After over 30 years of heading up a marketing service company through a range of business environments and economic challenges it might be useful to part explain quite how we got here in such good shape.
The UK economy, unlike the recessions of the 1980s, presents us a more complex and deeper drop in business confidence – less a fundamental problem on the shop floor, more one on the trading floors and networks of the City and major institutions!
Small businesses rarely have the luxury of choice as to how to proceed when the tough times arrive. We all usually cut costs where possible (and our credit cards) and knuckle down to doing what we do best and looking to do better where we can.
Our business was a bit like that too, but we agreed a few firm and committed policies. The over-riding one was to save cash. It seems a simple and logical thing to do… right? Wrong! Today’s businesses do not save much at all.
All cash saved throughout the year is quickly depleted from the company balance sheets by dividends, staff bonuses, payment into SSAS (small self-administered scheme), SIPPS (self-invested personal pensions), personal pensions and various ‘tax management’ schemes. The result can be a serious reduction in the bottom line and often levels reduce down to just the right amount of money needed to re-start next year’s trading.
And all this to avoid outgoing corporation taxation costs. The various government tax regimes since 1979, have not helped businesses save during the good times in preparation for the bad times. However, with the current uncertain climate companies are facing, maybe now is the time chancellor George Osborne should offer a helping hand?
Riding out past recessions
We at DirectionGroup followed various measures in order to successfully ride out all past recessions, but the most successful was to save cash. We would push clients to pay us faster by doing deals. We paid suppliers quicker and negotiated discounts. Credit terms were not there for us to hold back cash from our suppliers, but for emergency use only. Indeed, in the first years of running the business we sometimes paid trusted suppliers before being personally paid. Wherever possible we didn’t use the overdraft unless it was absolutely essential.
By the time we were in a healthy financial position, we would at each year end split the profits. One half went to staff, pensions, and small investments for the business. The rest of the money was retained on the bottom line. The cash we save is always taxed, while paying tax always hurts, it’s an essential part of any democracy. Nobody likes to pay more than needed, but following a business strategy based mainly on tax reduction or avoidance is both careless and will be very short lived.
Today our business remains independent and has no debts whatsoever and no overdraft for over 16 years. In addition, we have a healthy cash reserve saved and in the short-term we are almost self sufficient.
Our clients pay us promptly, but we totally refuse to sign purchase agreements or service contracts from any clients (even international corporations) that try to demand up to 60 or even 90 days credit. It’s a simple policy and if broken it would be hard to get back on track.
Where the government could boost sustainability
The government should look to secure legislation for fair pay fixed at 30 days for smaller businesses. That and corporation tax breaks aimed at creating balance sheet savings are two simple triggers to help boost confidence and growth in owner-managed businesses. By forcing larger companies to pay smaller organisations faster, they instantly help fill the cashflow of small and mid-sized businesses.
By adding tax incentives to encourage owners to retain profits in good times, entirely for the use within the company, the Exchequer would effectively provide investment and cashflow to help fuel growth, hire skilled staff or alternatively protect jobs and wages when the bad times arrive or get worse!
Our company for the last 30 years has slowly fuelled its own expansion and enabled itself to protect the business and staff in tougher times. In addition, the company has even borrowed from its own cautiously funded pension fund to purchase capital items it would otherwise need an expensive and potentially risky bank loan to finance.
In summary, if I were able to enact change for the good of the small and mid-sized business community I’d do four simple things:
- Save and retain cash during the good times
- Reduce reliance on banks or external borrowing
- Support fair pay for smaller businesses; do not accept long credit terms (i.e. over 30 days)
- Ask the treasury to build tax-free incentives into year-end corporation tax to retain cash from annual profits for smaller businesses (for the sake of argument, those with a turnover of under £10m).