Successful Retirement Planning

Many people spend time thinking about what retirement might look like financially, and this is particularly important now, especially given the current state of the markets, the economy and interest rates. Pension funds have been depleted by higher tax charges, reduced capital values, diminished rates of return and increased longevity. It is important to look at how much you need to save to secure your desired income and how your saving can be optimised for tax purposes. Time for a review? The applicable laws and tax regime change over time, as do economic circumstances and market-based solutions. Retirement plans should be reviewed periodically to check their adequacy. 

“Taking into account the impact of the recent financial crisis, no one’s retirement planning looks the same as it did a few years ago.”

Will the state pension suffice?

Even if it is not currently top of your agenda, being able to retire when and how you would like, is sooner or later likely to be one of your most important financial objectives. But achieving this goal takes planning and perseverance. You could spend a third of your life in retirement. Will you find those years the golden times we all dream of, or a constant struggle to pay the bills?

Your state pension is worth about £5,300 at current rates, assuming you have a full national insurance record. For those reaching state retirement age from6 April 2010, this requires 30 years’ contributions. If you have not yet retired, we can help you check your record and see if any gaps can be filled. A review of your state pension entitlement will also indicate what you may expect to receive as state second pension, SERPS and graduated pension.

The state retirement age is also changing with the state retirement age for women rising in stages from 60 to 66 between 2010 and 2020. This will not affect women born on or before5 April 1950, who can still claim their state pension at 60. Women born after5 March 1954will have a state pension age of 66.

The state retirement age for men is changing between6 March 2019and6 March 2020. This will not affect men born before6 December 1953who can still claim their state pension at 65. Men born after5 March 1954will have a state pension age of 66.

The state pension age may be further increased after 2020 based on life expectancy.

In 2010, the new coalition government announced that the state pension will in future increase by the highest of price inflation, earnings inflation and 2.5 per cent.

According to Government estimates, the gap between how much people are saving and how much they need to save to ensure a comfortable retirement is over £57 billion. It believes that 13 million people – nearly half the working population – are not saving enough for their retirement.

If you would like us to evaluate your retirement planning please contact us. 

Large contributions 

There has been a significant change in the rules relating to large donations to pension funds.  The new rule imposes an annual contribution limit of £50,000 to a pension fund with effect from6 April 2011. This is a massive reduction from the previous rate of £255,000. 

In occupational schemes, the limit applies to both the employer’s and employee’s contributions. For final salary or defined benefit schemes, the contribution limit applies to the increase in the value of the member’s pension entitlement value during the year. In such an employment, a significant pay rise can result in a significant increase in such entitlement value which could be caught by these new provisions. 

If you make a contribution above £50,000 or otherwise have your pension entitlement value increase by this amount, it may be possible to claim further relief under a transitional provision or by using an unused deemed allowance from one of the three previous years. 

If you do make a pension contribution above the limit, you will still get tax relief on the whole contribution at your highest rate of income tax. But you will also incur a tax charge on the amount of the excess. 

This large reduction in the annual limit replaces the previously announced provisions of restricting tax relief for those who earn more than £130,000. That provision has now been abandoned. 

Salary sacrifice 

Salary sacrifice has been much in the press these last few years, but this remains a tax-efficient way of providing for your future. This approach saves both the employer and employee money through reducing national insurance contributions. This can save the employee income tax too. Even so, taking a reduction in take-home salary now in exchange for a longer-term benefit is not everyone’s first choice and should only be used in conjunction with proper financial planning. This technique may not be effective for high income individuals. 

Self-Invested Personal Pensions (SIPPS) 

SIPPS allow the freedom to select the allocation of your pension fund investments. This pension vehicle is regarded as attractive to many as a result of this investment flexibility. Subject to approval by the SIPP provider, SIPP investors can choose what assets are bought, leased and sold, and when those assets are acquired or disposed (although certain items, like classic cars and residential property are inadvisable because they are subject to heavy tax penalties). The investor may also enjoy ownership of the assets via an individual trust, so long as the provider or administrator is listed as a co-trustee. Potentially, SIPPS can even borrow 50 per cent of the net value of the pension fund to invest in further assets. We are happy to discuss this option with you. 

The capping of the lifetime allowance 

The lifetime allowance of pension contributions is now capped at £1.8 million until5 April 2012when it reduces to £1.5 million. (The government had previously announced that the lifetime allowance would remain at £1.8 million until 2016.) 

This reduction in the lifetime allowance does not affect the upper limit of trivial pension. Before6 April 2011, the trivial pension limit was 1% of the lifetime allowance. From6 April 2011, it is fixed at £18,000. 

Retirement investing alternatives?

For those who want an alternative to pensions, or to not rely on them entirely, the alternatives are almost unlimited. Common savings and investment vehicles include ISAs, equities, bonds, insurance policies, property portfolios and fine art or other valuables. However innovative or unusual your retirement planning, it should stand the ‘reality and adequacy test’. Each of these alternatives have differing tax treatments so taking tax into account is an important aspect

Top-slice relief and the Investment Bond 

Investment bonds remain much underused in retirement planning, despite having been around since the early 1970s. Some see them as complex, but they offer unique opportunities to aspiring retirees. Because they are offered by life assurance companies, the investment bond is considered a life policy and is not subject to capital gains tax, instead, a tax liability arises on a chargeable event, such as the death of the owner or maturity. You can take a 5 per cent tax-free withdrawal every year, and excepting the events just mentioned, this can be carried forward for up to 20 years. 

It should be noted that this arrangement is a deferment of tax, not an exemption from tax. There is a tax advantage if you reasonably believe that you will be paying income tax at a lower rate at the end of the 20-year period. 

A higher-rate taxpayer would pay 20 per cent of the total gain (or 20 per cent on withdrawals above 5 per cent) with an additional rate taxpayer bearing 30 per cent instead, but there is no further tax liability over and above this. With foresight, a taxpayer bearing either 40 per cent or 50 per cent tax on income could enjoy 5 per cent tax-free withdrawals while working, and then on retirement, if in a lower tax bracket, use top-slicing relief to withdraw large sums without incurring a tax liability.

Further, a policyholder in a higher tax bracket can transfer ownership of the bond to a lower tax-paying spouse. Because this transfer is made by deed of assignment, it is not a chargeable event. Sound advice is key to long-term Investment Bond planning. 

How much capital will your business realise? 

Many expect their business to provide a substantial injection of capital into their retirement pot. However, before you bank the proceeds from sale there may well be capital gains tax to consider. Entrepreneurs’ relief reduces some or all of the business gain so that the net tax payable is only 10 per cent of the chargeable gain. Entrepreneurs’ relief provides a reduction in capital gains tax on the disposal of an interest in a business or business asset(s) up to a maximum of £1,800,000 relief. Advantageously for some, it has no minimum age requirement, and the business need only meet the qualifying conditions for one year. It replaced indexation allowance and taper relief, and now has a maximum lifetime allowance for gains of £10 million. 

If your retirement will coincide with the disposal of business assets and your planning has not yet taken into account the tax impact, please discuss this relief and your tax planning with us.

Does the Bribery Act affect you?

The Bribery Act 2010 came into force on the 1^st July 2011 making it a criminal offence for an individual or commercial organisation to offer or receive a bribe to bring about or reward the improper performance of a function or activity.

The legislation targets the prevention of the cases of large scale corruption and bribery, involving large multinational organisations that occasionally appear in newspaper headlines and at times lead to custodial sentences for top executives. The Act goes further as it also aims to stamp out facilitation payments that are often paid to low ranking officers (particularly in developing countries) to facilitate the smooth and expedient processing of a service. This is something that has implications for any organisation that operates overseas.

The challenge is enhanced by the fact that an organisation may be liable for bribes paid by its agents and joint venture partners, even if made without the company’s knowledge. 

However, even if your business is entirely focused within theUKcaution is required. Corporate hospitality is not affected so long as it is proportionate and reasonable. 

The principles of the Act are:

• Proportionality is the key to ensuring compliance
• Top-level commitment to a zero-tolerance on bribery and communication of this to staff, customers, suppliers etc. Further a senior executive of the firm should be appointed to have responsibility for bribery prevention.
• Regular risk-assessment of the nature and extent of exposure to potential external and internal bribery risks
• Due diligence – a thorough examination of third parties acting on the organisation’s behalf and their trading partners
• Communication of these measures – including training so that bribery prevention policies and procedures are understood throughout the organisation, and the likelihood that all types of employment contracts will need amending to refer to bribery in the context of gross misconduct/termination
• Monitoring and review all of the above principles regularly. 

In order to minimise the risk of being on the wrong side of the Act, companies should put in place: 

• Whistle-blowing procedures (setting out how staff raise concerns about bribery and request advice and support)
• Prevention policies to cover financial and commercial controls (invoices, remuneration)
• Prevention policies to cover rules on gifts, hospitality (a reasonable amount of corporate hospitality is still permitted), promotional spend/sponsorship (including charitable donations)
• Procedures on recruitment (including work experience) and discipline/grievance that include anti-bribery measures
• Details of how anti-bribery measures will be enforced. 

How to stay competitive

Most businesses come into being because an entrepreneur has identified a niche in the marketplace – and in the early months or years there may be relatively little pressure from competitors. But your very presence in the marketplace invites competition, and before long you find yourself in a tightening market with competitors, large and small, snapping at your heels. How do you stay ahead of them?

Market drivers

Markets rarely afford you the opportunity to rest on your laurels. The key to remaining competitive is knowing the principal drivers in your marketplace and developing and positioning products and services accordingly.

In essence, this means keeping one eye on your customers or clients and striving to delight them, and keeping the other eye on your competitors and striving to outshine them.

Customer focus

Successful businesses know their customers, understand their present needs, and successfully anticipate their future needs. Customers and clients are brought into active partnership with a goal of total customer satisfaction. Their level of satisfaction is constantly measured and their complaints and suggestions taken seriously.

Leading edge businesses strive not to meet their customers’ expectations, but to exceed them. At the very least, this means excelling on quality, delivery, and price, often in that order.

But many businesses these days regard these as the minimum requirements for surviving in the marketplace. To gain a competitive edge you need to continuously introduce innovative products or services customised to meet specific customer or client needs.

Innovation

As your market niche becomes crowded with competitors it becomes harder to maintain your differentiation. When this happens you have to continuously reinvent your market niche through innovation:

• Create a corporate culture that encourages and rewards innovation
• Whenever you introduce a new product or service make sure your development team are already working on the next one
• Keep one eye on new technologies, developments in legislation, etc. and learn to exploit them to gain a competitive edge
• Constantly strive to improve speed to market
• Do not reveal future developments to the marketplace any sooner than you need to – keep your competitors in the dark for as long as possible

To drive innovation, you need a constant stream of ideas:

• Listen to your customers – their complaints as much as their suggestions
• Talk to your suppliers about their future developments
• Monitor your competitors’ future plans
• Encourage your employees, especially those in direct contact with customers or clients, to suggest innovations
• Facilitate public visits to your premises and listen to the feedback
• Visit other businesses, even those in different sectors, to encourage lateral thinking

Know your competitors

One thing is certain – if you are successful in developing products or services that delight your customers or clients, competitors will appear like stars on a clear night. Therefore, the more successful you are, the more adept you will need to become at monitoring your competitors and anticipating their next moves.

First make sure you know who your competitors are:

• Direct competitors – businesses that compete with you head to head
• Indirect competitors – for example, a nightclub that might tempt customers away from your restaurant
• Potential competitors – companies that might move into your market in the future

Assign people to monitor them constantly, and gather as much information on their activities as possible.

SWOT the competition

A useful tool for staying ahead of your competitors is a SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis. First analyse your competitors’ strengths and weaknesses in areas such as price, added value, customer service, location, management expertise, reputation, convenience, skills base, advertising, and marketing, and compare them with your own. Try to find ways to turn their weaknesses into your strengths.

Then look at how well placed they are to respond to various threats and opportunities. These are usually factors outside their control such as developments in technology, changes in legislation, or new entrants into the marketplace. Look for ways to turn their threats into your opportunities.

Never take your eye off the ball as far as your competitors are concerned – and never underestimate their potential to wrong foot you. Whether you are watching them or not, you can be sure they are watching you!

Insurance and safeguarding your business

Business insurance: an introductory guide

Adequate insurance is fundamentally important for a business. And in many cases, it is actually a legal obligation.

What follows is a brief guide to the types of insurance a business must have and the types of insurance it might consider desirable.

Mandatory and optional

Essentially, business insurance falls into two categories: the compulsory and the optional.

There are three types of mandatory insurance. Any business that employs staff must have employers’ liability insurance. Any business that runs company cars or vehicles must have motor insurance. And any business that operates in certain professions, such as the law, must have professional indemnity insurance.

Of course, a business will also want to look at protecting itself with other, non-compulsory insurance. These might include cover for property, contents, equipment, interruption to business, goods kept in stock, goods in transit, money, loan repayments, public liability, product liability, partnership protection, health, critical illness and legal expenses.

Compulsory insurance

All businesses that employ staff must take out employers’ liability insurance. This will provide cover against any claims that an employee makes for any injury or illness sustained while working for the business.

Any company that has vehicles that are used for business purposes will need to have motor insurance. The minimum requirement here is third-party insurance since that will cover personal injury to others and damage to property. Comprehensive insurance will additionally cover for any damage to or theft of the vehicles themselves. In those cases where the car or van is used for private as well as business purposes, the insurance must cover both.

Some businesses – lawyers, financial consultants – offer advice as part of their service, and they will require professional indemnity insurance. This will protect them against clients who bring an action against them on the basis that the advice offered was wrong or negligent. As well as being a mandatory requirement for legal, accountancy and financial firms, professional indemnity insurance is often taken out by other types of business such as management consultancies and designers.

Basic business insurance

Most businesses have physical assets that need to be insured in case of damage or loss. These include premises, stock, equipment, tools and even money.

Exactly what sort of general insurance a particular business requires will depend on the type of business it is, the extent and nature of its physical assets, and the level of risk it faces.

Premises

Invariably, a business will operate from premises of some description, be it an office, a factory or a retail outlet.

A good, standard building insurance policy should offer insurance against damage caused by fire, floods, storms, lightning, vehicles, vandalism, explosions and riot.

It is possible for a business to choose an all risk policy. This will provide protection against any other sort of damage or loss mentioned in the policy, although it will not cover daily wear and tear, electrical failures or general deterioration.

Calculating the insurable value of a business building is not the same as simply placing a market value on it. The insurance should cover the cost of completely reconstructing the property. This is called reinstatement. To arrive at the reinstatement value of a building, a business should consult with a chartered surveyor in order to get an accurate figure.

If the property is rented rather than owned, the business should check with the landlord who is responsible for insuring the building before any lease is signed. This duty normally falls to the landlord.

Contents

Even if a business isn’t responsible for insuring its building, it will need to insure the contents such as computers, plant, equipment and stock.

There are usually two sorts of contents insurance: replacement as new and indemnity. With indemnity cover, the wear and tear to which the item has been subject is deducted when calculating a claim. But whether it is at full value or allowing for wear and usage, the policy must cover fire, flood and theft.

Business interruption

Business interruption insurance covers a company for any costs or loss of profits that arise from an event – fire or flood or major theft – that threatens to interrupt its ability to carry on trading. The costs should include having to re-locate to temporary premises and renting emergency replacement equipment.

Additional insurance cover

The nature of a firm’s business will dictate if it needs to take out special types of additional insurance. There is a range of specific policies available, some of which will have more relevance to certain businesses than others.

Portable equipment

Laptops and mobile phones can be expensive and vulnerable, so they must be insured against fire, theft and accidental damage whether on or away from the business premises.

Goods in transit

Any business that transports its goods should invest in cover to protect them against damage, loss or theft while in transit. The policy ought to cover road hauliers, couriers, the post or one of the company’s own vehicles, and should include door-to-door deliveries.

Stock

Stock that is susceptible when in storage – food items kept in a freezer, for example – should be insured against accident or damage.

Money

Cash, cheques, stamps, normally to a set limit, can all be covered against loss or theft. The premium will be priced on whether the money is on the business premises, in a safe or in transit.

Travel

Businesses whose employees regularly travel abroad will need travel insurance.

Expenses

Expenses insurance will provide a business with compensation if it should experience a financial loss.

Loans insurance

Businesses that are unable to meet their commitments on loans and overdrafts, either though accident or sickness, can take out insurance to protect the repayments.

Legal expenses

Legal actions can be very expensive. Legal expenses insurance will cover the costs involved in conducting or defending a legal action and, depending on the policy, employment disputes, tribunals and tax audits.

Credit insurance

Should a customer be unable to pay a bill as a result of a business failure, the loss can be made good, wholly or in part, with a credit insurance policy.

Engineering insurance

Some machinery is specialised or expensive enough to require its own insurance policy. In some cases, and depending on the type of machinery involved, insurers will insist on inspecting the machinery involved on a regular basis.

Data processing insurance

Businesses that handle large amounts of electronic data can get insurance to protect their processing equipment.

Vehicle insurance

The law stipulates that all business vehicles must have insurance cover.

However, a business must also make sure any vehicles that belong to its employees but which are used for business purposes are also covered for business use. The same applies to the business owner’s vehicle or vehicles; any private insurance policy will have to be extended to include business use.

A business should also consider the type of business use to which the vehicles are to be put. This is because varying types of business use require different sorts of cover. A sales employee who is constantly on the road will not be treated for insurance purposes in the same way that an employee who only rarely drives on company business.

Businesses with more than five vehicles may be able to get discounted fleet insurance.

A business must inform its insurers if any of the employees who drives for the firm has been convicted of a serious motor offence in the past five years. Failure to do so could mean that the business will not be insured.

Homeworking insurance

Normal household insurance policies are not sufficient to cover those people who run their business from their homes.

They will need to extend their household policies to include any office or business equipment. If clients visit their home to discuss business projects, then, as with other business premises, a home-run business will also need to take out public liability cover (see our liability insurance guide).

To make sure it has the right type and the right level of general and specialist insurance, a business should consult with an authorised and regulated insurance broker or provider. An insurance provider should be a member of the General Insurance Standards Council; a broker should be chosen through the Institute of Insurance Brokers.

Liability insurance

Under the law, a business has certain duties towards its employees as well as to its customers and the general public. If it neglects its responsibilities or ignores its duties, then the business could be deemed legally liable as a consequence for any injury or illness sustained by either a member of staff or of the public. Liability insurance is designed to cover the legal costs and the compensation that might be incurred were the business to be sued and judged at fault by a court or tribunal.

Employers’ liability insurance

Employers’ liability insurance is compulsory for any business that employs staff. The aim is to provide the employer with cover to pay for any compensation or legal costs that arise as a result of a workplace injury or illness suffered by an employee that is deemed the fault of the employer.

For the purposes of employers’ liability insurance, a worker is regarded as an employee if the business takes tax and national insurance from their salary; if the business is able to dictate when and where and how they work; and if the worker is unable to employ a stand-in when they themselves cannot do the work.

The law on employers’ liability insurance says that an employer must be insured for a minimum of £5 million, although most policies offer cover of £10 million. The Health and Safety Executive has the power to fine a business up to £2,500 for every day that it lacks cover.

Only authorised insurers can provide employers’ liability insurance. A copy of the policy must be displayed prominently in the workplace so that staff can read it; each copy must be retained for a minimum of 40 years.

Businesses should take care to offer their employees the protection that the law demands. They should also follow and implement the instructions of their insurers. Failure to do either could mean that the insurer may withhold payment in the event of a claim.

Public liability insurance

Many businesses have regular contact with customers or members of the public. Customers might visit the business, for example, or the business might need to visit its customers. Public liability insurance is intended to cover any awards that are made against a business for any personal injuries or damage to property for which it might be responsible. The insurance also covers the legal costs and expenses involved in defending a business in the case of any claims for an award.

Public liability is by and large voluntary, although a few types of business must take out cover.

Businesses that visit clients should make sure that their policy provides both on- and off-site protection. As well as businesses that operate from a shop or office, those that are run from home might also need public liability insurance if clients are in the habit of visiting.

The cost of the premium will be determined by the nature of the business, the turnover and the number of staff employed.

As with all policies, it is wise not to under-insure, since legal fees and compensation awards can be high. Any policy should be kept under review so that it adequately reflects any changes in the business and the scale of risk that those changes introduce.

Product liability insurance

The law regards a product as any item that is sold or offered to people by a manufacturer or a supplier.

Products must be made to a standard that suits their purpose. If, however, a product causes personal injury or damage to property because it is faulty or defective, then the company that made or supplied it is legally liable.

Product liability insurance will provide cover for any awards that might be made against a manufacturer or supplier for any injury or damage that is the outcome of a defective product.

If the business that supplied a faulty product is separate from the business that manufactured it, then the supplier might actually find themselves more exposed than the manufacturer since it is often they who will be claimed against first.

Ideally, the policy ought to protect the holder against safety claims, spoilage and indemnity costs like medical bills. There is, however, an important pre-condition. Product liability insurance only covers against unforeseen circumstances; it cannot be used to defend a business that makes or supplies an inferior or substandard product or that is responsible for poor quality workmanship.

Policies usually offer cover of between £0.5 million and £5 million. The cost of the premium will in part be affected by the level of risk posed by the product. This will be judged according to the use to which it is put, the circumstances under which it is used, and the people by whom it is used.

However, a business can help reduce the premium by implementing an effective quality control programme, of which the insurer should be made aware.

Professional indemnity insurance

Professional indemnity insurance offers cover for those businesses that deal in knowledge or particular skills.

If such businesses make a mistake or are negligent, then it safeguards them against any claims for compensation from clients that might arise.

Many professional businesses, like architects and management consultants and designers, opt to take out professional indemnity; but for some – lawyers, accountants and financial advisers – it is compulsory.

One of the peculiarities of professional indemnity insurance is that it must be held at the time that the claim is lodged as well as when the mistake was made. This is because there is often a substantial time lag between the two. To ensure that they are protected for long enough, anyone who either retires or shuts down their business will therefore need some form of continuation or ‘run-off’ cover.

In the event of having to defend itself against a claim, a business should always see that meticulous records are kept of all projects or commissions, and that contracts contain detailed and clear definitions of duties and responsibilities.

Directors’ liability insurance

The position of a director of a company brings with it special responsibilities in a number of areas. Directors can be held liable, both as individuals and collectively, over such matters as health and safety, data protection, keeping adequate accounts, fraud and negligence.

Directors’ liability insurance covers company directors for compensation, settlements and legal costs should a claim be brought against them. To qualify for cover, however, the directors must have acted inadvertently in breaching their duties; deliberate actions may mean that their liability is not met by the policy.

Property owners’ liability insurance

Were any members of the public to injure themselves in an accident while visiting business premises, then property owners’ liability insurance will pay for any damages that they might win as a result.

Sometimes such cover is included in a business or contents insurance policy. For businesses that rent rather than own their premises, it often the case that, while the business takes responsibility for insuring the contents, the landlord insures the building. The business must therefore check that at least one of the policies includes property owners’ liability insurance.

Premiums

The issue of the cost of business insurance has become a thorny one in recent years, with premiums reportedly rising by significant amounts each year. The volatility of the stock markets and, more importantly, the apparent growing willingness of employees to bring claims against their employers have, insurers say, added to the expense of putting together a viable policy.

Insurers will normally cost a premium by estimating the risk faced by a business. To do this, the insurer will consider the sector or type of industry in which the business trades; it will assess the actual level of risk; and it will review the claims record of the business.

A business is not entirely helpless when it comes actively to influencing an insurance estimate. If it can demonstrate that it has implemented a rigorous risk management policy, and if it has a good health and safety record, then the insurer will be more inclined to offer a cheaper premium.

A particular gripe – one that is now being addressed by the insurance industry – is that most premiums still involve a general calculation of risk taken across a number of similar businesses in the same or similar sectors. No distinction is made between businesses with an efficient health and safety policy and those that perform badly. The effect is that diligent firms end up paying higher premiums in order to subsidise those that are less attentive to their duties and obligations. While this is still the case, the good safety record of an individual business can have a bearing on the cost of the premium they will be charged.

The right advice

The numbers of claims being made against businesses are on the increase as employees and consumers are more prepared to go to law. With claims, and the costs of defending them, capable of reaching substantial amounts, the importance of adequate liability cover has never been more urgent for businesses.

To get the best advice on how to insure themselves in line with both the law and the risks facing them, a business should consult with an insurance broker. The broker should be a regulated by the Financial Services Authority, or should be sought through the British Insurance Brokers’ Association.

Small can be beautiful

Growth is not, as many believe, the only criterion of success in business. Indeed, it is perfectly possible to remain a small business and still be successful.

Equally, it is possible to experience growth in your business and to fail – or at least to be so beset with problems as to have little opportunity to enjoy the fruits of your ‘success’.

This is especially true if you take personal as well as business matters into consideration.

• Cash flow problems: – Often for rapidly growing businesses a steep increase in sales leads not to more cash in hand, but to less. If this process remains unchecked eventually the reduced cash flow will undermine profitability and in extreme cases lead to insolvency and business failure.
• Increased borrowings: – Cash flow problems can be further exacerbated if the growth requires extra short-term funding to pay for more office-space, extra computers, more stock, and so on.
• More people skills: – As you start to take on more and more employees you will need to develop a whole range of people skills. You will have to learn how to hire and how to fire, how to motivate and how to delegate, how to reward and how to discipline – and you will need to find the time to do all this!
• More bureaucracy. – As the business grows, so does the paperwork, compliance requirements, etc. You might need to invest even more of your scarce cash in bigger and better systems to deal with it – and find the time and expertise to master the new systems!
• No free time: – Rapidly expanding businesses make great demands on your time, and you might find yourself working much longer hours than you want to.
• More stress: – Add to all of this the problems associated with personnel issues, poorly paying customers, crashing computers, etc. and it all adds up to a lot more stress.

When you weigh your personal ambitions and lifestyle objectives against the added challenges of expanding your business, you might decide that the old saying, ‘Small is beautiful,’ has more than a grain of truth in it!

How to protect your business when your customers go under

What would you do if one of your major customers went under, owing you a substantial sum? Would you be able to recover the outstanding debt – or reclaim goods they had not paid for?

Unfortunately, experience suggests that if you are an unsecured creditor you would be lucky to recover a few pence in the pound – and in most cases you would receive nothing at all.

Your best course of action is to take precautions now to limit your exposure and minimise the impact on your business of any customer insolvency.

Basic precautions

There are certain basic precautions every business should take. Though these are largely common sense, we are constantly surprised by how often they are overlooked:

• Maintain an honest and open relationship with your customers and encourage them to share information with you
• Establish clear credit control procedures, make sure your customers understand them, and be seen to implement them firmly and consistently
• Check credit references before offering credit terms
• Do not extend credit limits without good reason
• Monitor customer accounts regularly

One of the first signs of difficulty is that a customer’s payment period begins to lengthen. If this happens, you need to act swiftly. You might, for example, arrange a visit to them to discuss the matter. Ask if you can see their accounts and projections. If you are still concerned, you might suggest that they take smaller deliveries more frequently until the situation improves.

Faster payment

Another way to limit your exposure is to speed up the payment cycle. You might, for example, consider:

• Restricting terms, say to 20 or even 15 days, and extending to 30 days only where there is a basis for confidence
• Specifying terms as ‘payment received’ rather than ‘payment sent’
• Including a reminder of your terms on your invoice
• Sending out a letter before the invoice is due asking for confirmation that the order was received – this pre-empts the ‘I mislaid/don’t remember receiving your invoice’ excuse

Contractual precautions

Other possible precautions include:

• Include Retention of Title clauses in your contracts to increase your chances of repossessing any unused stocks of your products held by an insolvent customer
• Where possible, obtain guarantees from directors or other group companies
• Where substantial sums are involved, consider taking out insurance against a customer’s failure to pay

Tread carefully

If a customer does get in difficulty it is not always advisable to instigate proceedings too quickly lest you precipitate action by larger creditors who have a prior claim.

In general, you have much more chance of recovering monies owed if a rescue plan is put into place rather than the company going into liquidation.

We can help

As you can see, this is a complex area and professional advice is essential if you are to avoid taking unnecessary risks.

We can advise you on:

• Establishing effective credit control procedures
• Minimising the impact of customer insolvency
• Dealing with insolvent customers

Call us today if you would like to discuss this matter further.

What the Bribery Act means for business

New laws aimed at cracking down on business bribery have come on stream. The Bribery Act, which took effect as from 1 July 2011, has been designed to update legislation in some cases dating back as far as 1889 and to bring the UK into line with international laws on tackling corruption. 

The main terms
Under the Act, it is illegal to offer or to receive a bribe or to ask for or to agree to receive a bribe (or inducement) that is a reward for acting improperly by way of gaining (or holding on to) business or a commercial advantage.

A new law of failing to prevent bribery is also introduced; this means that a company could commit a corporate offence if it does not prevent bribery being carried out by someone working for that company or associated with it. This covers agencies and subsidiaries as well as individual employees. A company can offer a defence if it is able to demonstrate that it has measures in place which are designed to stop bribery occurring.

The offences come with custodial terms of up to a maximum of ten years (up from seven years) and unlimited fines.

Both British and foreign companies with a presence in or engagement with the UK are subject to the new rules, which cover bribes made or received in Britain and overseas. The law includes bribes offered to foreign public officials. The Act is not retrospective, so excludes offences that may have been committed before 1 July 2011.

Delay and guidance
The Act had been planned to come into force in April 2011, but its implementation was delayed after business groups expressed concerns over the clarity of the law’s position on corporate hospitality.

In new guidance on the status of corporate hospitality, the Ministry of Justice said: “Very generally, bribery is defined as giving someone a financial or other advantage to encourage that person to perform their functions or activities improperly or to reward that person for having already done so.” Provided the hospitality offered is reasonable and proportionate – meeting clients and networking other firms – it won’t fall foul of the Act.

Companies are expected to be able to demonstrate that they have adequate procedures in position to prevent bribery taking place.

Such procedures could include anti-bribery training for staff, risk assessments of the markets in which they are operating, and conducting due diligence on prospective business partners and customers.

What firms should do to make sure they comply with the law
The Act sets out a series of areas where companies need to take action to ensure they are in compliance with the new regulations.

Risk
It is important to assess the risk of bribery occurring and to act in proportion to that risk.

The commitment of directors and senior management
The top people in a firm need to be aware of the implications of the Act and must ensure a general corporate culture in which bribery and inducements are not acceptable actions.

Checking business relations
Firms will need to be aware of the business relations it has with other organisations and will need to make sure such relationships are open and transparent. This due diligence should be carried out on a risk assessment basis: where the risk of bribery is negligible, a company may not decide to conduct such diligence; but where there is a higher risk, it may be necessary to make checks on or to research possible customers or business partners (including employees).

Ethical policies
It might be necessary to set up a written anti-bribery policy, if one doesn’t already exist, which makes it clear to all employees where the lines are drawn between acceptable, moderate hospitality and the giving and receiving of more lavish gifts, expenses and charitable contributions, for example. Training programmes in the new law may be appropriate. Terms and conditions in contracts should spell out the penalties employees could face if they are found to be in breach of the Act.

That anti-bribery policy should also be communicated to customers and clients, too, so that everyone understands what is expected in their dealings with the company.

New members of staff will need to be trained in the policy before they start work. It may also be prudent to cast an eye over a firm’s existing disciplinary procedures, as well as terms and conditions, to see whether anything needs amending to fall in line with the Act.

Companies should also have a system in place so that any members of staff who suspect that bribery has been taking place know of a senior manager to whom they can report the matter.

Proper use of policies
A company’s anti-bribery policies need to be part of the fabric of the business, woven into the way it operates, communicates, trains and recruits.

Reviews
A company will need to review its policies so that the way it monitors its finances, expenses and costs safeguards against bribery. Regular reviews of its policy will also help to take changing circumstances into account.

How firms will be affected
Firms that conduct business abroad and take on government contracts are most likely to be affected by the Act. Hospitality will need to be conducted in what is a proportionate manner: taking clients out to a restaurant should be considered acceptable, but expensive gifts may breach the terms of the Act.

Smaller firms that operate in areas where there is little chance of bribery happening will be less affected by the requirements of the Act.

If you feel that you need guidance and advice on the Bribery Act, it is essential that you consult with legal professionals.