CSR - How Companies Avoid Paying Tax
This is an emerging issue - and potentially a significant one too. I’m grateful to Peter Hill (Blessed Hugh Faringdon School) for sending me a link to ITN’s Tonight Show from last Thursday which examines the issue how Britain’s major companies are able to get away with paying so little corporation tax. According to Tonight, big businesses could be avoiding paying up to £12 billion in tax - by working within the system legally. But are they playing fair when the government says it is short of money? Here is the link to programme on ITV player.. At our AQA BUSS4 CPD days, we mentioned the emergence of NGOs like UK Uncut which are focusing on the low levels of taxation paid by well-known UK businesses. Here is a link to their current campaigns.
Niche segmentation - Britain’s Last Teddy Bear Maker
Here’s a cuddly story stuffed full with topical business studies teaching material. Of all the 30 or so teddy factories that once existed in Britain, only one still remains. Nestled in the Shropshire countryside, Merrythought Ltd has been making teddy bears since 1930. This short video takes us behind the scenes to watch the production process at Merrythought. It is almost like taking our students on a visit to a factory museum! Inside, a dozen or so ladies hand-stitch each teddy in much the same way as was done 100 years ago. The only real sign of the use of technology in the production process is a mechanised stuffing machine!
Oliver Holmes, the managing director of Merrythought, acknowledges in the video that his bears are far more expensive than others on the market. The average price of a soft toy in the UK is £7.81 and the smallest Merrythought bear retails at well over £50. Merrythought’s unit costs are over 50 times higher than their competitors in the Far East. So a key question for students is - how does Merrythough compete? And can they survive?
read more...»Toffees in a Sticky Situation
Everton release their financial accounts - and I guess that’s why they call it the blues…
read more...»Nestle - using branding & productivity to overcome commodity price increases
A huge amount of lesson material for both business & economics lessons here. The background to the video clip is the rapid increase in the global price of commodities such as cocoa & sugar together with energy costs. However, despite the soaring costs of raw materials, Nestle has so far been able to avoid passing on the cost to its customers. Why is this? Could it be the economies of scale that Nestle enjoys from being one of the world’s biggest food producers? Might the popularity of its brands mean that customers are less likely to switch to alternatives if Nestle attempts to increase its selling prices?
Cutting costs - with a lick of paint?
A half-term hat tip to Ian Pryer for spotting this neat story about low-cost airline about Easyjet. Easyjet’s use of a new hi-tech paint, which is claimed to reduce flight drag and therefore reduce fuel consumption is an excellent one for both AQA BUSS2 and BUSS4 students.
For BUSS2 students, an interesting example of the lengths low cost airlines will go to to reduce costs in order to make more profit or be more price competitive. This is a topic that they will no doubt have been recently looking at.
For BUSS4 students, there is a clear CSR angle here with Easyjet’s belief that this may lead to lower carbon emissions. Or are they simply reducing costs? Perhaps it’s an example of how firms can actually do both. One for students to discuss.
Here’s an article describes the innovation and here’s the Easyjet press release which gives the news a clear corporate spin!
The end of the line for JJB?
It really does look like the end for struggling sports retailer JJB Sports. The papers are reporting that JJB plans to close up to 95 stores in a last-ditch attempt to restructure its lossmaking business and convince lenders and shareholders to continue to provide financial support.
JJB is trying to pull-off a second “creditors voluntary arrangement”. In essence this involves JJB trying to get the agreement of 75% of its creditors to accept a significantly smaller payment than the amount owed. The big creditors are the shop landlords who might be unlikely to let JJB off the hook this time. JJB is reported to be running out of cash - very quickly. It may survive for a few more weeks, but needs an emergency fund-raising (again) to stay afloat whilst it tries to restructure the business and stem the losses.
This is a classic case study for business students for years to come - I fear.
Sources of finance - the attraction of franchises
In general, Banks don’t like to lend to business start-ups. The risks are high and the returns uncertain. However, there is one kind of “start-up” which the UK banks are often happy to finance - franchises - and this is illustrated with the launch of a new £100million franchise finance fund by RBS & NatWest. Details of the new finance fund are provided here on Smarta. The claimed benefits of franchisees which apply to the fund include:
- Loans of up to 70% for new franchise businesses (percentage of the total finance requirement)
- Two years free banking for new franchises
- Reduced fee of 1% (the loan arrangement fee charged by the bank)
- Up to 12 months of capital repayment holidays (i.e. start paying back the loan later - perhaps when the franchise is better established)
- Loans for existing franchise businesses (e.g. refinance to move away from the existing banker!)
- Access to an unlimited expertise from the dedicated RBS/NatWest franchise team
Why do banks like lending to franchises? The answer lies in the lower perceived risk of a well-established franchise. Over the years, the banks have gained a great deal of experience in working with franchisees. They understand the likely financial profile (revenues, costs and cash flows) of a Subway, Dominos or Green Thumbs franchise.
CSR - Branson, Paphitis and Meaden Turn into Eco Warriors
If Theo Paphitis, Deborah Meaden, Richard Branson, Sainsbury’s CEO Justin King, outgoing M&S CEO Stuart Rose and Pepsico’s CEO Indra Nooyi are prepared to appear in a video like this, then you know that the issue of CSR (and specifically sustainability) has truly risen to the top of the hierarchy of corporate objectives!
The new ‘Eco warriors or business leaders’ video is all part of Prince Charles’ Accounting for Sustainability initiative, which is ‘bringing organisations together to develop practical tools to enable environmental and social performance to be better connected with strategy and financial performance, and thereby embedded into day-to-day operations and decision making’.
Ok - so the video is a bit cheesy. But it’s a perfect stimulus video to show students as an introduction for their AQA BUSS4 research project too...
read more...»Cash flow and trade credit - putting the squeeze on suppliers
An interesting article here in the Telegraph which highlights the problem of late-payment of supplier invoices as firms look to find ways of improving their cash flows. Businesses of all types use trade credit as a key source of short-term finance - it is perfectly acceptable and a normal part of doing business. What is less acceptable (from an ethical point of view) is deliberately stretching the time taken to settle amounts owed to suppliers, often well beyond the agreed date.
The article explains that, based on the three months to December 2010:
“Large companies turned the screws on suppliers, paying their bills 36.7 days later than agreed terms, up from 35.9 days in the final quarter last year. But small companies recorded the largest increase in their late payments, taking on average more than 22 days to settle invoices – three days longer than the same period last year.”
Why are firms taking longer to pay? A good question for students, who ought to be able to identify some advantages and disadvantages of extending trade credit beyond agreed contractual terms. Is the increase a sing of worsening cash flow problems? Are suppliers not chasing hard enough for payment? Was it the disruption caused by the snow? Many firms may have tried it on by explaining that they had “sent the cheque” but that it was “stuck in the post & snow”.
Training, social immobility and tuition fees - KPMG’s blueprint solution
KPMG has been quick to announce a new trainee scheme for school leavers which it says it will introduce in September 2011. They plan to recruit around 75 school leavers who will study accountancy at Durham, as part of a six year programme with the firm, leading to both a degree and a professional chartered accountancy qualification from ICAEW. KPMG envisages that in due course school leaver schemes of this type may account for the majority (in excess of 400) of its annual trainee chartered accountant intake.
read more...»An idea that’s a lot of hot air….
What a great way to make the most of a resource that otherwise goes to waste - a firm in Sweden has found a way to ‘harvest’ body heat generated by travellers at Stockholm Central Station and use it to power the heating in a building over the road. The body heat generated by 250,000 people a day who pass through Stockholm Central Station is ‘collected’ by the heat exchangers in the Central Station’s ventilation system which convert the excess body heat into hot water. That is then pumped to the heating system in the nearby building to keep it warm. More details about the story are in this report from the BBC website.
read more...»Is Facebook worth $50bn?
According to recent investors who has provided an extra $500m in funding, the value of social networking phenomenon Facebook is now $50billion. For a business with annual revenues of just $2billion is this valuation massively over-hyped? What has happened is that Goldman Sachs and some Russian investors have paid $500m for a 1% stake in Facebook. To get to the business valuation, simply divide $500million by 0.01. BBC Technology correspondent Rory Cellan-Jones has provided this accessible analysis and evaluation of the $50billion valuation. It is an excellent example of analysis for students to take and apply to their exam case studies as well as providing the base for discussing Facebook. For more strategic analysis, this Guardian article is also worth a read.
Cash flow problems at Borders
Borders booksellers are trying to preserve cash and have taken the fairly desperate step of delaying payments to their suppliers (book publishers). The stock market has responded with heavy selling of Borders shares, pushing down the firm’s value by 15%.
read more...»Stakeholder or shareholder: who matters most?
This is a significant question most business students spend some time thinking about. Who are firms for? Is running a business about balancing the needs of a diverse group of stakeholders – or is it all really just about the bottom line? In other words, do the wants and needs of shareholders come before ‘stakeholders’? The Economist newspaper has an important article to add to the debate.
read more...»Tough lessons in running a business from the entrepreneurial coalface
Students rarely get the inside track on the hurdles and challenges faced by entrepreneurs day-to-day. They can be forgiven for thinking that setting up and managing a business is, in the textbook world, pretty straightforward. Get the marketing mix right, raise the finance, motivate the staff & the jobs a good’un. Yeh, right. Sure
So this excellent article in the Telegraph might help provide a reality check. It is certainly packed full of useful discussion points. Just look at some of the problems encountered by a nice mix of businesses and entrepreneurs:
- A stonemason for whom demand literally freezes when the weather turns wintery
- Declining net profit margins as competitors fight for market share in an industry with much spare capacity
- A major customer going into liquidation leaving a firm with a substantial bad debt
- Rapid growth in revenue highlighting deficiencies in stock management and customer service
- Tricky decisions about whether to delay investment in research & development as a result of weakening demand from the public sector
- A franchisor that is struggling to open new locations
BUSS1 Revision Quiz - Using Cash Flow Forecasting
This new 10-question revision quiz focuses on the topic of “Using Cash Flow Forecasting” for the AQA GCE BUSS1 specification:
Launch revision quiz on Using Cash Flow Forecasting
BUSS1 Revision Quiz - Sources of Finance for a Startup
Here is an updated ten-question revision quiz on sources of finance for a startup. Each time the quiz loads you get 10 questions from the bank of BUSS1 questions available for this topic.
Quiz - Sources of Finance for a Startup
Business ethics: tax evasion
Here’s another business ethics example to think over. It’s attracted lots of media attention (not all of it justified) in recent weeks. But it’s worth reflecting that on average, over the last few years, there have been 250 annual prosecutions for benefit fraud (which costs about £1bn a year). There have been roughly 50 annual convictions for tax credit fraud (which costs about the same) but there have been precisely 0 convictions for tax evasion using offshore accounts (which costs vastly more than all forms of social security fraud put together).
Do UK firms have an ethical case to answer?
read more...»Wipeout for the Whiteboard Maker
Many of you will have a Promethean IWB in your classroom or IT suite and perhaps a comprehensive range of Promethean software and resources to use with it. Next time you fire the IWB up, you might allow your students to reflect on the dismal 2010 that Promethean has experienced since it floated its shares on the Stock Exchange about 9 months ago.
This article in the Guardian today is packed full with useful inights into just what can go wrong for a business that floats on the stock market - even in a relatively short period of time. The numbers so far as shareholders are concerned are staggering. When Promethean World floated in M’arch 2010 the business was valued at £400million (i.e. its “market capitalisation”). After sharp falls in its share price following profit warnings, Promethean World is worth just £105million. That’s really bad news if you bought shares in the floatation and haven’t sold them before now.
A key question for students to consider would be why investors have taken fright with Promethean? Why has demand for IWB in its key markets slowed?
Liabilities - firms worry about what they owe
An interesting piece of research from R3, the association of business insolvency practitioners, on the problems of corporate debt. R3 have found that one in five businesses (19%) are worried about the amount of debt they currently owe to their creditors.
The research, which explores the financial position of businesses in the UK, reveals that smaller businesses owe on average around £110,000 to the bank, £82,000 to trade creditors and £27,000 to the Crown (e.g. HMRC for VAT,.Income Tax Corporation Tax).
Yet it is debts owed to trade creditors that in fact cause the most concern. A third of all businesses (32%) say they are worried about the amount they currently owe in trade debts; while 24% are worried about finance, overdraft and banks loans; and 18% are concerned about Crown debts.
A good exercise for students would be to consider why the relationship with trade creditors is so important? Why are business people worried about owing suppliers too much and less concerned about the tax man?
Raising finance: GM in colossal sale of shares
General Motors (GM) – for decades the world’s biggest carmaker – have broken the record for the largest ever sale of shares, raising a whopping £12.6bn. Their shares rose 7% to $35.99 in early trade in New York, having been priced at $33 by the company. The sale marks what looks like an astonishing turnaround after the firm had to be rescued by American taxpayers in 2008.
read more...»Cash flow problems put Pontins into administration
Pontins is the latest household name to fall victim to recession and the credit crunch. They have been put into administration, meaning that the future of the company is uncertain, for both staff and customers. The problem is that the banks are no longer willing to give them credit – so although they have customers willing to buy, they face the possibility of business failure due to a lack of cash flow.
read more...»Working with Suppliers - Thomas Cook Challenges Hotel Bills
First there was Serco threatening to withdraw their support if suppliers didnt accept a price cut. Now Thomas Cook - one of the duopoly of mass tour operators in the UK - has decided to flex its muscles and demonstrate its bargaining power with a key supplier group - holiday hotels. Is this an abuse of Thomas Cook’s market dominance?
read more...»Cash flow Clue-doh! The Mystery is Revealed…
Over 10,000 colleagues have now downloaded our cash-flow murder mystery activity - Cash Flow Clue-doh! And we’re getting an increasing number of enquiries asking what the solution is!
read more...»Revision Games - Sources of Finance Definitions
Play these revisions game which provide a definition which needs to be matched to the correct source of business finance:
read more...»Royal Family’s favourite water: Malvern to be axed, but wind farm harvest to come from the sea
Last week Coca Cola announced that it is closing the bottling plant for the Queen’s favourite, Malvern Water. A spokesman said that the plant cannot operate with enough economies of scale to compete: “Modern bottled water plants are around ten times the size of Colwall (the site of the plant near Malvern) and can often produce more water in a day than we do in a month.” Malvern Water is supplied to the Royal Household, having been first tried by Elizabeth 1 over 400 years ago and sold at the Great Exhibition in 1851. It is suffering from price pressures due to falling demand in the bottled water sector, as consumers become concerned that it is an “environmentally damaging” luxury.
However, the royal family could turn their attention to sea waters - not to drink, but as a source of income, as they are expected to benefit from the development of offshore wind farms within UK territorial waters. The sea bed is owned by the Crown Estates, who have announced today their intention to work with the government to develop offshore facilities to deliver up to a quarter of the UK’s energy requirements by 2020. And one of the announcements in last week’s Spending Review was that the Civil List, which provides state income to the Royal Family, is to be replaced in the next few years with a proportion of the profits generated by the Crown Estates. Creation of wind farms is bound to cause environmental controversy - there will be much debate about the ethics involved, but fossil fuels have to be replaced with reliable renewable energy somehow, and could help to provide collaboration with the private sector in clean technology and a National Infrastructure Plan, announced by David Cameron at the CBI conference today.
Profits up at Amazon - but so are costs
Proof, perhaps, that in the recession shoppers are switching to online retailers who offer value for money as well as good service levels - Amazon have reported profits rose by 16% in the third quarter of the year to $231mn. The greatest growth has come from sales of the Kindle, their e-book reader, which has become Amazon’s fastest-selling and best-selling item. Sales of electronics and other general merchandise, which includes the Kindle, rose by 68% to $3.97bn, while revenue from books, CDs, DVDs and other media grew by a mere 14% to $3.35bn.
The company expect sales to rise even higher in the final three months of the year, as Christmas is expected to be their busiest season, but the news was not all good - while overall revenue rose by 39%, overall expenses rose by 40%, which sent the shares down by 5% by the end of yesterday’s trading - showing the importance of the ability to read the Income Statement and Balance Sheet in sufficient detail to use ratios and analyse the figures that lie behind the headlines. If customers move away from buying electronics as the effects of lower income and higher tax take hold, will Amazon be able to sustain their costs? Listen to the interview with the Managing Director on this morning’s Wake Up To Money to get his view.
The unsustainable way to run a football business?
Here is a GREAT discussion article for looking at financial objectives, investment and (non) profitability. One way to use the article is as follows:
Ask the class to think of what they would do with £100m pounds. In between the ludicrous comments hopefully someone will pick up on buy a sports team or player.
Get the class to read the article and list down the possible implications of a business paying excessive wages (you may want to introduce bankers bonuses as well).
Focus the discussion on sustainability and whether it is good business investment or not.
Introduce the fact that the turnover at Man City is now LESS than their wage bill. Is this sustainable?
Conclude the discussion by considering factors contributing to financial sustainability e.g. being a Limited Company with cash rich owners (unlikely in the majority of businesses), investors attitude to future returns on these short term loss making investments, amount lost per year above revenue, lenders attitude to this strategy, repayment strategy, future returns on capital employed.
Sources of finance - bank loans down by £28 billion
An interesting statistic here which savvy students will add to their notes - particularly those who want to demonstrate real-life evidence to their examiner.
According to statistics from the Bank of England, the amount of bank loans outstanding to UK businesses is now £471 billion, down from a peak of £503 billion in September 2008 (the month in which Lehman Brothers went bankrupt). Thats a pretty significant change in absolute terms, although the percentage change is less pronounced.
Nevertheless, that’s a big chunk of bank finance which is no longer on the combined balance sheets of UK firms. Students ought to be able to identify several reasons for the shift, including:
- Reluctance of banks to lend to firms during the recession / credit crunch
- A strategy of cash conservation by many firms, who cut back on dividends, capital spending and operating costs in order to reduce their debt and gearing
Recession Strategy - Manufacturing Emerges Leaner and Fitter
Here is a really useful new report from accountants PwC focuses on how the UK manufacturing sector has weathered the recent recession in the UK. Lots of great insights in there about how manufacturing firms have attempted to remain competitive during the downturn.
read more...»
