A politician’s good example...

OK, I am not one for name dropping but I did have dinner with a cabinet minister last week. Thought you’d be impressed…Actually I guess you are probably not. Politicians rarely figure highly in any lists of people we respect. As estate agents seem to have been rehabilitated during the recent property slump, it is probably only senior bankers and News International executives that keep them off of the bottom at present.

Having said that, Ed Davey, Secretary of State for Energy and Climate Change, and the politician that I dined with last week, is deserving of respect. The dinner, organised by the London Local Chambers of Commerce Forum, had been arranged when he was a minister with the Department for Business, Innovation and Skills, and he would have had every reasonable excuse to have cancelled following his elevation to the Cabinet. However not only did he honour his commitment, he also ensured that he was properly briefed to answer the questions asked of him, even though business was no longer his area of responsibility.

Chatham House rules dictate that I can’t share everything about the evening with you. However one thing in his opening remarks did stand out for me. He listed all of the areas that he had been responsible for in his previous role, which included postal affairs, competition policy, corporate governance, company law, the Insolvency Service, multilateral trade policy and the implementation of the single market.

A fearsome list, each of which you would expect to command 100% of his time. And yet alongside all of this, he presumably has other party and governmental responsibilities as well as looking after his constituency affairs. Obviously he has the use of a very able civil service (stop sniggering at the back) who to be fair did provide many of answers that were given to our questions, but it is a timely reminder as to what a conscientious politician has to deal with, especially if they are also government ministers.

We should not feel too sorry for them though. Good politicians, like good business leaders surround themselves with good advisors, and to a certain extent they have to learn to trust the advice given by their officials. Without this supporting infrastructure they would simply not be able to function.

Building this infrastructure as an SME owner manager may seem daunting but it is not impossible. Even in the smallest businesses it is possible to put in place a virtual support team that you draw on as and when required. Flexible, part-time, outsourced, however you want to describe it, business expertise is now available at a lower cost and risk than ever before. Recognise what you are good at and what you need to delegate or outsource. Sometime politicians can set a good example.  

Getting it right...

When I write my modest blogs I do try to check any facts that I use with at least a couple of sources. This is the same meticulousness that I try and bring to my professional life. Therefore my heart sinks when I read an article or see a factual programme that includes obvious errors. If they can make a basic error like that on something on which I am well informed, what mistakes am I missing when reading about something I don’t know about?

For example a well-known and respected entertainment magazine recently used a picture of the wrong actress in place of the one who played the Danish PM in that excellent BBC4 drama “Borgen”. On the BBC I have seen poor Jon Anderson of Yes have his birthday on TOTP2 celebrated with a clip of The Strawbs purely because it included his erstwhile Yes bandmate Rick Wakeman (I am sure the “researcher” thought “well if it has got Rick in it, it must be Yes…”). 

The reporting of the “civil service tax dodge” scam is a case in point . Yes the corporate tax rate for small companies is 20% but any income or cash extracted from that company can be subject to a range of potential further taxes. Therefore comparing this rate to the 50% top rate, which is only paid on any taxable income earned above £150,000, is a touch disingenuous.

There can be tax savings resulting from operating through a limited company. Depending on how much the company might have paid the contractor in question in salary there could have been some savings in national insurance. There is also the potential to deduct expenses and involve a family member in the company. However all cash taken out of the company as dividends above the £42,475 higher rate income tax threshold for an individual’s taxable income, would have attracted additional income tax at a rate of 32.5% (or 42.5% for taxable income above £150,000). 

In short it is not straightforward, and considerably more detail is required in order to explain what tax savings, if any, resulted from the arrangement. For some lazy journalists though it was easier to subtract 20 from 50, thus leaving the reader to make the calculation on an income of £182,000 (£140,000 basic plus £14,000 bonus plus £28,000 pension) and become suitably outraged.

What really concerns me though is that these people would seem to be acting as employees in almost every respect and should have fallen foul of HMRC’s notorious IR35 regime. The fact that HMRC apparently did not question these arrangements is a slap in the face not only for genuine contractors but also those HMRC employees that do try to uphold tax law.

It should of course be noted that HMG itself would have made a considerable savings on its employer national insurance payments. Presumably it avoided other payments such as holiday and sick pay as well.

Highly skilled contractors working flexibly within Enterprise Britain, servicing a number of businesses through a limited company, and taking real financial risks, are going to play a key role in getting the economy moving again. Sadly it is they who are likely to end up suffering as a result of all of this inaccurate reporting and righteous indignation  rather than highly paid civil servants or journalists. And don’t get me started on MPs’ expenses…..

Don’t Give Up…..?

Whisper it but it has been a relatively benign economic slump to date. Obviously not for those who have lost their businesses and jobs or have seen inflation and low savings rates ravage their income and living standards. But anybody who can recall the previous slumps of the 70s, 80s and 90s will probably agree that we have been let off relatively lightly so far.

Insolvencies have still to really take off as the poor results from Insolvency practitioners show. Unemployment, whilst at its highest level since 1995, has not reached the emotionally fraught level of 3 million. Repossessions are minimal. Low interest rates are playing their part in all this. Equally, even if the banks aren’t actually lending enough, they are at least not pulling the plug on businesses in the way that they did 20 years ago. Owners continue to dip into their pockets to keep their businesses afloat.

Entrepreneurs are by their nature eternally optimistic. They will solve their problems. A new opportunity will emerge to for them to exploit. Yes the business may be “technically” insolvent, but this order or that cash injection is just around the corner. The wages will be paid. Key suppliers will be paid. Even HMRC will be paid…eventually. There is no need to seek insolvency advice just yet. And indeed they are often right, the business does get through its sticky patch and is still around many years after it was “technically” insolvent.

This is an approach to business that would cause those of us of a more pessimistic (or realistic) nature sleepless nights. It was certainly a real culture shock to me when I entered SME land from the cosy cocoon of corporate life where there was a treasury department that made sure cash was flowing into the right places (like into my bank account at the end of the month). This though is the attitude that ultimately builds winning businesses.

Having said that, it is also an attitude that can sometimes lead to broken lives and seriously out of pocket creditors fighting for their own business survival. I have observed many businesses that have been, how shall we put it, in fragile financial health. Some have survived against the odds due to the energy and never say die attitude of their owners. Oh, and the fact that the financial difficulties were genuinely of a temporary nature. However I have also seen businesses that were too far gone, only continuing because their owners were in complete denial about their situation to the detriment of both their wealth and their health.

Of course this could all be the calm before the storm. Interest rates will eventually have to rise. There sadly will be casualties. There will be business owners who will have to give up. Make sure that you don’t fall prey to false optimism. Better still make sure that you have the necessary financial systems and controls in place to ensure that you know about your problems in good time to do something about it.

In rude health...

This week’s blog by necessity is slightly shorter than usual due to a scheduled encounter with the NHS. However it was a good opportunity to observe first hand the largest organisation in the UK, and the following are some random unscientific thoughts from a paid up member of enterprise Britain.

The patient facing staff are by and large amazing. When you think of all they have to put up with (including a stream of agency staff who cost multiples of what they earn coming in to plug frequent staff shortages) their attitude and willingness is impressive. The NHS is fundamentally a people business and it is good to see that people skills are there in abundance.

I am amazed though at the number of people who appear to be employed by the NHS that wander aimlessly around NHS premises. I am guessing they are employees (or contractors) as they have all the accoutrements of employment such as uniforms, passes and keys. I am sure that they have valuable roles but they don’t appear to be patient facing so it is difficult to work out what they are actually doing.

£20 a day for parking is totally unacceptable as the people who invariably have to pay it are those who are receiving the more serious treatment. It is something that particularly penalises parents with hospitalised children who of course are going to stay with their offspring as long as possible. Yes I know that you can ask the nursing staff for a reduction but I suspect they (and you) will feel that dealing with such trivialities is not really a good use of their time.

During this short engagement with the NHS important paperwork went walkabouts twice. This led to us waiting around for many hours. The speed of the pharmacy in fulfilling prescriptions left a lot to be desired. The catering also seemed unable to cope with the diets required by the patients following their operations which meant that relatives had to run down to the M&S café to get the correct post-operative food.

This lack of joined up back office support is the one area that stands out. I think part of the problem of any public sector entity (or any large organisation for that matter) is a budget fixation. The belief that there is not enough tends to create a “can’t do” rather than a “can do” attitude.  

Entrepreneurial small and medium sized business know that if they want a budget to do something they have to create it, normally by selling either products and services to customers or a bright future with great cash returns to investors.

Part of me would like to work in the NHS one day. It would be a fascinating challenge and an opportunity to make a real difference. But I know it would not be easy and you have to respect those that have to deal with that challenge every day of their working lives.

Irreplaceable or what…..?

Pity the poor directors at Easyjet. OK don’t pity them that much as they are well rewarded for what they do. But unlike every other major quoted company they have Sir Stelios Haji-Ioannou on their back. Whether it is about strategic direction, buying new planes, or as in this case executive pay, invariably Sir Stelios has a view and, as a very major shareholder, clearly he has every right to that view.

Presumably this is what Vince Cable has in mind when he set out his plans for the role that shareholders can play in curbing excessive executive pay.  He believes that like Sir Stelios, and all SME business owners, they should be treating the company’s money as their own in terms of monitoring how it is spent. It would be nice if those in government also thought in such terms.

However perhaps the more incendiary part of this story is Sir Stelios’ comment "I know as shareholders we could easily replace them with talented executives and experienced non-executive directors who will cost half as much in bonuses."

Wow! One of the arguments for high executive (or any other) remuneration is that you need to pay it to get the best people. These people are apparently so rare in the global economy that their pay has gone up exponentially over the past couple of decades. Football agents and clubs also use it, although even allowing for massive TV deals, there is absolutely no financial justification for footballers’ salaries at current levels. Now it seems that Sir Stelios has woken up to that old cliché that graveyards are full of indispensable people.

Perhaps it is the vast sums of money involved that makes logic fly out of the window on this. Record labels have almost bankrupted themselves on multi album record deals for artists who they thought were sure fire winners. A salutary reminder that, as far as people are concerned, like investments, the past is not necessarily a guide to the future.

Vast sums sadly are rarely available to SME owners to enable them to keep hold of their key people. They have to find other ways to hold onto them, ranging from share schemes to providing a workplace where people feel they are valued and enjoy working in even if the money is not the best they can get.

Actually the problem is not really that key people are irreplaceable because of course they are. It is more that the process of replacement is a real hassle. Mind you if you are currently having to find someone to replace the irreplaceable, don’t despair. You might end up with someone even better at a lower cost. Well that’s how multi-millionaires like Sir Stelios think…..