Welcome to the August 2019 edition of our Small Business Tips.
How To Use This Update
Our Small Business Tips Updates are a mix of the practical – a summary of technical updates from the previous month – and articles which we provide as food for thought.
For this second section, find a quiet corner, grab a coffee, and use it to generate some quality contemplation about your business. Our aim is to provide enough varied content to give you the opportunity to think differently about your business, to think about the future and to generate some of your best ideas.
SOME RESPITE ON YOUR MARGINS?
Data from the ONS this month showed a mixed result for the pressures on pricing for businesses. Consumer inflation in the month of June rose by 1.9% compared to June 2018, whereas wages for the three months from March to May rose by 3.4%. This was at least partly driven by the new higher rates for the National Minimum Wage and the National Living Wage which came in to effect in April. Be sure to double check that you are complying with these new rates – as an example, the NLW is now £8.21 per hour which is an increase of 4.9% on the previous rate of £7.83 per hour.
The ONS also reported that factory input inflation fell by 0.3% in the month of June compared to the year earlier – this is the first reported drop since June 2016. This undoubtedly looks like welcome good news for your profit line, but it is entirely driven by a fall in the price of crude oil (-11.6%) in the month – with all other materials, food, and equipment continuing to show increases. Those businesses using crude oil will benefit, but for everyone else there is continued pressure on those margins.
COMPANIES HOUSE FILING PENALTIES
Companies House announced a change to the penalties for the late filing of accounts. There will no longer be any discretion applied to penalties in the situation where the accounts are rejected but the rejection is not received by the company. This is on the grounds that the filer of the accounts has the duty to ensure they are accepted.
To mitigate this risk: ALWAYS check that accounts have been accepted, file in plenty of time before the deadline, and use the electronic filing option as this gives an electronic confirmation of acceptance/rejection.
INHERITANCE TAX TO CHANGE?
The Office for Tax Simplification has suggested some potential changes to the Inheritance Tax (IHT) regime. Among the proposals is to reduce the period during which a gift can be taxable from 7 years to 5 years before death.
If this proposal were to be adopted, it would mean that any gift made in the period of 5 years before a person’s death would be subject to IHT without any relief, in the same way that their final estate is. Currently, the period is longer – at 7 years – but the amount of tax payable is tapered according to how long ago the gift was made.
RETAIL SALES STRENGTH
Retail sales in the month of June, and for the second quarter of 2019, were surprisingly strong – showing growth in both value and volume terms. On the basis of amount spent, June sales grew by 4.3% vs June 2018, and quarter 2 grew by 4.1%.
As the detail in table below shows, there are a couple of interesting underlying trends: there was no volume growth in sales from food stores in the month of June, whereas sales growth in other stores were a good match for the growth in online sales during the period:
Food For Thought
NOT EVERYTHING YOU TOUCH WILL TURN TO GOLD
A fascinating interview with Peter Bernstein – the veteran Wall Street investor and thinker – packed with more insight than you can shake a stick at.
Among the big ideas here is the fact that it is impossible for all of the decisions you make to turn out as you expect them to, and you need to be comfortable with that. As a result, given that you need to take calculated risks in order to move your business forward, always keep two things in mind: never take a risk that you don’t have to, and for those risks that you do take make absolutely certain that you can live with the consequences of it not working out. Survival of your business is the only way to long term success, so always make sure the potential downside of the risk is not too severe as to be fatal for your business.
To achieve this in practice, you should make sure that your forecasts are built on this basis. Prepare scenarios that ensure your survival whilst moving forward, make sure you build flexibility and agility in to the forecast, and measure/monitor everything to be able to respond quickly.
NOT EVERYTHING YOU TOUCH WILL TURN TO GOLD – PART TWO
From the same article is this interesting theory about how to give yourself the chance of making more correct decisions. The basic premise is that “Managements are more careful when they are not floating in cash”, and the ultimate extension of this is the strategy of paying out every penny of profit as a dividend each year, such that the business needs to consciously raise funding every year for the activities planned. This injects the need to base every investment decision on sound analysis and an objective evaluation of the potential returns.
In practice, this is likely to be a very inefficient way of operating but the theory is still sound. Take a look at the cash levels in your business and optimise, rather than maximise, them. You need enough to guarantee survival (see above) but not too much that your investment decisions become complacent. This doesn’t have to be through paying out all of the excess cash, but by ringfencing it somewhere that delivers returns for you while being separate from the day-to-day operations. Force yourself to create artificial scarcity for the purposes of maintaining rigour in your decisions.
A CLASSIC [COKE] CASE STUDY
The launch and subsequent failure of ‘New Coke’ is notorious as a case study in when people get decisions wrong, but this article argues that the real reasons behind the failure were not necessarily the product itself.
In identifying that the contributor to the downfall of this project was an individual with his own agenda and the skill to manipulate the media throws up a number of interesting thoughts.
In this instance, the management were under no illusion about the scale of the change that they were planning – setting up a war room to go through everything to the last detail to ensure success. What they overlooked was the fact that people love a negative story more than a positive one, and momentum can build quickly once the soundbites begin to appear. This is true more than ever in the world of social media and 24-hour news – and on a much smaller scale than the Coke project. It is always worth considering how your business decisions could be interpreted when assessing the risks, and of course keeping in mind that sometimes you just can’t anticipate the outcome.
The flipside to this is that one of the main reasons behind New Coke was to make it perform better in taste tests, where Coke were consistently coming second to Pepsi. They realised that a successful taste test depended a lot on having the sweetest drink, and this was generating interest. Compare this with the need to have something that is “Instagram-friendly” and that can stand out instantly in a crowded world. Keep in mind, however, that the sweeter the initial taste, the more quickly people get tired of it. Balance between an eye-catching product and longer-term substance is vital.
IF YOU CAN’T BEAT THEM…
Kohl’s – the US retailer with 1,100 stores – announced that it would start accepting Amazon returns, packing them and shipping them for free. This is not a decision taken lightly – it was previously tested in 100 locations – or just to support other initiatives. By Kohl’s own admission, this is the single biggest initiative of the year for them, and will actually need investment behind it in terms of additional employees and logistics – so this is not simply a PR stunt.
This is an excellent example of an established business trying to turn the disruption caused by a new entrant in to an opportunity. In this case, it is an opportunity with the new entrant itself, and is therefore also a good example of an initiative that is trying to find the “win-win” sweet spot. The idea is that Amazon customers will benefit from the ease of returns and Kohl’s will benefit from additional traffic in to stores and (they hope) additional sales to those visitors.
This is obviously a risk for Kohl’s – if the extra traffic doesn’t convert to additional sales then it will simply be additional cost and complexity to deal with. Worse still, the ease of returns could actually persuade more people to use Amazon rather than physical stores. Credit has to go to Kohl’s for taking this calculated risk in the name of growth.
This interesting development highlights the need to always look for ways to drive people towards your sales funnel – and this often requires active investment. It also shows that if you are nimble enough, you can repurpose your biggest assets if you find their original purpose – and therefore value – is being eroded. In the case of Kohl’s, their network of stores is undeniably an asset, but only if it is put to good use.
If you find your business model being eroded by a competitor, try to find a way to co-exist with a win-win strategy, and try to do it first as there is huge value in being first-mover where the opportunity is with one big player in the market.
CAN’T GET NO SATISFACTION?
This article on how Microsoft got to the bottom of their lack of employee satisfaction covers two subjects very close to my heart – the power of data and the importance of people in an organisation.
By cleverly using data that had not been used before, but which always existed (the Microsoft “digital exhaust”), a number of insights were revealed. Among these insights were the fact that working long weeks did not necessarily make people more effective, and managers working in evenings and weekends encouraged others to do the same.
More interesting was what they discovered about how to reverse the trend of dissatisfaction. The findings here are applicable to any organisation – even those that employ no people, since working on your own you are still subject to the same forces as everyone else.
What Microsoft found was that people were more engaged when they could transfer internally very easily – in other words make sure you keep the challenge fresh and the opportunity for challenge readily available.
Success came from frequent 1:1s rather than large meetings, and extensive networks. In fact, big meetings were actually counter-productive as they are time-consuming and give people no time to think. Employees, they found, need to actively schedule solitary time for important tasks and to think. That is, after all, the whole point of these monthly business tips – give yourself a break and food for thought.
HOW TO CHOOSE AN ACCOUNTANT
A large number of people seem to want advice on what to look for in an accountant for their business, and worryingly a lot of people seem to think that all accountants are the same – or offer the same services. To try to address both of these issues, we have a helpful guide here to give you some pointers. Getting this decision right will be of huge benefit to your business, so make sure you consider it from all angles.
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