April 2025 Accounting Bites

In this video, Paul and Kirsty discuss:

• What US tariffs could mean for UK small businesses

• How to ensure small businesses are resilient to these global impacts


• The impact on UK small business lending

Paul Surtees: Hey, Kirsty, how are you?

Kirsty McGregor: Well, I think this is going to be known as the Trump Episode. As we are recording this on Friday, the 11th of April, at one Pm. And we need to give that time stamp, because with all the ups and downs of the US. Tariffs, seems they're the only topic in town this week, so is this a week. You wish you were back on the trading floor, Paul.

Paul Surtees: Good question. I think that it would certainly be exciting and terrifying in equal measure, and you know there are definitely times when I miss it. I miss that experience, but hopefully can take some of that knowledge and pass it onwards here.

Kirsty McGregor: Excellent. Right? So shall we discuss what's happening and the impact for the UK economy. And in particular, as this is our world, Uk lending Uk Sme lending. So where are we at? At the moment.

Paul Surtees: Well, let's let's carry. As you said, that information is changing very quickly. So you know any number stats or anything that we put out today, you know, it is subject to rapid change. Obviously, if we think back to the earlier part of this week, there was a great deal of market turmoil. 2 days ago we had a pause happen, a 90 day pause from Trump, and you know, the market responded. You know exceptionally well, and we can touch on that a bit. But where we're kind of sitting is that we've outside of China, we've got a baseline of 10% on imported goods. The EU has got an additional 20%. The UK and Australia specifically have been carved out to have a 10%. But we do still subject it to this. Still, an aluminium, 25%. And really all focus is on China. So there's a 145% tariff. So 125% levy on the existing 20%. So 145%. And that will apply to 438 billion dollars of imports. Unsurprisingly, we've had a tit for tat today of 125% china come in and match it. But we're already reading of sellers on any of the various Chinese platforms like Temu. Already, you know, dropping out and not supplying and not distributing into the US.

Kirsty McGregor: So he obviously did hit pause and backtrack a little bit, although he says it was a success. What he intended to do all along. Do you think that was caused by the market volatility?

Paul Surtees: I read a fantastic quote the other day that the market finally had a leash on trump, and effectively we kind of understood where his limits were, I think, that effectively the stock markets were changing. You know they're very volatile. The vix index which we talked about was, you know, it was spiking, not quite as high as the pandemic and financial crisis, but was spiking more than you know. Anything in between.

All assets were effectively getting sold off. And at that point in time where everything is being sold, we're moving to cash. And the reason that investors are moving to cash is because they want certainty. They don't want that volatility, they can't handle it. So they move out. I think.

Kirsty McGregor: Liquidity, don't they?

Paul Surtees: They want, they need liquidity. And I think the thing that really spooked him was the Treasury Market and the Treasury market is like our guilts. It is the most liquid market in the world. It's 2728 trillion dollars in size. It underpins the pricing of almost all other assets in the financial service world, and is used for collateral across the board, between banks, between hedge funds, between financial service companies, and on Tuesday there was a 3 year auction so effectively, the Government raising money through a bond the Treasury, which is a 3 year duration. and whilst it didn't fail. It didn't go to plan, you know. It was. It was poorly priced. But speaking to an old colleague normally, about 19% of purchases are done via international. But it was actually reduced by 13% to 6%. So only 6% of that auction was bought by international buyers.

There's been conspiracy theories that China is retaliating by not buying treasuries, and that they're going to continue to do that. I don't think it will be. It would damage them, too, if they stopped and deleverage quickly. 

But that is systemic risk, because ultimately Trump has made all of his money on the back of debt and leverage. He understands. You know what debt and leverage means. and if the Us. Cannot afford to fund itself, then he's got far bigger problems.

Kirsty McGregor: Yeah. And it's just because you know, the US bond was the global top class asset for everyone to own. It was the safest place, wasn't it? Initially and obviously, you know, the world is now a very different place. So what responses do you think the central banks will have to the Bank of England's obviously over in the States, the Fed and and the EU as well.

Paul Surtees: Again, and I, at risk of sounding a little bit like a broken record. You know, they're gonna find themselves in quite a challenging place because even though there's been elevation in terms of the tariffs with China, the de-escalation with everybody else, and bringing 70 countries to the table, is being heralded. As you know, the market doesn't like it. Actually, you know, it's kind of realized that, you know, it was a really big bounce 2 days ago. It didn't look so good yesterday with the market selling off equity markets.

I think the reality is that we're still talking about 10% tariffs, and that 10% tariff ultimately is going to be a drag on the consumer and on businesses and will have an impact on global growth. If there's a GDP model out of the Atlanta Reserve, which is like each of the States, have their own little mini central banks, and the Atlanta Reserve is currently predicting real time GDP in the US. At minus 2.4%. So given that it was such, you know, easily the fastest growing economy in the G 7 last year, at minus 2.4%. That gives you some idea of the big swings that are. You know, they are potentially around the corner. I think that back to your question about the central banks it feels like inflation is likely to be coming. I listened to an economist from Yale before his 90 day pause, and she's responsible for the Budget lab at Yale.

Her calculations pre-pause whether it would cost every US fFamily $4,600 if the average salary was $50,000. Then that's a really big uptick in terms of goods. Now, because this is on goods. Those in a lower income bracket than that will be impacted more than those on higher services. So she used dog walking and tutors from a service perspective for those with more money. They're not going to be affected. But the people buying food and goods are really going to be, you know, as a percentage, so it will feel damaging. So the central bank's response is: is this inflation sticky, or is it structural? And what I mean by that is, is inflation going to be here for a really long time? Or is it just sticky? Which is what we experienced during the cost of living crisis? Okay? So it wasn't transitory. It became sticky. What we're talking about here is structural, right? So they've got to make that decision.

Or are we really worried about growth, in which case they'll come in and cut rates and support the market. I honestly can't tell you. I think. I will take a quote from a hedge fund. Guru Howard marks you can't predict, but you can prepare, and I think you know that's kind of probably the spirit of what we need to think about from a business perspective, and as advisors.

Kirsty McGregor: Yeah. And I think the other difficulty we've got, of course, is that this is going to be a company by company response in each country.  and different companies will have different thoughts around that. You already talked about Timu over in China. But you know other issues. And of course, coming back to the UK. We are currently, as we speak at the moment, unless it's changed in the last hour, struggling around British steel as well. So you know we could be importing more British steel than we used to as well. So in the UK this morning the GDP stats are out better than we expected. What? What do you think about those?

Paul Surtees: Well, we got a 0 point 5% print for February. Everything was up. So services, production and construction. The big one was production. So manufacturing up by 1.5% yay.

But the UK economy is anemic. Its last quarterly print was 0 point 1%. We know that the Government doesn't have an enormous amount of spare capacity from a spending perspective. And what crucially we should take away from this February print is that there is no tariff up or down, or changes in those numbers. And so we're going to have to wait a few months before. So it is the 11th of April, and we've just got the February print. So we need to wait 2 to 3 months before we start to see the impact of what's happening now in terms of data. That's why the Atlanta Reserve forward prediction of minus 2.4 is interesting. It's not always right, but it's giving you a you know, an indicator of what's to come.

Kirsty McGregor: And of course GDP could have been slightly higher because there was a big rush pre-budget spring statement. Sorry we didn't know what she was going to bring in, so it could have been loaded a little bit in February. But so what? Given that? It feels like we've got definitely uncertain times ahead. I mean, nobody, as you say, can predict. But we can plan. What about historically, if we look back over other uncertain times? You know? What can we look to for guidance and best practice?

Paul Surtees: So there's a really great study from Bain that I like. It took a 10 year view starting at 2,007 through to 2017. So effectively looking at the impact of the financial crisis kind of before, during and after. What we know from that is that downturns, you know, and let's say a recession if that's what might be ahead. But hopefully not. You know, create risks for businesses, risks of making mistakes and making wrong decisions. But there are, of course, opportunities. Obviously, you're a massive advocate for supporting small business acquisition. And you know particularly our kind of older directorships and things.

But what we can and will see is that there will be a dramatic shift in either gains or losses for companies through this period and typically over that period we would see a 47% increase in kind of shooting stars and businesses doing really, really well relative to what we'd expect out of it.

But equally, we would see an 89% increase in businesses really struggling kind of sinking ship style. You know, relative to a normal period. So a study of about 4,500 businesses. 10% of businesses will go on and improve their compound annual growth rate, and they will do so by being very disciplined in their balance sheet approach, so they will surgically restructure costs. They will be very customer centric, so they will maintain or improve their customer focus whilst others drop away. They'll price accordingly, so they won't, you know, increase prices across the board. They'll be, you know, snipers around how they, you know, can extract more value out of their clients. They will pursue considered acquisitions where appropriate. Obviously, you know, for the smallest businesses that won't be applicable, but they will focus on working capital as a key component. And we've talked about it ad infinitum pre-pandemic. On January 20, the largest corporations in the UK. Absolutely went to market and got their funding. The Sme started to think about it in April and May. Okay? And so, making sure that you can get working capital at the right time. And the right price is absolutely critical. The remaining 90%. So we're talking. The vast majority will do one of 3 things: they will either cut costs across the board, you know, blindly, 20% costs across sales across marketing. They'll sash R&D, they'll let valuable talent walk out the door. They'll rule out acquisitions. or they will try everything, so they will try new products, new markets, new products, and new markets. You know, they're just kind of betting on anything to try and realize some value.

 Or and this is probably 50%, 60% of that 90. They will simply just wait too long. So head in the sand ostrich style and hope that you know they can come out, and that forces a very reactive response. So businesses do have a choice. They do have the ability to prepare and to kind of get into that space. We can't predict what's going to happen. But we do need to look into it. We always talk about it on this channel, about leaning in, I think, to use another quote that I like from Mervyn King, who was the Governor of the Bank of England during Brexit.

Uncertainty is not just an inconvenience. It's the defining characteristic of the world we live in. And this is what we've been saying for the last couple of accounting bites. This is where we are. and I feel more sanguine now than you know I have in crises. Because I know it is about resilience. It is about understanding that this nonsense is around us, and we've got to make the best of what we can.

So that's what the businesses have to do. And from an accountant perspective. I think that hopefully, we've got ourselves in order so that we've got segmented client bases. So we know which businesses to approach, which to speak to and have these conversations about balance sheet discipline, because there's an enormous amount of value that we can give. But you can also earn. You know, from fees by doing this work. So lots of opportunities.

Kirsty McGregor: Yeah, I think you're absolutely right. And not doing everything across the board, as you said, is, you know, but actually focusing on those that you can help the most. So identifying key sectors identifies those most at risk, but also those that will give you the greatest return. And you know it's really worth investing your time into absolutely segmenting your client base making sure you know your key sectors and being able to go straight to them. That is where, you know, accountants can really add value, and, you know, not run themselves ragged either. You know, you know we've got to be. We're clever here, not busy fools. So that's really useful advice.

Paul Surtees: Let me give you like one clear example. Right? If you imagine cutting cross costs across the board as a key part and the 1st one being cutting costs in marketing as a sector. A whole vertical business in marketing services, for instance, may well get the rump end of that we're already seeing in the KPMG survey at the beginning of the year, which contributes Catherine man's view on consumer confidence. The recruitment

So you cut across the board. Those 2 things are going to suffer so we can focus on those and try to support them and help them and get through this period by getting in front of it. But equally we can understand that these businesses might struggle.

Kirsty McGregor: Yep. So, bringing it back to our world of lending, of UK lending. So what are you hearing from the lenders? You know. What do we think the banks are going to do, and what are we seeing on the platform?

Paul Surtees: So far. You know the lenders are very much playing a straight back business open as usual, as usual. Credit underwriting, you know, not really changing we've had 2 2 tiny tweaks from 2 lenders so far, so you know. One has changed its appetite for any business that gets more than a certain percentage of its revenue from the US. I think I can probably understand. That is that the 1st of many is that the 1st I've heard? I don't know at the moment. But I think that the lenders will be very sensitive to these changes as it manifests. So what I imagine will happen is we are already seeing more inquiry. I don't know if it's a response to what is happening, or whether it's coincidence, I suspect that that might over time the underwriting time might get a little bit longer, as we spend a little bit more time, not us, but the lenders focusing on making sure that it is a good underwrite, and over time we may see more declines. If you can imagine a scenario of a business that's got good cash levels at the moment, if you were to go to that business as an advisor and say, Make sure you've got working capital  they will say. Well, we've got plenty of cash at this point in time.

 Let's just say they're in one of those 2 sectors that I discussed. They start to run down their cash reserves, you know, just as a point where the liquidity might change. Okay? And actually, lending appetite has changed by virtue of, you know, a more pressing situation than we've had this week.

So you know, just be really mindful of working capital.

Kirsty McGregor: Hmm, yeah.  Okay, right? Well, I think that wraps up this month's episode. Obviously, lots are changing globally. It's not something to ignore by any stretch. It will impact our UK businesses whether they are directly importing or exporting or just operating in the domestic market. It will impact all of us just like the supply chain issues. Did the pandemic? Did you know it will definitely have an impact. As Paul said, you know, we can't predict, but we can plan. So from an accountant's perspective, please do get you know, all that support to the right clients as quickly as you can, and they will really value that if you want to hear more from Paul, he's speaking at Account X. Next month in May. Who knows where we'll be in a month's time? Heavens! Can't plan week to week at the moment, but Paul will be speaking again at Account X. So go and listen to him. If you want to hear the latest. We will have more stuff coming out via capitalise support you on this. So keep an eye on our Linkedin and on your emails as well, and go well, and we will see you soon.

Thanks, Paul.

Paul Surtees: Thanks. Kirsty.