud activity with 71% of fraud but Wales has also experienced 15% of fraud in this interim period compared to only 2% last year

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Two thirds of small business owners support the coalition government’s decision to scrap the regional elements of advisory service Business Link, a poll of over 500 people by BusinessZone.co.uk reveals.

According to the survey of 516 entrepreneurs, 61% said the axing of the system which supports SMEs in England is a good decision compared to 39% who believed it is a bad move.

Comments posted in response to the study included: “Business Link was run in a misguided way by people who didn’t know what they were doing. They were all about looking like they were doing the right thing, rather than actually doing something useful.”

Another business owner said: “I tendered for a web development project, with search ranking added and they made a complete hash of it. RIP Business Link; gone but happily forgotten.”

Not all responses were negative however with one entrepreneur saying: “Without our Business Link advisors we would have struggled to have secured training for our staff. I’ll miss our advisors and just wonder how the new system will work.”

Another added: “Having had first hand experience of working with Business Link on a number of projects, I can honestly say that it does depend very much on the adviser themselves. Don’t forget, Business Link is just a brand – it’s the private companies which secure the funding to deliver the brand and supply the advisers – some are great, some aren’t.”

Commenting on the survey results, Dan Martin, editor of BusinessZone.co.uk, says: “Business Link has been a controversial subject for many years and while it’s good news that the questions about its future have been answered, the hard work to build an effective business support regime in England begins now.

“Entrepreneurs need and deserve a system that is simple, targeted and easy to access and it’s important that any positive elements of the existing set-up are retained. It also needs to be relevant to whatever route an entrepreneur takes whether that be a lifestyle business, a fast growth company or a social enterprise.

“In addition, ministers must ensure that real consultation takes place with all interested parties and ensure that the government doesn’t just pay lip to so called ‘stakeholder engagement’.”

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In its recent submission to the Basel Committee on Banking Supervision’s consultative document, ‘International framework for liquidity risk measurement, standards and monitoring’, Algorithmics has cautioned against the danger that is inherent in the proposals to use standard liquidity ratios that do not account for bank size, resulting in a simplistic indication of a bank’s liquidity position.

The Basel document proposes two standard ratios that all banks should be obliged to maintain above a defined minimum: Liquidity Coverage Ratio and Net Stable Funding Ratio. Algorithmics warns that applying these ratios without considering bank size might not provide enough protection against the systemic risks of larger banks, while penalizing smaller banks, which do not pose a systemic risk, through unnecessarily high liquidity requirements.

By having standard rather than size-dependant ratios, the regulations fail to recognize that size in itself is a risk, which has been an issue in the recent crisis. The standard ratios only provide a simplistic indication of a bank’s ability to withstand liquidity stresses and, despite being created with severe stress assumptions in mind, they should not be exclusively relied upon by senior management.

Algorithmics has made two recommendations to the Basel Committee with respect to liquidity risk measurement. The first is the use of liquidity buffer and survival horizon measures in conjunction with economic capital as part of a comprehensive framework that reflects the institution’s risk appetite. The second recommends that banks should not only stress and reverse stress risk factors, but also the underlying assumptions of the corporate strategies and business plan, as well as their interdependencies.

Dr Mario Onorato, Senior Director of Balance Sheet & Capital Management Solutions at Algorithmics and Honorary Senior Lecturer, Cass Business School in London, said: “Even if two banks show equal ratios, the potential systemic impact of a liquidity issue can be totally different depending on the absolute amounts of their exposures. Our response to Basel recommends that banks’ size should be taken into account when defining the standard requirement, and that the ratios should be complemented with liquidity VaR for market liquidity risk, liquidity buffer and survival horizon for funding liquidity risk, and the interaction between the two.”

Ratios aren’t the only issue that banks are dealing with. Dividing scarce and expensive resources, such as capital and liquid assets, between competing needs is a pervasive problem facing firms, as Dr Onorato explains, “Correctly understanding the cost of liquidity associated with the right level of liquidity buffer will be a key factor in optimizing capital management and business growth. Our advice is to ensure that liquidity risk management becomes an integral part in the setting and monitoring of explicit enterprise risk appetite and reward targets at the balance sheet policy level.”

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Nearly two-thirds of the companies included in the annual Ernst & Young working capital survey reported deteriorations in performance in 2009 compared to 2008, with cash-to-cash (C2C) increasing by as much as 6% in the US and 3% in Europe.

All tied up, a report on the working capital performance of the 2,000 largest companies by sales, headquartered in the US and Europe, also finds that companies now have an aggregate total of up to US$1.1 trillion of cash unnecessarily tied up in working capital, an amount equivalent to nearly 7% of sales. This is a higher figure than a year before (when it was 6%), suggesting that the gap between best and worst performers has widened.

Jon Morris, Working Capital Management Leader at Ernst & Young LLP (UK), says:

“Working capital management has become an area of stronger focus in recent years, which raises the question of the true effectiveness of current strategies. However, the deterioration in performance is also explained by uneven growth patterns which showed large variations on performance across industries. For some companies, sales patterns and commodity prices significantly affected the measure of performance. 2009 was also another year marked by large currency fluctuations which had a significant impact on performance.”

US v Europe

In the US, just one-third of the companies in the survey posted an improved C2C performance in 2009 (compared to 63% in 2008). A majority of them (51%) managed to improve payables, while a much smaller proportion reported better inventories (36%) and receivables (25%) performance.

In Europe, 38% of the companies reported better C2C performance (compared to 50% in 2008). A slightly higher proportion of companies posted improved inventories (37%) than higher receivables and payables (32% each).

Europe saw an overall deterioration in working capital performance in 2009. Only Germany and the Scandinavian countries reported improvement over the previous year.

On the whole, US-headquartered companies exhibit better performance than those based in Europe. Overall C2C for the US in 2009 was 3.5 days, or 8% below that of Europe.

Steve Payne, Americas Working Capital Management Leader, at Ernst & Young, says:

“Trade terms are generally longer in Europe than in the US, although with wide variations across countries, notably between the North and the South. On a like-for-like basis, the US has a superior performance in inventory. Companies in the US have simpler supply chains than their European counterparts, due to the absence of national borders and the single currency and language in the US. In Europe, transport also takes longer and logistics costs are higher than they are in the US.

“The findings indicate plentiful opportunities for many companies to release additional liquidity from working capital. The 1,000 US companies included in the research would have in total between US$280 billion and US$515 billion of cash unnecessarily tied up in WC. The 1,000 European companies would have in total between 215 billion euro and 400 billion euro of cash unnecessarily tied up in WC.”

Effective working capital management strategy

“Implementing effective strategies and processes can generate significant operating cost reductions and also unlock the ‘cash potential’ tied up in working capital,” says Morris. “Leading companies will be those that take a structured “root and branch” approach to improving working capital by working even more closely with key customers and suppliers, driving ever greater efficiency out of the supply chain, sharing real-time information about supply and demand, and having robust risk management policies in place.”

About the report

This report contains the findings of a review of the WC performance of the largest 2,000 companies (by sales) headquartered in the US and Europe for the year 2009. The analysis draws on companies’ latest fiscal 2009 reports. Performance comparisons have been made with 2008 and with the previous seven years.

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Consumer Affairs Minister Edward Davey has announced that a review of consumer credit and personal insolvency will be undertaken by the Government.

The Minister met with the All Party Parliamentary Group on Debt and Personal Finance, where he announced the review. It will be conducted jointly with Mark Hoban, the Treasury’s Financial Secretary, and will cover a number of areas, including:

• How consumers enter into credit commitments, including the way in which credit is sold and the extent to which consumers understand what they are committing to
• What issues arise during the lifetime of a loan from both the consumer and the lender perspectives; and
• What happens if things go wrong; are the current insolvency solutions fit for purpose?

The review will be an opportunity for all stakeholders to provide evidence on what is working well, and where the Government can intervene to relieve pressures in the system. It is an opportunity to reshape consumer credit policy and will lead to a full consultation later this year, or early next year.

Edward Davey said:

“This is an opportunity not only to improve the safeguards on consumer credit products, where this is necessary. It’s also a chance to cut unnecessary regulatory burdens, which increase costs and stifle competition.

“As Consumer Affairs Minister, I want to be sure that people can get fair deals on credit cards, loans and other products on the market – improving access for the financially excluded; having an insolvency regime where those who can, pay, but those who can’t are helped to make a fresh start; and ensuring a regulatory framework that’s fair to consumers and creditors alike.”

The Call for Evidence will be issued after the summer recess, which should lead to a consultation on specific proposals later this year or early 2011.

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• Late payments affects nearly three quarters of SMEs but less than half have taken steps to alleviate the problem
• UK businesses have invoices worth £15.7 billion more than 120 days in arrears
• Small businesses are hardest hit by wasting valuable time pursuing slow paying customers

New research from NatWest and RBS reveals that 71% of SMEs in the UK have suffered from late payments over the last 12 months, with the collective value of invoices paid outside of the stipulated terms and conditions estimated at £62.87 billion. As a result, 235,000 SMEs claim time wasted chasing debt has adversely affected their business.

Whilst larger companies have a higher value of invoices paid late, as a proportion of turnover it is smaller businesses which are worst affected. For example, one in five (20%) businesses with an annual turnover of between £250,000 and £500,000 has suffered.  This compares with just one in fifteen (7%) of medium and large businesses.  For businesses with a turnover between under £1m, the equivalent of 12% of their annual turnover is paid late.

Despite these problems, the research reveals that less than half (45%) of SMEs have taken measures to improve their cash flow. Of these businesses, around one in ten (11%) have hired an in-house credit controller. Only 9% have used invoice discounting and 8% have used factoring, both of which are effective means of plugging a cashflow gap and are now widely recognised as appropriate alternatives to mainstream funding methods.

Peter Ibbetson, Chairman Small Business, NatWest and RBS said: “Bad debts and late payment of invoices are endemic problems for UK businesses.  For more than one in ten (12%) firms, over 60% of all their invoices are paid late, causing major cash flow problems for many. What’s concerning is that so few are making use of services from their bank to help alleviate the problem.

“For businesses trading on short-term credit there are financial solutions available which enable them to turn unpaid invoices into working capital. For example, RBS Invoice Finance is ideal for businesses looking to take control of cash flow and fund growth. It can give businesses an immediate cash injection of up to 85% of the value of unpaid invoices.

“The reality for most small businesses is that they are too busy to spend time chasing payment and managing debtors. However, our Invoice Finance team can pick up the burden of chasing payments and help protect businesses by safeguarding their financial supply chains.”

Stephen Alambritis, Head of Public Affairs, Federation of Small Businesses, said: “Poor payment practices can drastically affect cash-flow for small firms at a time when business owners are doing their best to hold on to precious funds. Indeed, figures from BIS show that late payments were responsible for some 4,000 business failures in 2008 alone.  Since the economic downturn we have been urging businesses and agencies in both the public and private sector to sign up to the Prompt Payment Code to highlight best practice and help boost the cash-flow of small firms during these tough times.”

Late Payments by sector*

Late payments are most prevalent in the wholesale industry with 93% of firms reporting that they have experienced late payments in the last twelve months.  For one in five (19%) business services companies, over 60% of all payments they received were paid late. The retail industry has fared the best with late payment figures below the UK average of 71%.

*Research conducted in February 2010 by Continental Research amongst a nationally representative sample of 501 GB businesses

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This blog post is content property of National Westminister Bank  & The  Royal Bank of Scotland

Despite fears of a double dip recession, corporate administrations have dropped to a pre-credit crunch low according to analysis by Deloitte, the business advisory firm. Research shows that the first six months of 2010 saw 1,065 administrations, down 43% on the same period last year and even 25% less than H1 2006, the last full year before the financial downturn began, which saw 1,419 administrations. In addition, administrations dropped 18% in the second quarter of 2010 compared with the first three months of the year.

Lee Manning, reorganisation services partner at Deloitte, comments: “Whilst Deloitte’s latest CFO Survey revealed increasing fears of a double dip recession, these figures paint a more positive picture and may provide a corporate confidence boost. The proactive approach adopted by companies and lenders alike has had, and continues to have a positive effect in most distressed situations. By acting sooner, companies have, been able to remedy problems more effectively. Equally, lenders have been supportive, preferring to make debt for equity swaps or even advance suitably priced risk capital, rather than crystallise their debt through an insolvency process.”

The pronounced decrease in administrations is being seen across a broad spectrum of industries; retail administrations fell a staggering 57% in the first six months of this year, compared with the same period in 2009; similarly, property and construction failures are down 43% year on year, and manufacturing administrations are down 46%. Quarter on quarter this trend has continued, with retail administrations down 20%, property and construction down 25% and manufacturing down 27% compared to the first three months of the year.

Manning adds: “We are seeing a steady decline in administrations and this is certainly a positive sign that the climate is stabilising. I would be very surprised if administration levels increased dramatically this year; rather I would expect the second half to mirror the levels of activity we’ve seen in H1.

“The summer months traditionally see lower levels of administration activity, particularly given the periodic absence of key decision makers taking summers holidays. We expect this decline to continue into Q3. Confidence has been on the rise, with consumer spending holding up better than expected, and corporate confidence being felt more widely. For example manufacturing, one sub-sector impacted, has experienced improved output.

“Retailers have also experienced a more buoyant six months, following the high number of retail administrations we saw in 2008 and 2009, with many retailers now picking up the market share left by those businesses that failed. Clearly the economic situation will remain challenging and whilst increased VAT in the New Year won’t have a material impact on the prices of most products, this won’t help consumer confidence either. To date retailers have been positive, responding well to the changing environment, managing their cash flows and stock levels appropriately, as well as having successful discussions with landlords over spreading the burden of rent and service charges. I expect this level of engagement to continue, with CVAs and informal arrangements with creditors being used as a constructive alternative to administration.”

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Commenting on the manufacturing output figures for May, David Kern, Chief Economist at the British Chambers of Commerce (BCC), said:

“May’s small increase in output confirms that the manufacturing recovery is on the right track, and supports the positive messages signalled in the BCC’s latest economic survey.

“The new figures leave manufacturing firmly in positive territory when compared with a year ago, and they reinforce expectations that GDP will record stronger growth in the second quarter of 2010. But, there is no room for complacency and the level of manufacturing output is still some 10% below that recorded in 2007.

“It is now important to support the welcome signs of recovery. With a competitive pound, UK manufacturers are in a strong position to increase their exports. However, given weaknesses in the eurozone, firms will have to look to other global markets for an export-led boost.

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