Unfair VAT Relief to Change

How many small businesses can afford to send their low value goods to the Channel Islands for storing, packaging and resending out to customers in the UK? All to avoid having to add VAT to the purchase – a significant competitive advantage.

Large organisations have been doing it for years through the Low Value Consignment Relief (LVCR) arrangement whereby goods with a value of below £18, and more recently, £15, from outside the EU are VAT free. But from 1 April, 2012, this VAT relief from the Channel Islands will cease, as announced by the Chancellor in his 2011 Autumn Statement.

Bad News for Some

It's bad news for the major retailers who have been taking advantage of it. There will be no advantage for them of sending their goods out to the Channel Islands any more, and they will certainly be making other arrangements. So it's also bad news for island workers in the fulfilment industry, the ones who facilitate the logistics of this kind of order fulfilment. They will not be needed any longer. Others who are likely to suffer are island residents who will probably face higher postage costs and possibly air travel costs as the volumes of post and transport requirements reduce. And it's bad news for the consumers who have been buying these goods without having to pay VAT on top.

Good News for Others

Perhaps it's good news for you. It's certainly good news for smaller operators for whom the cost of making such arrangements would outweigh any benefits from the LVCR. They have been making reduced profit margins because of having to compete with the lower prices of goods with no VAT added. They see this new legislation as levelling the playing field and making the competition fairer.

It is also good news for the Treasury which stands to gain in the region of £100 million or more in additional tax revenues.

Is it Legal?

Since VAT is an EU law requirement in member countries, it has been argued that this proposed change is a breach of fiscal neutrality. A prominent tax accountant believes that the change should not be implemented without gaining permission from the European Commission for a deviation from the EU law. It could therefore be challenged. If you sell low value goods to consumers, ask your outsourced bookkeepers to keep an eye on the situation, and set a price review date for the next financial year.

Understanding Profit

Are you sure you understand the difference between gross and net profit, and how to calculate your profit margins? It's surprising how many business owners are vague about this. In a small business you may trust your accounts staff to give you the figures and reports you need, whether or not they are deserving of your trust. In a micro business, you may not have the staff to deal with these aspects.

Your profit margins are a key indicator of the health of your business. You need to know what they are, if they are changing and why. If your profit margin is going up, you can't afford just to sit back and congratulate yourself. The rise could be temporary and the fall that follows could be a serious crash. You need to recognise the reasons for the rise to predict what will happen next, and to learn the lessons that might help you to keep it high or repeat the momentum. If the margin is going down, you must understand the reason so that you can do something about it.

Gross Profit or Net Profit

Gross profit is the amount of income you receive from a product or service, less the amount it costs you to provide it. Knowing or predicting your gross profit helps you to decide what products and services to supply.

To arrive at your net profit, you have to add all your overheads into the equation. For interested parties, such as lenders, your net profit is what counts. It should also be the most important to you because, even if you are getting a good gross profit margin, if other expenses are too high, the net margin can still be very low.

The Profit Margins

It's easy to arrive at your gross profit margin. You divide your gross profit per item by its sale price and multiply that by 100. That gives you your margin as a percentage figure.

To arrive at your net profit margin is a lot more complicated, because you have to get your overhead figures right. They might include wages and salaries; the expenses relating to your premises; equipment; travel and communication costs, and so on. You'll have to average them out to monthly, weekly, daily, or whatever period you choose to check your net profit margin. A similar calculation takes that into account as well as your total sales for the period and the direct costs of producing them.

Whether you do it yourself, or get these figures from staff or outsourced bookkeepers, to have real confidence in the health of your business, it's best to have a good understanding of where the figures are coming from.

How Healthy Is Your Credit Rating?

The credit rating of small businesses doesn't just affect how much cash you can borrow. It can also affect the amount and timing of the credit your suppliers will allow you, and whether you can source materials from new suppliers as quickly as you need them. It can even affect your order book if potential customers believe your finances are not sound enough to be sure you will be able to complete a contract. Some businesses will not trade with you at all if they believe your credit rating is poor. You really do need a good credit rating.

Different Credit Agencies May Give Different Ratings

That's okay, you say, you already have one. That's good, but unfortunately when other people check it, they may not get the same picture. It could depend whether they check it with the same agency as you do. If you compare recommended amounts of credit from several different agencies, you may get a very wide variation in the amounts.

Accountancy firm Shelley Stock Hutter decided to check 100 companies with three different agencies over a period of two years. They not only found these massive variations – one company's credit limit recommendations varied between £7,000 and £290,000 – they also gave very different limits when checked again a few months later.

At present the agencies do not have to divulge how they make their decisions. They all use different kinds of information to measure credit risk, but it is hard to see how they can justify such broad fluctuations. Nevertheless we have to live with them.

What Can Be Done About it?

When you are deciding whether to do business with other companies, you'd be wise not to rely solely on a single credit rating. Where appropriate, ask to see business plans and management accounts. Your outsourced bookkeepers would most likely be able to give these a once over for you, and let you know how they feel about them. Unless you can cover the risks, don't take any chances. Perform a mini due diligence exercise.

Where you are seeking credit for yourself, you need to offer your own up-to-date business plan and accounts for scrutiny. Again your outsourced bookkeepers could help with the preparation of these. It would be a really good idea to get at least a template of these prepared so that they can be made available at short notice whenever they are needed.

Go the Extra Mile for Your Customers

One of the current conundrums for small businesses is how to cut costs without letting customer service standards slip. In a recent survey of 2000 consumers by the accountancy software company Sage UK, they found that customer service performance was becoming even more important. Nearly a third of their sample reported that they wouldn't give a second chance to suppliers who let them down in some way.

Consumers are Getting More Demanding

Providing outstanding customer service has always been an important factor in business success. Keeping your customers happy brings you repeat business and saves on the time and money needed for marketing and pitching for new contracts. Now it seems that consumers are seeking more for their money in terms of the type of service they receive, both when they buy and following a purchase.

The basics of good customer service are just being polite, helpful and responsive to the customer's concerns. Whatever pressures you and you staff are under, they must be put out of mind at times of interaction with customers, so that you can all appear upbeat and friendly, and listen to what the customer is saying. In the Sage survey, only 22% believed that businesses they dealt with were giving outstanding service while riding out the economic downturn.

The Extra Mile Campaign

Sage's extra mile campaign has been launched to provide some recognition for companies providing good customer service. You and your customers can use the #extramile hashtag on Twitter to get public appreciation where you think it's deserved.

If you'd like to be nominated, get your staff to brush up their customer service practices. Set a good example by treating your personnel the way you'd like them to treat your customers. Welcome them each day with a friendly smile; get to know them by name and remember their birthdays and other things that matter to them; listen to their niggles and deal with them; ask for their feedback and give them credit for useful ideas.

Make yourself available to customers too, and always be ready to deal with complaints in a way that doesn't leave them feeling let down. Remember that statistic about not getting a second chance. Here's another one that comes from a different survey: of customers who are satisfied that their complaints are dealt with quickly and reasonably, 72% will continue to use the company they complained to.

Are you going the extra mile for your customers? Who would you nominate for the Sage UK extra mile campaign? Perhaps it will be your outsourced bookkeepers.

Don't Fall Foul of the Phishers

What would you do if you received an email saying you were due a large tax rebate and should go to a link to claim it? If you are sensible you won't click on that link. You could have received one of a batch of phishing emails which will take you to a clone of the HMRC site. Once you are there, you'll have a request to give credit or debit card details. If you comply with that, your bank account will be emptied and your credit card maxed out.

HMRC doesn't use email to advise about rebates due, only snail mail. It will never ask for credit card details either. No matter how legitimate the email and the website look, they aren't the real thing.

Why Do the Phishers Do it?

How can it be worth the effort of copying a website and sending out these emails? Apparently the phishers have acquired thousands of email addresses. They just have to set them up as a group, type in the message once and press send. And when we all turn on our computers and get connected, they pop up in our inboxes, or perhaps in the spam folder if we are lucky.

Unfortunately there are always some gullible people who click on the link and comply with what they think are HMRC instructions. Then the dastardly phishers move fast to gather their funds and disappear.

What to do if you Get One

HMRC believes that the trend for trying to get easy money this way is growing, so we are all going to get more and more of these phishing emails and must be on our guard against them. The HMRC website requests that, if you receive such an email, you forward it to phishing@hmrc.gsi.gov.uk to assist in investigations to try to find the criminals behind them, recover fraudulently acquired cash and put a stop to their activities.

The site gives a list of email addresses that have been used for phishing, none of which are ever used by the revenue. It also mentions other methods used to con people out of their hard earned cash.

Some fraudsters make telephone calls claiming to be tax officers. They ask for bank details so that a tax refund can be made. Others send text messages asking you to call them. This is more difficult to recognise because HMRC officers do sometimes leave messages asking people to call them at their local office. Always check if the telephone number is correct before making the call.

Take precautions. Don't get caught out by the phishers.

The Benefits of Non-executive Directors

Do you have a non-executive director, or have you ever considered it? There are many benefits to be gained if you have the right one. A good non-executive director will take on many different roles as your business develops.

In your start-up phase an external director could bring experience of your marketplace and contacts from within it. He or she should offer guidance and open doors for you. The non-exec might even help with opportunities for business, taking part in meetings and presentations. Acting as a mentor to you and other senior members of your team, your non-executive will attend meetings, give opinions and advice, and support whatever decisions you make.

How to Find the Right Non-executive

Advertisements for non-execs usually find plenty of applicants with a mix of motives. Putting such positions on a CV is always helpful to the career of an ambitious go-getter. You could even find an aspiring non-exec who will not require a fee initially, but you would still need to be sure they could bring what you need to your board meetings. It might be more advantageous, and more profitable in the long run, to pick someone with experience of the role who would expect some remuneration, but be able to bring you more benefits.

Before you start to weed them out, decide exactly what you are looking for in terms of the relationship. Look at its duration, how often you will meet during that time and what you expect to get from it. When you interview them, make all this clear, and don't think of appointing anyone unless you are confident about what and who they know that can help you reach your business objectives. Be sure to discuss the financial aspects with your outsourced bookkeepers beforehand and be clear about what you can afford. Then you can have a maximum fee in mind and negotiate to no more than that.

Get the Most from the Relationship

Have an option of one-to-one meetings where you can review how things are going and speak frankly to one another. Regular debriefs can make sure you are both on the same wave length and neither of you are expecting too much of the other. The role of the non-exec should change along with your business development, and you both need to recognise the shifts and phases you need to go through. It's a good idea to have these discussions before each board meeting so that you can plan strategies and iron out any problems. Speaking with the same voice at your board meetings can save valuable time and be reassuring to other board members.

Remember the advantages of a non-executive director when you are considering how to grow your business.

Farewell Default Retirement Age

Do you have anyone over 65 on your payroll? October is the month when the Default Retirement Age (DRA) begins to be phased out. Unless you informed them of the date you intend them to retire before the 6^th of April this year, you can no longer force them out because they have reached the DRA. While they retain their right to retirement at 65 if they wish, you can no longer oblige them to do so.

Will the DRA be Good for Your Company?

Of course, many employers have been keeping workers on after that age for quite some time. Some have been happy to recruit more mature people because they perceive them to be more reliable and loyal than the younger generations. They have more work and life experience, so more knowledge of the world and how the markets operate. They are often more willing to keep going when things go wrong, and to persevere until they get it right. And statistics prove that overall they take fewer sick days, despite being of an age when you would expect them to have more health problems.

Having a balance of different age groups among a workforce is no bad thing, provided it has a healthy culture of respect flowing both ways between younger and older employees. Everyone should be valued for what they can bring to the party. While greater energy and enthusiasm for state of the art technology and other developments might come from a younger group, many of their older colleagues might have more staying power and more wisdom to see both advantages and disadvantages of proposals.

Will the Younger Generation Suffer?

Some people believe that the knock on effect will be significantly fewer jobs for young first time applicants, especially in the unskilled sectors. To some extent, this appears to be inevitable. However, young people without skills are hardly likely to be recruited into vacancies left by retirees who have acquired many skills over the years. There will still be areas where this type of young worker is needed.

A number of companies have introduced more flexible working hours to accommodate older workers who would like to continue in work but slow down a little. Part time positions are ideal for this and allow businesses to retain the skills and experience of their more mature staff, and still have vacancies for all ages of applicants.

What About the Financial Consequences?

Anyone over 65 that you have to let go must receive the statutory redundancy package. There may also be an effect on your ongoing payroll budget, so discuss it with your outsourced bookkeepers before you decide on your future HR strategy.