Fundraising made simple…..

Tinchy Stryder, who is apparently something big in the pop world these days and therefore a suitable role model, has been advising young people to invest and save wisely. I think this is a great initiative, and personally believe that lessons in business and finance should be compulsory in all schools from as early an age as possible (as apparently does Ed Balls). However, what particularly struck me when reading about this, is the fact that he partially financed his debut album by selling clothes.

In a world where everybody from pop stars to business people seem to be looking for somebody else to fund their dream, it is a timely reminder that the best way to generate cash to finance investment is to sell something at a profit and then make sure you collect the money that is due to you.

There are countless stories of entrepreneurs who have held down two or three jobs to raise the necessary funds to finance their dream and then have “bootstrapped” (i.e. used funds generated from their own business operations) their way to fame and fortune. The Beermat entrepreneur, Mike Southon, is a big fan of this approach, and it certainly saves the time and hassle of trying to find, and negotiate with, potential investors. Such an approach will require sound and disciplined financial management, but it does mean that you will have more control over your own destiny than if you allowed external involvement in your business.

I know this sounds glib, and yes of course some businesses do require significant development capital which can only be acquired through outside investors. However, I do think that some entrepreneurs spend too much time obsessing about how to raise money and lose sight of the fact that they ought to be thinking about how they should actually be making money.

Business is not meant to be easy, but it is simple, and perhaps business people of all ages could benefit from learning from Tinchy Stryder’s approach to financing their dreams.

Counting the Cost

I was recently at the inaugural screening of the film ‘Counting the Cost’ , a film written and produced by Duncan Wiggetts for DLA Piper . It portrays the actions of the non-executive directors as they cope with undetected fraudulent conduct of some members of the management team. It’s not a true story, but given that the film is so well written (and acted) it could easily be mistaken for real life. The film looks at the challenges around preventing and detecting fraud and the importance of effective controls.

An esteemed panel were invited to provide their feedback and comments to a mixed audience of some 100 Lawyers, Accountants and Non-execs. Introduced by Graham Durgan of the Non Executive Directors Association (NEDA) and moderated by Duncan Wiggets and Neil Gerrard from DLA Piper, the panel included the likes of Donald Brydon , Chairman of Smiths Group and Royal Mail and Robert Wardle, a former Director of the Serious Fraud Office.

The event provided a lively debate, particularly when the post mortem revealed charges of dishonesty, fraud, conspiracy to defraud, fraudulent trading and bribery against the CFO.

Non-executives today are expected to act with a high degree of independence and have the skills and capability to manage the interests of stakeholders and shareholders alike. This has recently been highlighted in the case of Torex Retail, where Edwin Dayan, former Chief Technology Officer and Christopher Ford, former Finance Director of subsidiary Xn Checkout Limited, were charged by the Serious Fraud Office with conspiracy to defraud, false accounting and misleading an auditor.

These are the challenges we face in an increasingly regulated market requiring greater privilege and disclosure.

Taxing Times.....

Nobody likes paying tax. There it is. A bald statement. Oh people will tell opinion pollsters that they would happily pay more tax to improve services that they value, but in reality anybody fighting an election based on a message that more tax is a good thing is not likely to be holding the keys to No.10 Downing Street any time soon.

Yet like it or not, and regardless of who wins the next election, we are all likely to end up paying a lot more tax. National Insurance is due to go up in April 2011. It is highly likely that VAT will increase. There is also talk that Capital Gains Tax (CGT) will have to go up as well due to the disparity between the new higher rates of tax and the current 18% level of CGT. This will no doubt fall disproportionately on entrepreneurs, and provoke an outcry similar to that which followed the curtailment of the 10% taper relief for business assets a couple of years ago.

The Tax Advice industry is currently in overdrive finding ways of mitigating the impact on their clients of the new 50% rate which is being introduced from April 2010. And yet the retrospective nature of a recent court case relating to the reclassification of a long time “non dom” has caused many advisors to wonder whether even giving solid advice based on how tax law is currently being applied will be of any use if the Revenue decides that its own interpretation at the time was wrong and seeks to go back and correct matters.

It would appear that even with frighteningly detailed tax legislation in place, court cases will turn on specific facts, and the current HMRC view of those facts, and there is no guarantee that this view will be consistent.

HMRC are effectively operating as if there is a general anti avoidance provision in place, having cleverly blurred the boundaries between legitimate and legal tax avoidance and illegal tax evasion. Not only are they challenging the more imaginative schemes that have been specifically devised to avoid tax, but they are also looking to attack what was hitherto regarded as sensible tax planning.

Added to all this is the argument that the Directors’ Duties under the Companies Act 2006 require them to minimise their tax liabilities where possible which will make taxation issues even more of a burden for company directors and owners to deal with.

The UK already has a horrendously complex tax code with pitfalls galore even for those who do their very best to comply. Throw in the impact of uncertainty generated by HMRC’s attacks on tax avoidance, which could then potentially be applied retrospectively, and you are setting the scene for an era in which the tax lawyers are likely to be the main winners.

Taxing times indeed……

Work? Well if you insist…….

A couple of interesting reports caught the eye this week on the future of work and employment.
The first from the New Economics Foundation suggested that the working week should be cut to 21 hours , saying that this would help boost the economy and improve quality of life by easing unemployment and overwork. They admitted that people would earn less, but said that they would have more time to carry out worthy tasks.

I am sure most entrepreneurs when they heard about the former, initially though “21 hour days – that seems about right” but no, the authors really were suggesting that 21 hour weeks should become the norm, with a few additional hours no doubt to carry out some worthy tasks.
The second by Friends Provident suggested that by 2020 we would have an elite group of knowledge workers who, due to the their scarcity, would be able to demand higher salaries, better benefits and a greater degree of professional fulfilment. However, we would also have a growing underclass who would face poor prospects and limited expectations, which could leave UK plc facing a serious skills shortage.

Clearly working life is changing for many of us, and it is interesting to note that more and more young people are looking to control their own destinies, and expressing a desire to set up their own businesses. However the skills question keeps cropping up, and I suspect that personal development will need to remain a priority however many hours we work a week.

Given the above two reports, it is interesting that much of the comment surrounding the unemployment statistics for January focussed on the issue of underemployment, and how measures such as part time working had effectively kept the headline numbers down. Underemployment is one of the big issues of this recession, and many of the statistics quoted do not include those people who are setting up their own business or working as freelancers. Many of these people are working very hard to establish and market their business, but are underemployed in terms of actually earning real money.

All this reflects the changing nature of work and employment over the last decade, and many of the trends, such as flexible working and people starting their own businesses, will be accelerated by the current economic downturn.

Very exciting stuff of course, but what this move away from traditional employment will mean for the future tax take and our yawning public sector funding deficit is another issue, and no doubt the subject of another blog.

"M&S - You wouldn't run your own company like this. Why do boards allow it?"

“If we don’t learn from history we’ll repeat the same mistakes.”

That’s an annoying phrase but in the case of Marks & Spencer it seems very appropriate.

You can’t have failed to notice that M&S has appointed a new chief executive and terms have finally been agreed with him. Marc Bolland will start on 1 May and will be paid a base salary of £975,000. Not excessive you might think except that there are six other components to his remuneration package which could mean that he receives £14.8m in his first year. This is quite a staggering amount for someone who until he joined Morrisons, had never worked in retail and who at Morrisons hasn’t had any experience of non-food retailing, which makes up the bulk of M&S revenues.

So, how did the board of M&S get to a situation where they have had the same CEO and then Executive Chairman for six years but haven’t got around to grooming one of their 75,000 employees to take over? If they had, they might find that they didn’t need to pay £15m to Stuart Rose’s successor. What does it also say about Sir Stuart Rose that he hasn’t been developing his executive team for the top job?

In any Chief Executive role, whether M&S or running your own small business, leadership skills are usually the most important characteristic of success. Every CEO should have as one of their objectives that they develop their successor and infact in good companies there will be two or even three potential successors who are then motivated to perform strongly with the hope of getting the top job. In smaller owner-managed businesses of course, the good Chief Executive develops the management team so as to make the company less reliant on him/herself which in turn makes the business more saleable at some point in the future.

In a business like M&S which has a board of directors of the great and good, how could the succession issue never have been addressed in all that time? Especially as M&S had been here before; Stuart Rose himself had been parachuted in during 2004 replacing internally-sourced CEO Roger Holmes, who clearly wasn’t the man for the job but had got the role anyway. Poor Mr Holmes was probably the least bad person for the CEO role at that time and might have muddled through had it not been for the hostile bid from Philip Green, at which point everyone recognised that he wasn’t the right person for the job after all. Stuart Rose came to the rescue having been snubbed for the CEO role previously as the M&S board obviously thought they had it covered when they didn’t.

What does this say about how large company boards operate? Well, its not an encouraging sign especially after the debacles of poor board performance at other companies over the last year or two such as Northern Rock and RBS. What does it mean for owner-managed businesses in Enterprise Britain? Probably too much to go into detail in this column but it raises questions you should ask about how effective your board is and whether your board members add value and have accountability (yes even the non-execs!) and whether you are building a strong management team and developing your high-flyers. Because if these things aren’t happening then sooner or later, like M&S shareholders, you may end up paying a hefty price to compensate for those failings.

Three sets of books? Well that makes everything clear then…….

I recently read an recent article in Accountancy Age (no please keep reading, it’s not going to be that bad), which railed against the proposals made last year by the Accounting Standards Board concerning the future of financial reporting in the UK . In essence big companies will need to use the full set of International Financial Reporting Standards (IFRS), smaller companies will use IFRS “lite”, and the smallest will continue use the Financial Reporting Standard for Smaller Entities (FRSSE). It is hoped that this will promote consistency in financial reporting and enhance global comparability and understanding of the numbers presented.

Still with me? Good, because here is the bit that ought to concern you.

There are going to be three ways of presenting your accounts, all of which involve theoretical approximations of certain economic situations e.g. financial derivatives, share option schemes, pension, most of which are not relevant to SMEs, and arguably none of which really explain how a business is performing, and what the end cash is likely to be. The last comment is pertinent because, as we all know, the value of any business is based on its cash flows to investors.

This all reminds me of that old story of a certain faraway country (OK you’re not that far away, are you Italy?) where each business used to keep three sets of books. A first set was given to the tax authorities, who would normally return them after collapsing on the floor laughing. They were then given a second more acceptable set. The third set, of course, were the real books used by the people that actually owned and managed the company to run the business.

It seems to be we are all being driven in the same direction as regards company reporting, although this time it is not the taxman being taken for a ride (not intentionally anyway), but anybody who wants to use their accounts to manage their businesses efficiently and effectively, and explain to investors what is really happening.

We will have a set of books which constitute the statutory accounts of the business, which are legally required and used by the wider investor community based on a combination of IFRS and FRSSE. We will then have internal management accounts with key performance indicators (KPI’s) reflecting whichever agenda the incumbent management have chosen to make them look good. Finally, we will have the cash focused set of books which really determine business success or survival, but will probably get hidden from the people who really matter.

As the accounting profession rushes to place emphasis on the former, and in house finance functions focus on management reporting, it does seem that we are all losing sight of what really makes the business live or die.

It is surely our responsibility as finance professionals to report financial issues in as clear and unambiguous way as possible. If we do not then frankly we are not doing our job properly. The message from company owners and managers needs to be clear. Show us where the cash has come from and where it is ultimately heading. Then we can know if the business is worth continuing with or not, and whether you, Finance Professional, are actually adding value.

Britain’s got (financial) talent….

Businesses fail because of bad financial management. And we are not just talking about businesses that go bankrupt here. We are also referring to businesses that do not make as much money as they could have done. Potential world beaters that get overtaken by seemingly less well resourced businesses.

And yet if you look at most business plans or proposals, while they will provide full details of the sales, marketing, creative and operational talents within the team, there is often very little reference to the finance talent that will be required to manage the money, and provide the financial returns that are faithfully promised to potential investors and finance providers.

In the heady atmosphere of developing an exciting business idea, it seems that financial management is almost an afterthought (as opposed to finance, which of course is seen as vitally important, especially when it is provided by somebody else).

I can recall all too many instances where financial management skills have been reluctantly brought in at the last minute in an attempt to avert a catastrophe. I say reluctantly, as the management still seems to want to haggle over the cost, as if you are a burden rather than the one thing that stands between them and financial oblivion. And yet this is the same management that has probably splashed out vast sums on the other talents in the team (and themselves) with almost carefree abandon. That is of course until the money has almost run out.

So entrepreneurs, if you want the money men to be interested in you, and achieve the best result for yourself, you need to make sure your have somebody in your team at a very early stage interested in looking after their money. Britain really does have financial talent – make sure you use it and value it.