Stuck in a Rut?
In the intervening years since I last viewed an end of year school report, things may have changed. Rarely containing a personal comment, they had to be scrutinised for hidden meanings to talk over on parent’s evening. Promises of trying harder were made for after the summer break… the fresh start of un-graffiti-riddled folders and un-bitten pen sets.
Similar to an end of year school report, commercial lending annual client reviews have content which rarely deviates too far from standard statements. Comment of the, could do better or has the ability but needs to focus ilk is made to those whose promises go unfulfilled, with the more usual fare being about fiscal sustainability and continued improvements, steady and measurable progress, operational effectiveness and manageable growth.
Capital, cash flow, credit, reserves, liquidity, surpluses and reorganisation are boring (for the most of us). It’s only when I get my teeth into a project that the structure of those elements take on a different shape, when their life-cycle comes alive, then I get interested. But, for the smaller business owner, when there’s little or no co-operation from the channels or instruments used for these elements, it can be very frustrating – and easy to see why focus disappears. There’s a trajectory to the great unknown which is daunting enough without increasingly hearing the latest in vogue F-word lavishly bandied about.
Distracted focus from a commercial liability can undermine its strength when the base-lines used to measure creditworthiness or business performance keep shifting.
Aversion, happening further up the food chain of global markets, acts to exacerbate the problem of financing for the smaller business owner. Limitations are trickling down in the real economy, at the same time as costs rising; disconcerting the independent business owner and disorienting general financial conditions. Even with positives to a business investment, even for the risk-averse and even in an F-for-Frugal environment, sustaining profitability can suffer from caution as businesses are being forced to operate differently.
Lending banks won’t deviate from their deposit base as they shore up their capital base. The UK inflationary pressures are low, with a likelihood of interest rate increases looming ever nearer.
Banks, and other lending sources, are businesses – hugely complex businesses. They have a business plan or operating strategy (that includes a marketing presence). They’re run with strategic focus, which has strategic objectives and a perception of risk. They have lending profiles and use cost control. Targets seek returns and are derived from KPI’s (Key Performance Indicators), monitored by KRI’s (Key Risk Indicators) for losses (immediately and effectively). They often have a mix of funds and borrowing, debt and equity to operate with. They use monitoring systems for their operating expenses and price margins. Sometimes mid-term reviews are implemented for corrective measures to their targets. They look to minimising their cost of capital and balance their own capital, borrowed funds or reserves and their internal management systems expect customers to operate similarly.
What happens when a businesses system doesn’t have those elements available or implemented?
The only difference between a Rut and a Grave…. is the depth.
Image credits: Sonny Abesamis and SUF Article credit: Copyright SUF © 2014
04 07 2014
The FPC (Financial Policy Committee) has proposed new rules for mortgage lenders which caps loan-to-income ratios and includes interest rate stress tests. Lenders will not be able to have more than 15% of new mortgages at loan-to-income above 4.5 times and it applies to all Help-to-Buy loans. Coming into force 1 October, the test ruling applies to the first 5 years of the loan and assesses the borrower being able to afford repayments, if their interest rate rose by 3% above the rate at origination. The stress tests are generally in line with those already implemented by major lenders as part of their affordability calculator and are part of policy measures being taken to limit the risk of house prices being detached from earnings. The restrictions cover owner-occupier loans however the FPC minutes state ‘The FPC considered the need to monitor mortgage lending activity beyond the scope of the recommendation…This included close monitoring of the buy-to-let market….’
Payday lenders and other firms offering high cost, short-term credit will face new rules applied to rollovers, continuous payment authorities and risk warnings, from July 1. Such high-cost short-term lenders are restricted to two unsuccessful attempts to use CPA (Continuous Payment Authority) to take a repayment and can’t use CPA for part-payment. Similar rules are applied to loans repaid in instalments.
UK house prices increased by 1% in June (11.8% higher than June 2013), according to Nationwide Building Society; all regions showed annual price gains in the second quarter of the year. Their current figures state the average price for a home is £188,903, with price increases 14 months in a row.
According to a survey of 1,000 NLA members the average void period experienced by UK landlords has continued to fall and is down to 2.7 weeks, bringing it to 2012 levels. High tenant demand is credited to keeping the time a rental property is empty between tenancies. The survey was to find the top factors that landlords consider when getting ready to make a BTL purchase. Quelle Suprise! Landlords prefer to invest in areas where they have local knowledge and understanding of market trends. Other factors were cited as strength of tenant demand in the chosen area, local rent levels, capital growth prospects, local transport connections and almost ¾ of the participants said they’d be looking near their own home.
The British Retail Consortium has published recommendations for the reform of business rates. Calculated on the rental value of properties in 2008 (before the recession) it is therefore thought not fair to businesses competing against online-only businesses. The recommendations include reducing the total amount of business rates and that they are shared more fairly between different industries, including incentives for energy efficiency.
The Market Purchasing Managers’ Index (PMI) showed a score of 57.5, up from 57.0 in May. Any figure above 50 indicates growth in the industry and the UK manufacturing sector has grown at its fastest pace for 7 months (June) with job creation growing at its fastest for 3 years.
That’s the serious bit….. now, on a more flippant note…..
A 55 year old Entrepreneur / Consultant has recently joined LinkedIn with an apparently list of more than 150 careers. The former astronaut and fashion designer always has a ‘smartphone, tablet and briefcase by her side’; she is apparently a ‘smart, stylish career woman’ whose business is named Dream Incubator. And (for those who like management speak) her tagline ‘If you can dream it, you can be it!’ might inspire a LinkedIn invitation…… to the plastic lady known as Barbie ….. she might be dressed, but is she ready to work?
Image and Article credit: Copyright SUF © 2014
Money Spiced with Llama Spit
Some fifty four pages of analysis, trends and developments across the economy are patiently explained and in a matter of fact manner, and inflation projections are translated by a patient and informative Agent…. yet, even with an A4 glossary, I left the meeting with my brain shrieking the same way it does reading isolated EBIDA figures.
I’d been to the Bank of England quarterly inflation report meeting where coloured diagrams and graphs that appear to go all over the place, at one brief point illustrating seismic waves for an earthquake potential, are shown.
There are no instructions for reading Inflation Reports (or EBIDA figures) and no warnings stating `This is an educated appraisal which contains potentially nuclear information, therefore as you may not be fully informed, you may experience a sense of foreboding’.
As financial needs for a business owner are as different as a full economic analyses and ‘our survey said’, or a single EBIDA figure heading up a report and the same figure coming after the pluses and minuses, although full analysis or single figure are created to give some clarity, without an accompanying mix of information that can set the full picture, and stop me feeling as though I’ve just swallowed something that tastes like lavatory cleaner spiced with Llama spit, they may as well be written in hieroglyphics.
As well as being at the heart of my business, the smaller employer is close to my heart (my grandparents and parents owned and were involved in operating smaller businesses, my extended family have local businesses or service-based businesses) and the non-corporate business is incredibly important to our economy. I don’t understand everything about the economy but….. Brace yourself if you’re of a nervous disposition about your business…. I’ll tell you what I do know…. and I’ll try not to be too graphic.
The day after the meeting when I got to speak with a mix of business owners and lenders’ people and I was unsettled, in a full-face Llama cleansing way. There was no mention of mention of the economy (…and some weren’t aware of EBIDA figures, single or full).
With that purple line, on the current B of E probability of inflation above target chart, being almost as straight as a straight road named Stagnation, unless those earthquake potentials are realised, interest rates are in a good place for businesses to set their stalls for their futures. And, because some lenders traditionally set their stalls as a ‘one size fits all’, being aware of EBIDA type metrics is an essential for the business that wants to successfully negotiate a way through finance and funding options for their future.
I’ve likely told you about the same as you’d tell me: there’s no explicit detail about what’s going to happen in the economy and as boring as it is for a cow to chew its cud, financial forecasting is a necessity.
Parts of our financial system haven’t changed; from the good ‘ol days of the local bank manager, through the dark days of the five horsemen of the apocalypse and into the IT platform future, they’ve just got a whole lot more value attached to them for anyone who wants to stay ahead of times that are-a- changing.
I can’t promise that, by understanding how the cash flows: the differing forms, uses and structures, seat belts would be needed for meteoric rises but I will say that small steps moving further away from running on empty is, when (as someone noted) ‘this is all temporary’ (would that be the same person who said ‘who knows what tomorrow will bring’?), a way to get an extra gear …. which, as far as I can tell, is better than being stuck in first gear when you’ve an irritated Llama closing in.
Images and Article credit: Copyright SUF © 2014
02 06 2014
Data from ONS show that illegal drugs and prostitution contribute around £10bn a year to the British economy. For the first time statisticians are measuring the value of the drug-dealing and sex work – apparently about “the same contribution as farming – and only slightly less than book and newspaper publishers added together” or accommodation services which included hotels, bed and breakfast and caravan parks. The figures will be included in the category of household spending on “miscellaneous goods and services alongside life insurance, personal care products and post office charges”. The smuggling of alcohol and tobacco are already included in GDP and make up some £300m.
A report by HSBC has revealed Hull offers the fifth-best yields in the country for landlords, generating 7.47 per cent of a house’s value for its owner every year, with average value in the city of £68,243 and annual rent of £5,100. With yields of 7.82% and rental accommodation making up almost a quarter of total housing stock, Southampton was placed the best for BTL where an average rent is £901 a month. However, Siemans’ are set to start a £310m turbine site in Hull later this year and 2017 it will become a culture capital which is likely to promote price rises, however, there could be an effect on rent yields which, similarly for Blackpool, Manchester and Nottingham, are driven by cheaper stock. The other locations identified by the report for fastest growing yields were Reading, Brighton and Hove, Southampton, Cheltenham, Bristol, Bournemouth, Manchester, Oxford, Eastbourne, Hammersmith and Fulham. The reports best hotspots were Southampton, Manchester, Nottingham, Blackpool, Hull, Coventry, Oxford, Portsmouth, Liverpool and Cambridge.
Commissioned by the Treasury, the telephone survey of 5,000 businesses has cumulated in BBI (Business Banking Insight) , a data collecting website about individual banks service provision. Available for SME’s to rate their bank and who according to the survey, were 40% dissatisfied with the service offered by their account holder (of employers with nine or fewer people) and 35% dissatisfied (of employers with ten to two hundred and forty nine employees).
Property website Zoopla announced a stock market flotation based in London, and launched only six years ago, it’s seeking a valuation of about £1bn and is looking to sell at least a quarter of the business.
Living up to their tagline (Here For You) RBS seem to be very available for some recent news articles. In no particular order: Mobile banking services for the their Group has been hit with another IT glitch (Lloyds, Halifax and Bank of Scotland were also affected), Lloyds Banking Group is joining a lawsuit to sue RBS over a rights issue, filing claims for over 400 million pounds and, in the event of independence, there is a call to break up RBS, and unpick it from Lloyds Banking Group, and Clydesdale Bank for National Australia Bank Group and ‘for just twenty pounds a month’ businesses can receive a variety of cloud-based accounts services.
Image and Article credit: Copyright SUF © 2014
A Tale of Discrepancy and Discretionary Tarting
‘Ehghaahg uhmajeddth ohtkchgh mghigh emmmhgh’.
Nope, I wouldn’t get that either! But my dentist’s brain seems to have adapted to most of his customers, at some point, sounding as though they’re in a cardboard box full of cotton wool. Open-wide mouths, some filled with metal probes, he knows the risk when he places his customers in `The Chair’ - there’s little chance of gratifying conversation – instead he explains what’s happening as he goes along.
At the same time as guiding a new assistant for quality control whilst translating the procedure, he’d however underestimated the risk of his dental dictionary being stretched too far. Re-framing the language for me, there was no risk to it not making sense, however, what hadn’t been thought through was the potential for his patient to choke…. with laughing: ‘I’ll tart it up using a Tarting Tool’.
In business, as in most situations: risk in proportion is reasoned by discretion.
Business and work environments are full of problems, many attributed to the grating that happens between rules and practice. For some, whose situations involve being their own managers, there are additional challenges to working autonomously without specific or clear rules available; conditions are defined using personal, sometimes unreliable or inflexible, values, which in turn makes the creation of a structure, to measure competency, ever more challenging. And, when a situation arises, when there isn’t a specific rule or working practice that offers conclusive direction, discretion, as part of a business practice, or system becomes stressed.
Holes, like rules, have a life cycle. For discrepancy the tarting tool needs discretionary usage.
Following the financial crisis explosion, the FSA (now FCA) announced, that it would undertake a review, MMR (mortgage market review): to deliver ‘a sustainable market for all participants’ and to be ‘flexible for consumers’. Its recent implementation has created headlines in respect of the assessment of borrowers’ income. In essence there were ‘holes’ which needed addressing and to prevent consumers being trapped, now places responsibility with the lender.
Figuratively, in the shoes of someone who fell through such a hole is Alice. Contemplating her situation (‘…she was considering…. making a daisy-chain would be worth the trouble of getting up and picking the daisies), she weighs the benefits to her fiscal position (this might be for a property or her business) against the effort that’s required. A White Rabbit (financial product headline rate) intentionally runs close by. Alice’s time is consumed and because she hasn’t a discretionary ‘system’ available, the labyrinth of challenges for discrepancy she’s facing isn’t considered as she follows the white rabbit…. down the hole.
There are some super-massive black holes in finance provision; similarly there are massive holes in business and for business, with property purchase and property sale, and, when they come about from discrepancies merging together, it isn’t all black …. its liquorice.
Tarting a cavity with a tarting tool has no effect when the discrepancy has come about because risk wasn’t measured with discretion.
Image Credits: Official US Navy Page, Mark Engelbrecht, Andrew Yee. Article credit: Copyright SUF © 2014
03 05 2014
A national estate agency report expects price rises across the country for residential property of 5.5% in 2015, which would overtake the predictions for London, with a median house price for England and Wales seeing a `4.2% increase to £186,000 compared to Q1 2013’ There has also been a recent increase in the people outside London buying for investment purposes rather than secondary homes with the first quarter of 2014, showing for the first time in a number of years, that ‘an outward flow from London into the South East and further afield’ has been seen. With, `perhaps a recognition that the disparity between London and the regions has peaked’ the Nationwide’s latest house price index showed UK prices have increased by 10.9% in the past 12 months, the biggest rise since June 2007.
The Bank of England have suggested that the FPC (Financial Policy Committee) may have to recommend action within the next couple of months. However, the new rules on mortgage lending MMR (Mortgage Market Review) may help to constrain house prices but, as yet, ‘have not been tested’. The tough affordability tests (officially in force since 26 April) for all mortgage sales have created a glut of headlines about fear within the market as it seems everyone is on red alert.
The B of E is also preparing stress tests to ensure banks could survive a housing crash with a 35% slump to prices and 5% interest rate jump. Eight of the UK’s biggest banks and building societies are likely to be put under the tests to be able to survive sharp drops and sudden rises. The PRA (Prudential Regulation Authority) will be conducting the tests against RBS, Lloyds, Barclays, HSBC, Standard Chartered, Co-Operative, Santander UK and Nationwide Building Society.
The EU is concurrently preparing to outline its details of a co-ordinated programme to make the financial system across the EU resilient enough to withstand market turmoil, with a sample of about 124 banks, including four UK banks, Barclays, HSBC, Lloyds and RBS.
The month started with sterling rising to its highest for nearly five years against the dollar and an almost two year high against the euro. Image and Article credit: Copyright SUF © 2014
BOOM! The Only Acid Test
“As I hurtled through space, one thought kept crossing my mind – Every part of this rocket was supplied by the lowest bidder” ~ John Glenn.
There are some small numbers that can make a big difference to a business and there are some metrics that are readily available and ripe for easy improvement: the efficiency in using breeze blocks proportionate to bricks for a refurbishment, the types of stock allowed on the shelves longer than other types, the specific machine able to put out a new product, or even how the length of time taken to make a repair for a part that a customer doesn’t even realises exists.
And, glancing backwards over experience garnered in the daily running of a business, it’s probably the small tweaks and adaptations (how the day is organised, the sales cycle, staff issues… etc.) as being the most noticeable in having made or are still making a bigger difference for that business.
Putting aside the actual business type and market sector to isolate the financial aspect, too often financial decisions are also taken after, when the biggest numbers’ (gross profit, cost of goods, inventory and so on) history on the logs and spreadsheets have been looked over… and an accountant will likely guide through further changes to net better results (tax, VAT, company formation, bookkeeping….).
The small numbers that can make a difference get the attention they need. The mechanics are regularly overseen. The metrics are monitored. The financial statements have a regular MOT (Monitor or Terminate).
But what about, as we call it, the mysterious metric?
This is the measurement I use as a starting point for calculating lender’s interest for mortgages, loans and business finance. It isn’t a secret, obscure or hidden metric. It’s a usually overlooked business buffering opportunity made up of those small numbers – the little ones that make the difference amongst the numbers, spreadsheets and statements.
The financial statements might (maybe a year down the line) show where there is a problem (which six months ago was the future but is now the past). BOOM! While these numbers have been building up (or down), lenders have been building their key metrics using their own ratios and, a year ago, when there might have been wriggle-room in a business, so might a lender have had some wiggle room.
A business’s metrics (from its ratios) change, lenders’ metrics (from their ratios) change. The correct business metric directed at the correct lender metric, at the correct time is the acid test of fiscal health. BOOM!
Images and Article credit: Copyright SUF © 2014
04 04 2014
As from 1 April 2014 the Competition Commission is being taken over by the Competition and Markets Authority (CMA) and will assume the consumer functions of the Office of Fair Trading OFT concurrently with Financial Conduct Authority (FCA) who will hold the law powers in relation to financial sector activities for over 50,000 applicable consumer credit regulation firms.
As from 26 April 2014 new lending rules will be applied as a framework for lending when the Mortgage Market Review (MMR) comes into full effect. For all types of regulated mortgage contracts, lenders will be looking for the ability of all borrowers to afford the loan at both the current rate and, additionally, if there were rate rises. It applies to staying with the same lender; repayment methods, further advances, part or full redemptions and equity transfer, as well as considering a new lender and non-bank mortgage lenders subject to risk-based capital requirements and liquidity risk management controls. Using detailed scrutiny, this advice driven model in essence focuses on responsible lending and affordability assessments.
‘The more organised you are and the quicker you can get to the point of exchanging contracts, the less time there is for movement in the market.’ Although we haven’t seen it recently, apparently gazumping is on the rise.