Simply Junior

It’s the second week of December and ever growing throngs of people are dipping into their savings accounts in order to stock up on Christmas gifts. This is nothing new; the ‘Christmas Rush’ has been the busiest time for all manner of retailers for decades and is the core time for high street shops and online stores to get a hefty boost to their revenue. In spite of the recession and widespread economic concerns on a global level, this year’s December spending is looking as healthy and high as ever. This isn’t however solely due to festive spirit but also heavily influenced by politics.

January 4th 2011 – V(AT) Day

On Tuesday 4th January 2011 VAT will be increased from 17.5% to 20% in the UK. Although a 2.5% increase may not sound like much, when you consider that VAT is payable on the vast majority of products and services that you purchase from stationery supplies through to online recruitment services- it all adds up. In most cases, retailers will pass on the increase to the consumer which means an extra penny or two on grocery items, all the way through to several hundred pounds more for a new car. In light of the potentially large additional costs when it comes to high value goods, many people are looking to buy larger items sooner rather than later. This rush to spend money before January 4th on top of the Christmas rush is a great short-term boost to the economy.

Potential Concerns

Aside from the obvious downside that a VAT increase impacts upon the less affluent as much as it does upon the more well off, there are other potential negative ramifications on a broader scale. For starters, the slightly higher cost of certain items may hit retailers hard – with the option of absorbing the increase themselves or passing it on to the consumer they risk either eating into their profit margins or losing business. It could also adversely affect charitable organisations – charities do not have to be VAT registered such that the maximum sum goes to the cause they represent. The flipside of this arrangement is that charities are unable to claim back the VAT they spend on items or services – as such the VAT increase could well have a noticeable impact upon the amount they ultimately raise.

The Upsides

Although 20% may sound like a high figure to many, it is in fact very much in line with the VAT levels of other European countries – on a par with Italy, Austria, Bulgaria and the Czech Republic and considerably lower than the 25% charged in Denmark, Norway, Sweden and Hungary. VAT also serves as a means of keeping income tax down, by providing a governmental revenue stream which many consumers don’t even notice.

Whether you’re for or against the forthcoming VAT rate hike in the New Year, there is nothing that can be done about it on a personal level- apart from leaving the country, and to do so for the sake of 2.5% seems a slight over-reaction!

Staff Retrenchment Isn’t The Answer
Retrenchments occur because they save money. In almost every business, wages and other staff costs are the biggest or second biggest expense. Retrenching 20% of 50,000 or 10,000 staff saves huge amounts of money. And you still have 40,000 or 4,000 employees remaining to reorganize to share the workload.

Retrenching 5 of 20 or 2 of 10 employees produces modest savings. And in a busy small business it’s more difficult for 20 staff to do the work of 25 or 8 to do the work of 10 than for 40,000 to be reorganized to do the work of 50,000.

Retain Your Staff: Reduce Your Profits
Are you prepared to work on reduced profit margins so that you can retain staff? Almost all your competitors will retrench staff, reduce prices and cut costs. But their service standards will drop. Their revenues will fall. They might maintain a 25% gross profit. But 25% of severely reduced recession revenues may be less than 20% of pre recession revenues. Your objective is to maintain a viable business for the next 2-3 years so that you can regain good gross profit as quickly as possible.

Be Ready For Intense Competition
Recessions create competition. Expect your competitors to use all sorts of tactics to frankly, put you out of business. They’ll reduce prices, extend credit lines, offer bulk discounts, target your best clients and staff and even spread misinformation about your financial viability. Don’t be surprised when this happens. Be ready for it.

It’s Bargain Time
Recession time is bargain time. I don’t advocate wanton spending merely to “snap up” bargains. But during a recession, you should also be able to negotiate lower prices from suppliers. You may even be able to renegotiate and extend current leases at favourable terms. Of course, you must have the cash flow to support such expenses. Don’t overextend just for a “good price”.

Recessions Create Winners As Well As Losers
During the Great Depression, employees who kept their jobs, even with reduced wages, improved their living standards. Wages may have reduces by 50%. But prices for commodities such as eggs, milk, meat, bread, sugar and similar staples fell by up to 80%. Many companies too, stayed in business with reduced revenues. But their expenses also fell. And they gained new clients from businesses which closed. It may be doom and gloom for many. But if you can survive you should also thrive. Make recession a positive self fulfilling prophecy for your business.

Conclusion
When your business survives the recession, it will be leaner and better focussed. You’ll have better systems, better expense control, higher performance standards, more dedicated customers and more committed staff. Put simply, you’ll have a far more effective business than you had prior to the recession. And that’s the biggest benefit of all.