Happy New Year and best wishes for 2023 to all clients, family and friends of Drummond Laurie.
It feels like every year since January 2021 that we have been glad to see the back of the prior year, and are hopeful of better things to come. Whether it is a global pandemic, war in Ukraine, cost of living crisis, or our political leaders damaging the economy, we haven’t had our problems to seek in the last few years.
It all started so promisingly in 2022. The face masks were coming off as Covid restrictions were lifted and everyone was looking forward to getting back to some semblance of normality. However, when Russia invaded Ukraine, in addition to the terrible loss of life there was a significant impact on the UK through trade sanctions and supply chain issues that have led to shortages across all industries and massive price increases in oil, food and utilities. This squeeze on the cost of living affects every business and individual.
There was time for the country to come together in June to celebrate the Queen in her Jubilee year, although the country also came together in mourning for the Queen in September when she passed away at the age of 96, our longest serving monarch. King Charles ascended to the throne at the tender age of 73 after serving the longest apprenticeship in history.
Step up the shortest serving Prime Minister in British history. Liz Truss succeeded Boris Johnson and, along with her new Chancellor Kwasi Karteng, promptly sparked turmoil in the markets with unfunded tax strategies based on trickle-down economics. This resulted in the pound dropping to its lowest level against the dollar since the mid-80s and mortgage lenders pulling hundreds of products in expectation of rising interest rates. The UK base rate had started the year at 0.25%, increased to 1.75% by the time of Liz Truss’s appointment, and topped out at 3.5% by the end of 2022.
45 days passed and Liz Truss, along with the rest of the country, decided that her resignation was required – Rishi Sunak stepped in to take the reins after losing out to Liz Truss such a short time ago. Jeremy Hunt had replaced the fired Kwasi Karteng and Mr Hunt’s first action was to reverse most of his predecessor’s unfunded tax cuts. In his Autumn statement, Jeremy Hunt announced that tax thresholds would be frozen across the board in what is effectively a stealth tax grab, while also reducing allowances on capital gains tax and dividends tax.
Therefore we enter 2023 in the knowledge that we are in the midst of a cost of living crisis while the tax burden for businesses and individuals will also increase. Even the sunniest of optimists are struggling to find the positives for 2023. However, as with most economic cycles the hardest phase, which we are currently experiencing, will pass. The length of any economic cycle is always unknown but typically recessions last for somewhere between four to six quarters and therefore it is likely that the economy will begin to recover around the end of 2023.
The key for our clients during this recession will be to implement a conservative but agile financial strategy, safeguarding cash assets and maintaining credit ratings to build resilience in the year ahead, while looking to come out the other side in a stronger position. The main areas that business owners can look to address during a period of recession are as follows:
This will be paramount and focus should be on strong credit control and stock management to ensure that cash is not tied up unnecessarily in customer debts and inventory. Supplier terms could also be reviewed to assist in the short to medium term.
Implementing a budget that includes planning for potential downturns is important during uncertain times. For example, a budget could be prepared at different income levels with cost actions identified for each level. Hopefully this won’t be required but you will be in a good position should action be required.
Strong businesses will ensure their cash flow forecasts are maintained and reforecast regularly to ensure that any cash deficits are identified and addressed quickly. Early discussions should be held with finance providers to ensure the business will be supported if required. Ensure that available credit such as an overdraft is used even if not required – no one wants an unused overdraft withdrawn by the bank just before it is required.
Businesses should prepare accurate timely management accounts and engage in robust analysis of key performance indicators in comparison to budget. Action can then be taken in a timely manner to ensure costs are controlled.
During time of recession, can you identify areas where you can diversify your income streams in order to protect against potential losses? Can you identify competitors that don’t provide the same level of service or value as your business, and market your business to take advantage of this?
Typically, an increasing demand for labour is an unusual issue during a recession, but this is the position we find ourselves in. How do you ensure retention of key staff during a time of high labour demand? We have worked with a number of clients over recent months on methods of supporting their staff during the current cost of living crisis without necessarily increasing their fixed cost base. We have also worked with clients who have taken steps to secure key staff for the longer term by putting in place innovative multi-year bonus schemes and share option schemes.
There are various tax changes which will be implemented in April 2023 and it will be important to ensure that your business in the correct position going forward. Is your remuneration strategy the most tax efficient going into 2023/24? How will the increase in Corporation Tax affect your business? Can you take advantage of the capital allowance super-deduction in new plant before this scheme ends on 31 March 2023?