K2's Turnaround Update | Edition 4

Welcome to K2’s November 2022 Turnaround Update

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Yesterday was certainly a day to remember with the Chancellor confirming the dire state of the UK finances and announcing draconian measures for raising taxes and cutting costs to deal with them. The adverse impact on all of us and our standard of living will be felt for years.

Following the budget, for me the most alarming data was to hear the size of the annual bill of ￡120.4bn to cover interest on our national debt of ￡2,500bn, a significant increase from ￡354bn in 2000.

I may be old fashioned but I have always believed that debt should be used to buy capital assets and that it should be repaid out of their contribution to productivity, and we should not rely on being able to refinance it.?Perhaps more controversially I would argue that debt for consumption enslaves the borrower. Such borrowing has, I believe, contributed to the vast number of zombie companies that we are seeing as possible acquisition targets for K2 Business Partners .

The other reason yesterday will be memorable is that it was the best TMA UK Conference since we launched Turnaround Management Association (TMA UK) in 2001. The line up of speakers was outstanding. I was particularly fascinated by Touker Suleyman of Dragons Den telling us about his companies over the past forty years and the many stories we have read about in the press where he was able to give us the inside story on deals and personalities. My thanks to the conference organisers: Andrew J Pepper and Joanne Rumley , and to the team behind the scene: Nyree Magill and Kelly Darlaston .

In this newsletter:

• Can your business weather the current economic storms?????
• Can you justify your R&D tax credit claim????
• Are we more productive working from home or less? Bosses and employees seem to disagree???
• Business owners should look after themselves as well as they look after their customers???

After the fiasco of a UK Prime Minister who lasted just six weeks, a complete turnaround on a mini budget, and the sacking of the Chancellor of the Exchequer who issued it, businesses will be hoping for a more stable political period but whether this will be the case remains to be seen.

Unfortunately something we can guarantee is the economy is only heading in one direction for the foreseeable future. It’s likely to get worse still as the government seeks to reduce its deficit and borrowing with higher taxes.

Undoubtedly borrowing costs will continue to climb and we can expect further interest rate rises from the Bank of England.

Fittingly, ‘weathering the storm’ is the theme of this month’s issue.

Can your business weather the current economic storms?

Should you restructure your business when it’s not insolvent?

It’s something all companies should consider in the coming months as economic challenges are only getting worse from here.

Online publication, The CFO, suggests “Companies where the underlying business is sound should look to navigate through the restructuring environment to mitigate against unsustainable debt burdens which have been brought about by the incredibly challenging economic headwinds...”

The economic situation is changing rapidly and is only set for more turmoil in the coming months thanks to the war in Ukraine, the energy crisis, rising interest and borrowing rates and increases in the costs of raw materials.

In the last week alone, one piece of research carried out by ACP Altenburg Advisory has revealed that interest rates over the next nine months are expected to cost businesses an extra ￡13.6bn annually in loan interest payments.

Investors have reportedly pulled a record ￡27.9bn from UK funds in the last month and according to the Insolvency Service insolvencies have risen by 40% in the last quarter compared with the same time last year.

The article continues:?“Early engagement and a proactive approach to restructuring options, even for the healthiest of companies, can result in very positive outcomes for a business. Such efforts do of course also form part of directors’ duties,”.

K2Business Partners has many years of experience in helping companies to restructure and are always at the end of a telephone when you need us.

But your first step is to know exactly what financial position your company is in.

We have a cash management tool that can help you and it is free to download. See link below

Cash Management Tool:?FREE DOWNLOAD

Can you justify your R&D tax credit claim?

HMRC has shifted its focus from dealing with Covid fraud to R&D claims.

This means they will now be examining the technical justification of R&D submissions more closely.

According to specialists at Markel Tax: “between 2020 and 2021, HMRC have increased the volume of its inquiries into R&D claims by around 450% year on year.”

Previously HMRC only tended to investigate claims in excess of six figures but now they’re looking at submissions of relatively small value.

An article in Accountancy Today advises accountants to thoroughly assess their R&D adviser by looking at track records and the quality and quantity of technical experts able to properly assess what are usually complex technical developments.

The Government??defines R&D as “work on innovative projects in science and technology.”?Specifically, the project must relate to your company’s trade, either an existing one, or one that you intend to start up based on the results of the R&D.

SME R&D relief allows companies to deduct an extra 130% of their qualifying costs from their yearly profit, as well as the normal 100% deduction, to make a total 230% deduction.

For more information on the Government’s guidance see here.

A disconnect in perceptions of productivity?

The results of a recent survey of more than 20,000 people in 11 different countries has identified two completely opposite views about productivity in relation to working from home.

While four out of five bosses surveyed felt their staff were less productive when working remotely, the majority of employees, around 87%, felt they were more productive.

There could be a number of explanations for this.

At a time when, according to the latest Begbies Traynor Red Flag report, more than 600,000 UK companies are in critical financial distress it is possible that anxious bosses are desperate to increase their firms’ productivity and this is distorting their perceptions.

There can be little doubt that less commuting and a better work/life balance as well as enabling employees to work for longer periods.

Perhaps there is a little distortion of perception going on here too?

However, for the findings to be a more accurate reflection of the reality, there are a number of questions that should be asked.

1. How well have the bosses communicated their expectations to remote workers and do they give feedback on performance?
2. Do employees have measurable goals?
3. Do employees have the right tools and technology to allow them to get things done?
4. Are their devices suitable for the job they are doing?

In assessing, and hopefully improving, productivity there needs to be an established baseline from which to measure.

Business owners should look after themselves as well as they look after their customers

I came across an alarming statistic recently about how business owners value their health.

“[During the Covid-19 Pandemic] Three out of four (75%) didn’t take a single sick day or didn’t feel they had the option to. Of those who suffered poor mental health, only one in five (21%) took any leave.” Source: Simply Business – Better for Business wellbeing report on small business owners 2021.

We all know that we can’t run a business effectively when we’re tired and stressed and yet so many of us fall into the trap of working harder as the pressure increases.

This is something I’ve personally been prone to over the years so I can understand feeling like you need to be on top of everything all the time. The need to work harder just to keep up.

I find this statistic particularly worrying because the signs are suggesting the economic climate is only set to worsen in the foreseeable future and the knock-on effect will increase pressure on business owners once again. Can we work even harder?

Given that pressure leads to stress which in turn leads to reduced effectiveness. Are we stuck in a cycle of declining performance? And what is the impact on personal and business wellbeing?

I’m keen to start discussing how we can break the cycle and promote more effective strategies for coping with pressure and avoiding stress.

K2 seeks to partner up with businesses who want support as well as investment to relieve both personal and financial pressure on owners.

Sharing the burden and supporting one another as a team is much easier than bearing the pressure on your own.

No doubt everyone has their our strategies for dealing with pressure so I’m keen to hear about them in the comments as well as any ideas as to what we can do as a community to help tackle burnout culture.

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K2's Cash Management Tool

FREE DOWNLOAD

This tool is designed to assist in managing cash on a weekly basis by enabling you to plot your expected cash in and outflows, and then adjust them to manage your cash position.

It’s primary function is to ensure you mange cash in a way the prioritises payments for those vital supplies needed to trade so you can generate invoices and get paid.

About the Author?

Tony Groom?is a turnaround and?restructuring professional with?K2 Business Partners,?a firm that invests in companies that have committed boards and assets that others find difficult to value.???

“As a turnaround investor, I back Directors of industrial and manufacturing companies who are facing a crisis. I bring an understanding of business as a Director and Shareholder of the many businesses and turnarounds that I have helped make successful.”??

About K2 Business Partners??

K2 Business Partners ?are a small team of turnaround investors who put their money where their mouth is by backing directors and companies with ￡3m-￡20m turnover with assets that other investors find difficult to value.??

K2 don’t generally sell out and are in it for the long haul!?

Contact us if you’d like to know more about our investment process and to book a?free strategy and viability review.