Cash Crucial

 

The ICAEW received responses from 984 chartered accountants in England, Wales and Scotland.

 

Robin Fieth, ICAEW executive director, finance and operations, said: "Loss making businesses can survive, but businesses that run out of cash will not."

 

The property sector saw confidence decline to the lowest level ever recorded for any sector and now stands at -47.0.

 

In addition construction fell to -24.2, also reflecting the current property market downturn.

'Tricky Position'

 

Mr King also spoke of the difficult balancing act the Bank had in juggling a slowing economy and accelerating inflation.

 

"The balancing act faced by the Monetary Policy Committee (MPC) is even more challenging than it was in February," he said as the Bank presented its latest quarterly inflation report.

 

"The MPC is facing its most difficult challenge yet. For the time being at least, the nice decade is behind us."

 

The state of the economy has put the Bank of England in "a tricky position, to put it mildly", says BBC business editor Robert Peston.

 

If the Bank keeps rates where they are, then the outlook for growth will be dismal and the UK could be tipped into recession.

 

If it cut rates, then its credibility as a "crusader against the wickedness of inflation" could be severely damaged, especially as it expects inflation to be well above target later this year, our business editor adds.

 

Consumer Squeeze

 

Mr King said that external factors, such as high food and fuel prices, and problems in the global financial markets and the subsequent credit crunch, were hitting the UK and would have a noticeable impact on the economy.

 

"The central projection is for growth to slow sharply in the near term," he said.

 

While he was expecting growth to rebound in 2009, there would be a squeeze on living standards for many people living in the UK.

 

"The credit cycle has turned, commodity prices are rising," he explained.

 

"We are travelling along a bumpy road as the economy rebalances. Monetary policy cannot and should not try to prevent that adjustment.

 

"The MPC must focus on bringing inflation back to the target in the medium term."

 

Eventually, the UK economy would absorb the problems and bounce back, helped by a weaker pound and easier access to financing in the global financial markets, he said.

 

Mr King explained that the slowdown in the economy would reflect a squeeze in real incomes, before credit conditions began to ease and the depreciation of sterling started to boost exports and reduce imports.

 

However, Mr King warned that that "the balance of risks to the outlook for growth is to the downside in the medium term".

 

Credit Crunch

 

Speaking about the problems in the global financial markets, Mr King said that financial organisations and banks were in the process of rethinking how they operate.

 

"In some ways we're only beginning to see the difficulties that have faced banks feed through now to conditions in the credit markets for companies and for households," he said. "We are reverting to a more sensible and prudent approach to lending and borrowing," he added.

 

A simple guide to inflation by Richard Scott

Referring to a plan that would let UK banks swap problem mortgages for some £50bn of government bonds, Mr King said it had been successful "so far, but it will take a long time before its effects feed through".

 

The Bank of England hopes the scheme will encourage banks to lend to each other again and also to homeowners, easing the credit crunch that has started to affect consumers and their spending patterns.

 

"It will take time to rebuild that sense of confidence in the banking system and during that period credit conditions will be more difficult than they would normally be," he said.

 

"I think the events of the last six to nine months are not ones that people will forget in a hurry."

"Jobless claims show the labour market is starting to weaken," said Chiara Corsa, an analyst with Unicredit.

 

"I do expect further deceleration in the pace of job creation as the economy has already started a below-trend journey."

 

The region where the unemployment rate was the highest was the North East, at 6.3%, followed by the North West. The South West had the lowest rate of unemployment at 3.6%.

 

Wages

 

The data also showed that total employment climbed by 117,000 to 29.5 million in the three months to March.

 

Average earnings rose by 4% in the year to March, given a boost by worker bonuses.

 

The wage data will highlight the challenge facing the Bank of England as it tries to boost economic growth, while also tackling rising costs.

 

"Earnings were higher than expected, but it's nothing to get too concerned about," said Alan Clarke of BNP Paribas.

 

He added that the main message was "a softening in labour market conditions that we haven't seen until now".

 

On Tuesday, the ONS said UK consumer inflation reached its highest level in 13 months driven by high food and fuel costs.

 

"Given that the labour market is now loosening, we think that wage growth will remain well-contained in the coming months," said Nick Kounis, an economist at Fortis.

 

"As such we do not see the labour market as an important risk to inflation at this juncture, which is good news given that there are plenty of other inflationary headwinds facing the economy."

Letter

 

However, some analysts added that the main drivers of price growth were fuel and food costs, which higher interest rates did little to control or rein in.

 

In the current climate of slowing economic growth and a weakening housing market it was unlikely that the Bank would hike interest rates as price pressures were not being caused by an overheating economy, the analysts said.

 

The CPI figure is above the 2% target set by the government, and increases the chances that Mervyn King, the Bank's governor, will be forced to write to the Chancellor to explain the accelerating rate of inflation.

 

He has to write a letter to the Chancellor if the rate of inflation tops 3%, explaining the reasons behind the increase, the actions that are being taken, and a time-frame for bringing inflation back within target.

 

The governor has only had to write such a letter once before, and that was on 16 April, 2007.

 

The Bank "needs to explain why it is cutting rates when inflation is rising; a difficult but not impossible task", said Ian Kernohan, of Royal London Asset Management.

 

"The major concern remains inflation expectations since, if these remain elevated, the advantages we've enjoyed from low and stable inflation over the past decade may be lost," he added.

 

"This makes it a political as well as an economic problem."

 

Budget changes

 

Of the 12 types of goods measured by the CPI, seven categories saw prices rise in April compared with the previous month. Alcohol and tobacco were amongst the gainers after tax increases set out in the last government Budget.

 

Another significant reason for the higher inflation data was a sharp increase in electricity and gas bills after the six leading suppliers raised prices.

 

Higher power and gas costs contributed 0.2% to the increase in the CPI figure, the ONS said.

 

Consumers and companies are already feeling the effect of higher costs.

 

On Monday, data showed that manufacturing output dropped by its biggest margin in six months during April, with firms hit hard by rising raw material costs.

Sunny weather

 

In the three months from February to April, like-for-like sales fell 0.6%.

 

The BRC's director general Stephen Robertson said he hoped the recent sunny weather would have helped retailers since April.

 

But he added that these figures gave "further evidence that hard-pressed customers are really watching the pounds".

 

"With higher fuel and utility bills eating away at people's spare cash, they are concentrating on essentials like food.

 

"Despite heavy discounting, clothing and footwear were at their weakest for at least eight years and more expensive housing-related goods continue to struggle."

Freeze

 

In an attempt to overcome the effects of the credit crunch, the Bank of England recently made extra funds available to UK banks to encourage them to start lending to each other again.

 

Mr Coogan warned that the bank's efforts had yet to have much effect on the London Inter-Bank Offered Rate (Libor), the main interest rate governing the cost of lending between banks.

 

"Since the introduction of the special liquidity scheme, there has been a slight improvement in credit market conditions with Libor moving in a more helpful direction," he said.

 

"But Libor still remains high relative to the Bank rate and any improvement in credit market conditions will take time to feed through into the mortgage market," he added.

 

However, one of the biggest mortgage lenders, the Nationwide building society, cut some of its fixed rate loans for new borrowers by up to 0.3%.

 

The society said it was responding to the Bank of England's move to restore lending between banks.

 

Last week though, the Building Societies Association warned that the current blockage in the mortgage market might last for another two years.

 

First-time buyers

 

The number of mortgages for house purchase has now fallen by 40% over the past year.

 

And first-time buyers are continuing to be squeezed out even more than before.

 

There were 17,800 first-time buyer loans in March, the lowest monthly level on record since monthly figures were first compiled in 2002.

 

That took the number of first-time buyer mortgages in the first quarter of 2008 to 53,700, which was the lowest quarterly figure since the start of 1975.

Slowdown Spreads

 

The likelihood of further house price falls has been highlighted by the Council of Mortgage lenders.

 

It revealed that mortgage lending to home buyers fell in March to its lowest level for 33 years and that both lending and sales would go even lower in the coming months.

 

There was also downbeat news from two UK house building firms on Tuesday.

 

Redrow said the number of reservations so far in 2008 was half that seen the previous year. while cancellations of reservations, which had been running at about 20%, had seen "a marked increase" since Easter.

 

Rival builder Galliford Try said that its annual profits would be at least £60m, but this was below analysts' estimates of about £77m.

 

Declining Market

 

The Rics survey, showing price falls more widespread than at any time since 1978, is further confirmation that house prices in the UK are now declining after a decade-long boom.

 

The survey found that 68% more surveyors noted a fall rather than a rise in new buyer enquiries, compared with 51% in January.

 

Other surveys, such as those from lenders including the Halifax and the Nationwide, have reported recently that prices are now lower than they were a year ago.

 

Rics said that regions where prices had still been rising until recently have now been caught up in the general decline.

 

In Scotland, which had bucked the UK trend, the house price "balance" also turned negative last month.

 

Small Falls

 

The bursting of the house price bubble has been caused by a combination of prices that had reached unaffordable levels, and the effects of the credit crunch which has caused a sudden shortage of mortgage funds.

 

However, Mr Perry said the scale of house price falls was still "relatively small" compared with past downturns.

 

"Large numbers of distress sales - either repossessions or sales from those attempting to avoid the repossession process - have not yet appeared in the market place," he explained.

 

"While mortgage arrears remain low and the employment situation remains strong, the lack of supply will continue to prevent large declines."

 

Government Figures

 

Other figures, released by the Department for Communities and Local Government (DCLG) suggest that house prices are still higher than a year ago.

 

Its survey said that in March, annual property price inflation fell from 6.3% in February to 5.2%.

 

That pushed up the average house price in the UK to £217,344.

 

The biggest slowdown has been in Northern Ireland where prices have fallen by 1.2% in the past year, the DCLG said.

 

In Scotland they have risen by 9.3%, and they have gone up by 5.2% in England and 4.1% in Wales.

Over a third of SME owners believe that ever more demanding customers have made it more difficult to run their business, new research reveals. 

According to poll by T-Mobile, the UK’s ‘want it now’ culture is creating new pressures with one in three respondents saying that customers, colleagues and suppliers now expect faster response times.

The report claimed that amid the increasingly challenging environment, businesses could be missing out on £60,000 by failing to make use of "deadtime", the period spent travelling on work business or waiting for meetings to start.

However with more than three quarters of firms which provided staff with mobile devices claiming that their customer response times had improved, the study urged SMEs to exploit the benefits of modern technology.

Derek Williamson, from T-Mobile UK, said: "The rise of the internet has given birth to a ‘want it now’ culture - customers expect an immediate response to every enquiry.

"This is forcing SMEs to operate in a different way, and use all the tools at their disposal to be more productive and efficient.

"The ability to fulfil orders and respond to customers as quickly as possible is of paramount importance, which is why SMEs are starting to recognise that mobile technology can have a significant impact on their bottom line."

The study by Lloyds TSB Business and researchers at the Open University found that only a quarter of companies had put in place the ‘right to request’ rules for employees, which make it possible for staff to work beyond retirement age.

Almost half said they were still undecided as to whether they would implement the procedures, while a third claimed they intended to do so.

The most popular reason for employers holding back was the expectation of extra red tape followed by the fear of cost rises and the belief that the changes would not have a significant impact.

Despite the apparent reluctance to encourage staff to work beyond the age of 65, more than a third of respondents admitted they were bracing themselves for a drop in the number of younger workers over the next decade. Amongst larger firms this view was even more widely held, with 57% of firms employing 20-49 people expecting a fall in younger employees.

Stephen Pegge, from Lloyds TSB Business, said: "With skill shortages one of the biggest issues, it’s vital that small firms make the most of the talent older employees have to offer and this may save them money in the long term. Planning ahead now could also avoid costly legal disputes in the future."

It said that, in a month when proposed changes to rules on paternity rights and measures to address flexible working were being discussed, the effects on small business should be more keenly investigated.

In changes to paternity rules, suggested earlier this month by employment relations minister Jim Fitzpatrick, fathers would be allowed to take six months’ paid paternity leave instead of mothers.

The law is not likely to come into effect until maternity cover is extended to 12 months, which will happen in 2009 at the earliest.

"A small firm with few employees who are highly skilled or have specialist knowledge of their workplace will suffer greatly from the absence of one of their workers," said the FPB.

"It isn’t as easy as just recruiting a replacement for the short-term, business may have to distribute that worker’s responsibilities around the rest of the workforce. That hits productivity and profitability."

It warned that the government’s approach to employment law, "using one rule to suit all", was endangering small businesses.

"Big business has little trouble adapting to such changes in law, with their larger, more flexible workforce and human resource departments," it said.

"For smaller firms there is a much higher degree of difficulty dealing with regulations and coping with their practical implications on the business."

"Good business owners recognise the need for flexibility in the workplace and are willing to find solutions to employees’ needs," said Victoria Carson, FPB campaigns manager. "However, so far the government has failed to understand that different types of companies have varying degrees of flexibility."

The poll by communication agency The Aziz Corporation revealed that almost half of entrepreneurs confessed that presenting to a public audience was the most daunting aspect of the job, while 71% admitted to being nervous about addressing a large conference.

Another 80% acknowledged that they would be similarly anxious if faced with the prospect of a television interview.

In contrast, what would seem much more complex business tasks were considered routine. Just 38% said they found reviewing financial data problematic and only 31% cited difficulties in preparing business plans.

Professor Khalid Aziz, chairman of The Aziz Corporation, said: "Business leaders are, by their definition, successful people. Considering that they are also the public face of their company, and that a major speech or TV interview can make or break their reputation, it is worrying that so many of them fear communication.

"Executives often rise through the ranks as a result of technical expertise and so can find themselves misplaced to deal with communications issues, preferring the more behind-the-scenes number crunching, to the fame of a public persona. Clearly good public speaking requires practice and those in business are not born with that."

According to the BBC, which obtained an Inland Revenue document under the Freedom of Information Act, 2,700 migrants were wrongly paid credits between April 2003 and December 2004 because officials were instructed to ignore any claim irregularities.

Benefit office workers were only required to check whether claimants had a national insurance (NI) number. But earlier this month, it was revealed that thousands of workers suspected of being illegal immigrants were given NI numbers.

With tax credit overpayments averaging £1,000 a year, the BBC said it would amount to at least £2.7 million if all 2,700 migrant families had claimed for the entire period covered.

Responding to the revelations, liberal democrat work and pensions spokesman David Laws accused the government of carelessness.

Speaking to BBC Radio 4, he said: "It appears that, from then on for about 18 months, the Treasury was relying on the Department for Work and Pensions to issue National Insurance numbers as a proper check on people's entitlement to work here.

"But we now know that the DWP was not actually putting in place the proper immigration checks.

"The Treasury was relying on the DWP, the DWP was relying on the Home Office and the Home Office doesn't seem to have been doing its job, and as a consequence millions of pounds have been paid out in tax credits, and possibly in benefits as well, which shouldn't have been paid out."

The scandal is the latest to plague chancellor Gordon Brown's flagship tax credit system.

Overpayments have reached around £2 billion for the past two years, while HM Revenue & Customs was recently accused by the treasury select committee of playing down the role it has had to play in errors.

There have also been demands for Dawn Primarolo, the minister responsible for tax credits, to resign from her position as paymaster general.

The Health and Safety Executive (HSE) poll showed only 40% of workers believed the risk of stress in their workplace could be realistically reduced, while just a third said their employer had taken preventive actions to cut stress levels.

HSE chief executive Geoffrey Podger said, "Stress is a major problem in British workplaces and this survey underlines that.

"Stress can occur in any workplace and it is important that both employers and employees recognise the symptoms at an early stage.

"We have produced guidance for employers and the stress management standards can help employers tackle the issue."

The report also questioned workers on health and safety risks.

Slips and trips topped the list of workplace risks staff thought were most likely to be reduced. Slips and trips cost employers around £512 million every year.

On health and safety training, around 73% of employees said they had received instruction in manual handling but only half had been trained in working around moving vehicles. Some 35 workers were killed last year after being struck by a moving vehicle.

The findings were taken from the latest Workplace Health and Safety Survey which surveyed around 10,000 workers.

HSE said it will soon be publishing further analyses with more detailed patterns by industry and assessments of preventive measures within the different risk categories.

Under the new injury cost recovery regulations, in force from 1 October, the NHS will be able to claim back from employers the cost of treating staff injured on their premises through firms' insurance policies. Experts have claimed the change is likely to increase ELI costs for SMEs by up to 8%.

David Robertson, chief executive of Bibby Financial Services, said despite the warnings, firms can take measures to minimise the impact of the new regulations.

"Insurers have made it clear that they are willing to work with the business community to keep costs as low as possible, by reflecting responsible health and safety practices in their rates.

"Owners and managers who wish to minimise the impact of the regulations on their business should review their health and safety procedures as a matter of priority and work with their insurers towards a manageable solution."

Bibby advised businesses to ensure they register with the appropriate health authorities. All companies with at least one employee must do so.

Firms with workers in offices or shops must register with their local council, while factories should register with the Health and Safety Executive.

Business should also assess healthy and safety risks, Bibby said. Whether firms are an employer or work alone, they are legally required to assess workplace risks.

Bibby said carrying out a risk assessment is the first step in minimising the cost of health and safety by ensuring that the correct preventative measures are in place

In addition, companies must review their risk assessment on an annual basis and amend it when circumstances change such as when a new piece of equipment is bought. Outcomes of risk assessments and any corrective action taken should be recorded.

In case of an accident, companies must have suitable first aid facilities and under the Reporting of Injuries, Diseases and Dangerous Occurrences Regulations (RIDDOR) they are required to report serious injuries, diseases and dangerous incidents.

All businesses must also have an accident book that records the date and details of each accident, including the name of the injured person and what action was taken.

Releasing a consultation paper, the Department of Trade and Industry (DTI) said up to two million of the UK's lowest paid workers will benefit from additional holidays, particularly part-timers, women and ethnic minorities.

Currently, all employees are entitled to 20 days statutory leave but employers are allowed to force workers to include bank holidays as part of it.

The government proposes to phase in the additional leave beginning with an increase from 20 to 24 days from 1 October 2007.

In addition, ministers are seeking views on whether the rest of the leave should be introduced in one stage, from October 2008 or October 2009 or in two phases, increasing to 26 days in October 2008 and 28 days from October 2009.

Jim Fitzpatrick, employment relations minister, said: "The government intends to honour its commitment and make sure that workers have the right to take paid bank holiday leave and not have to use them as part of their twenty day holiday entitlement.

"When we gave everyone the right to four weeks annual leave in 1998, two million workers got paid holiday for the very first time. There are still many people, particularly the lowest paid, who have to take bank holidays from their leave entitlement. The government is determined to put this right and ensure they get the extra leave they deserve."

The consultation document is available at www.dti.gov.uk/employment/Holidays/index.html

According to the study by Alliance & Leicester, 7% or 300,000 of the UK's small firms are so reliant on notes and coins they would face shutdown if customers switched to solely using credit or debit cards.

Another 17% of respondents admitted "significant changes" would have to be made if cash use was ditched, while 8% believed business growth would be stunted.

The report found hospitality and entertainment firms would be hardest hit by the demise of cash transactions with almost one in five believing they would be forced to permanently close their doors.

While many small businesses admitted to relying on cash for receiving payments, more than a third confessed it was also their own preferred way of settling bills. Only 21% said they use credit or debit cards for financial transactions.

Russell Carter, from Alliance & Leicester Commercial Bank, said: "The results of our survey highlight the important role the humble coin and note still plays for many UK businesses.

"Not only do many SMEs still say cash is their favourite payment method, many sectors in the UK rely on cash for the smooth running of their business and without cash many small businesses would be forced to close down."

As part of the plans to drive up efficiency, several offices are also set to be closed as the Revenue attempts to save £30m by April 2008.

In a statement, HMRC said consultations on the "future shape and direction" of the department will begin next month.

"The department now has more buildings than it needs," it added. "Co-locating staff makes good business sense whilst providing the opportunity to streamline processes and eliminate duplication."

HMRC said it is on "its way to meet" its target of 12,500 "net staff savings" by April 2008.

"The creation of HMRC, where Customs and Excise and the Inland Revenue were integrated, means the new organisation now has more space than it needs,” added HMRC acting chairman Paul Gray.

"We are taking the opportunity to save taxpayers' money by operating with fewer buildings in a more co-ordinated cost efficient way. We are inviting all staff to comment on our proposals and to fully participate in our programme of change."

Trade unions however hit out at the announcement saying it means that current inefficiencies in the department will get even worse.

Mark Serwotka, general secretary of the Public and Commercial Services Union, said: "It is foolhardy in the extreme to think that cutting more jobs and closing more offices will improve service levels in HMRC.

"With a backlog of 1 million items of post already stacking up as the department slash 12,500 jobs, further cuts will damage service levels and undermine the ability of the exchequer to collect revenue, leaving HMRC unfit for purpose.

"We are growing increasingly fearful that as other departments also seek to cut their budgets by 15% over the same period that more job cuts will follow elsewhere.

"Time is running out for the government, who need to wake up to the fact that cuts mean deteriorating service levels and who need to realise that decent public services need people to deliver them."

Billed as a "landmark" decision, the directive aims to facilitate easier cross-border provision of services by instructing member states to screen out any legislation which may have a negative impact on incoming service providers, and to create 'one-stop shops' which detail all the legal formalities involved with starting up.

It also means that firms do not have to have a permanent establishment in a member state in order to be covered by the directive. They just need an appointed representative and an establishment that constitutes more than a letterbox.

Martin Smith, EU spokesman for the Forum of Private Business, said: "Smaller businesses often don't have the capacity to take the unreasonable risk of setting up a permanent office in another country, they need to test the market first.

"Unlike for goods, free trade alone is not sufficient for services as some services can only be delivered locally, and therefore need a local presence.

"Service providers also need to navigate their way through the regulatory minefield present in many member states. This directive will mean they can set up an operation in another member state without the same regulatory headaches that might have put them off in the past."

More than three quarters of UK workers believed they would struggle to find employment of a similar level if they lost their job compared to 71% six months ago.

Peter Coles, director at Right Management in the UK, said: "The drop may appear unusual with the UK economy remaining strong and the recruitment market relatively buoyant.

"However, the continuing restructuring of the labour market with the growth in outsourcing, particularly in the public sectors has led to increased uncertainty for many about their future job security. In addition many people feel they don't have the relevant experience for the new jobs being created.

"But workers should remember the UK economy is in a much stronger position than many of its global counterparts. Good workers are always in demand, so it's as important as ever for employers to maintain the morale of employees, and regularly review their recruitment and retention strategies to identify and hold onto the best talent."