November 2024 Accounting Bites

In this video, Paul and Kirsty discuss:

• UK Autumn Budget

• The US Election

• Bank Of England & Fed Rate Cut

• Increased Inflation Expectations

Watch the short clip, or you can read the full transcript below.

Kirsty McGregor: Paul. Hello! We are back again for this month's accounting bites.

Paul Surtees: Hey, Kirsty, how are you?

Kirsty McGregor: Well, how long have you got today? We've got a lot to talk about. What are you going to talk about?

Paul Surtees: Well, there is so much macro activity. I mean, it is the largest, the single largest amount, you know, in recent memory. We've obviously had the UK budget and the fireworks around that we've had the US Election. We've had the Bank of England, and the fed rate cuts and inflation expectations are creeping back into the market. So there's plenty for us to talk about today.

Kirsty McGregor: Right. Let's deal with the US. Election first. The Republican party have won the Presidential election in case you've been hiding under a rock, but also they've won the Senate, and as we record today, they are very, very close to having control of the House of Representatives as well, which will mean that there is an awful lot of control at Congress for the Republicans and President elect trump as he is at the moment, so policy decisions that the President's going to want to pass are likely to pass very quickly. So why is this important to UK SMEs in the longer term?

Paul Surtees: Yeah. Good question. Let's think about the market to start with. The S. And P. Made all time highs last week again you know, through the Trump election. Why? Because the market is expecting lower regulation, lower taxes, and as a result of that more inflation very quickly afterwards we actually had the fed go ahead and cut rates as expected, because once you say, the trump policies can get rushed through here, they don't know what's going to get rushed through at this point, and they've got to act the data that comes through. So they proceeded to cut rates.One of the biggest U.S. Movers was actually the inflation market that jumped because there are concerns in the market about reflationary policies. Obviously he's talking a huge amount about tax cuts, but also tariffs, and I'll come on to that in a minute. Over the weekend. Actually, I was watching a video about overtime tax cuts removing all tax for any overtime. So I think that's going to be really interesting to see how Musk's efficiency team actually managed to chop into that and get the right amount of tax on those hours. So that trump is coming in with a very strong make America great the Maga policy, as you say, it's likely to have far fewer breaks this time to progress. His inner circle are loyalists. They're plutocrats rather than career politicians. And I saw a post actually from Seb Johnson, who's a sort of Fintech commentator posting that Musk actually made 153 times return on his $ 130 million in donations from the increase in his Tesla stock, and so on. So is that the best return ever made in such a short period of time. But they're the plutocrats that we talk about.

The other piece is that this is a final term for Trump, and, as you say, if he does manage to get both Houses. His policy success could be really characterized by rapid action, and you know, and shoehorned through those houses. But it will come with some stamping of feet, and some flags being waved, and there will be, you know, an increase in risks of backlash and institutional resistance coming through both domestically and internationally. Whether it's world Banks and IMFs and other institutions like NATO, things might go through. But there's going to be a lot of action.

Kirsty McGregor: Oh!

Paul Surtees: Throughout each of those.

Kirsty McGregor: And the Justice Department and the FBI and all sorts of other people are being, yeah. Yeah. So that's all across the pond, though why do we care here?

Paul Surtees: Well, 1st and foremost, the U.S. 1st policy could imply 20% tariffs. Okay? So in 2023, 144 billion pounds of goods were exported to the US. With nearly 38 billion of that attributed to our Sme. So they're the businesses, Kirsty, that we talk about all the time that are being looked after by the councils listening to this podcast but it's not just those who export to the US. Of course, we also export to the US. Supply chain. And there are those who are not actually directors that will also get hurt by those tariffs. So you know, we've got lots of transportation clients, you know, who work only in the UK. They could be impacted. We've got insurance and financing and many other products that could actually as a side product fill those headwinds from tariffs.

The impact is estimated to be around 0 point 8% of economic output. That's 19 billion pounds of impact to the UK economy. It's always funny money when we're talking about billions. But think about that. In the context of the 40 billion pound tax rise. So it is a case of America sneezing or changing the way in which the world operates. And you know, we've got to figure out how to work in that context.

If there is large-scale trade then the IMF thinks that, you know inflation is going to get driven up, and that could lead to the global economy shrinking by 7%. So it definitely feels beyond our control. It definitely feels like it's being discussed outside of our pay grades. But it is absolutely going to have an impact on all of our services, our economy, our borrowing rates, you know, and our businesses need to have that in mind and get themselves ready. So the conversations that you guys need to have with your clients might not necessarily be at this level. But this is the headwind that is coming.

Kirsty McGregor: Wow! Has anything been happening in the UK?

Paul Surtees: Not much, not much. Well, we did have a little budget, didn't we?

We've also had the Bank of England. So let's just tackle that 1 first, st and then we'll come to the budget. So the Bank of England cut rates by a quarter of a percent, and now got a base rate 4 and 3 quarter percent. It was a unanimous 8 to one vote, so not only was it the Governor and the Chief Economist, you know it's pretty widespread.

 But, Kirsty, you've heard me talk about Catherine Man many times.

Kirsty McGregor: Auntie Catherine. She's still here.

Paul Surtees: Auntie Catherine. She's the inflation hawk, and I would argue that she was calling for rates to go up sooner. She's been arguing for rates to come down slower. She's been arguing for the impact of inflation, and she has continued to kind of hold out in this particular cycle. So I think. You know, when we think about the inflationary lens that's coming from the UK budget and from the U.S. Side and the trade tariffs and everything else that goes. I worry that she may be proved right again. So it looks like the fed. You know we've had a big event, but the Bank of England has to deal with the data that it sees. So, for now it's too early for them to respond to the budget, you know, because the changes are just going to lag, you know whether it's the investment that's coming through or the tax implications. They've got to wait to see that land in the data. But last month and the month before, and the month before, I've been talking about the inflation expectations of the Bank of England, and in November's forecast last week. They are still predicting inflation. To go back up to 2.7 5% over the next kind of 12 months before falling back down to 2% post.

Whilst the Bank of England can't necessarily respond immediately. The markets, of course, can, and given the increased inflation expectations, it has reduced its future rate cuts that are that the market's expecting. So obviously, that has an impact for businesses who are borrowing and consumers and investment, and all of those kinds of pieces that come through. So it has a very real impact in terms of what we do here at capitalize.

So the budget.

Kirsty McGregor: The budget.

Paul Surtees: The budget. From my perspective, SMEs were absolutely hammered. Putting aside missteps or language around working people, to which, you know, I take great offense because I put in quite a few hours. You know the employers, Nic. There was very little to cheer here.if you look at what the Obr have said about the employees. Nic, they suggest that we're going to lose businesses are going to lose 1 billion pounds, and instead of the expected 25.7 billion raised is going to be closer to 16 billion. So the market really didn't like the impact of the budget from a cost perspective. So 10 year guilts are much more expensive. and it begs the question, will there be more tax rises next year, so time will tell.

I think. Lots of membership organisations have been talking about a lot, but I think Kate Nichols, who leads hospitality. Uk.

Probably because they're the closest to the most impact is the most vocal membership, as I can see, suggesting that businesses will absolutely close in the hospitality sector.

If we move to the Food Giants and Tesco's Morgan Stanley expect Tesco's to have to spend an additional 250 million pounds. As a result, Sainsbury's have come out with their results, saying that it's going to have a 140 million impact. And they have simply said that margins are so thin that prices will rise as it's going to impact the whole supply chain.

 There's also the knock on effect of Smes and the conversations I've had with my friends who run businesses, but also capitalize alone.

Fewer people are going to be hired as a result of this increase in employers. And I see. So it's going to have a big impact. And when we think about the impact on the budget on the UK's own borrowing. 10 year guilts kind of went into the budget at about 3.7 5%. And it kind of ended up at around 4.45%. So you know, it's had quite a significant increase. It's about 70 million pounds of interest for every 1 billion pounds that the government borrows for 10 years. Okay? And obviously, they're borrowing a lot more than 1 billion pounds.

So very likely we'll be told by Tesco, Sainsbury's, and so on, that we should expect inflation through food. We've been told that hospitality as a minimum is going to lose businesses. And, personally speaking, and capitalize, we're going to be hiring less people in the UK, as a result.

So my only hope is the tax and spend strategy. And hopefully she's got enough coin with the rebasing here enabling sound investment over the long term, and she can make big differences for our Smes, but for us as living, breathing people in this world.

Kirsty McGregor: Hmm, yeah. She wondered, with the guilt rate there, whether she's scored a bit of an own goal there. But accountants, I know, are pretty disappointed and worried for many of their clients for next year. So how's the activity? Been on the platform? Though at Capitalize at the moment.

Paul Surtees: I think the activity into the budget from our accountants has, for sure, slowed the funding that we saw across all channels so direct and accountant was much more cash flow oriented. So it was keeping the wheels moving rather than thinking about kind of growth and investment. And that's absolutely to be expected, I think. Our direct channel is very busy, though, and I suspect you know we're on track for another record month in that channel. So given, what's happening in all of these macro events, businesses are borrowing, and they are borrowing for cash flow, and that cash flow suggests that they might need it, you know, to kind of get through some of these headwinds, so don't wait for your clients to come to you, because they are looking for funding, use it to your benefits. Have the conversations, discuss capital advisory, and use it to build your practice. So Kirsty, how should the accountants be handling this market at the moment. What do you think?

Kirsty McGregor: Well, I think there's 2 main pieces of work which I'm going to talk about, and then I'll give you a couple of little bonuses as well. So, firstly, I think, find the clients who are going to struggle and get solutions for them ahead of that, and I'm going to talk about that more in a while. But then, looking more optimistically, look for where the opportunities are going to be for the sectors who are going to benefit most from the initiatives which are definitely going to be offered by this Government or facilitated by this Government. And I'll tell you why I think this is going to be one of the most influential governments ever. For some of your clients the funding opportunity of a generation is what I'm hearing said by more than one person.

So let's go back to those that need triaging before they get into intensive care with the impact of in the short term, the national insurance and minimum wage increases, and then a bit longer term on the impact of the trade tariffs, which I expect will come in from the States.

So think about any client who pays minimum wage and already works on quite fine margins because their wages are going to be their wage bills going up anyway, as well as the National Insurance.

So I'm thinking, bars, restaurants, cafes, hotels, but also care homes, domiciliary care. You know those that pay the national minimum national living wage. They're going to be hardest hit and then looking longer term. Let's go into 2025. And beyond, we're thinking about the supply chain issues for the exports to the US. Or for those who import from the US. Because the Us. Supply chain, say, is coming in from China, which will be impacted by trade tariffs. So there's going to be a very wide impact. As Paul has already said, about these companies all the way through the supply chain of many, many countries. What can you do now rather than waiting is, you can improve their credit score. So work on that. Now, wherever you can credit. Review service is fantastic, because if you are going to be going in March and April to look for more cash flow. then a higher credit score will mean that they'll have more supplier credit if that's relevant to their sector. But also they'll be able to access the best rates for lending, and we don't want to look at credit scores when we're going out to lending. We need to look at credit scores now, so we can get that track record in there for the lenders in due course. So what to do now is credit score review definitely. Look at how we can increase credit scores for your clients.

So then, shifting tack and looking on the more positive note for growing clients, then I've talked about this before. The industrial strategy is something that is going to be quite different to anything we have ever seen in this country. And you know I've been around for a few governments now, quite a few. It is still in consultation. Don't layer it on. It is still in consultation, so please do provide your opinions, because that only ends in a week or so, like 3rd week or 4th week of November. it's likely it's going to all be put into practice, you know. It's a very common sense document. From what I can see, there isn't anything really controversial there. And so what's going to happen then is that the Government and the Chancellor and the Department for business are going to give a steer then to the main agencies by about March. So quite quickly. Now we will see that the Government is going to be announcing lots and lots of new initiatives and schemes or facilitating them. So if you remember the focus of these industrial strategies, there are 8 sectors which the government believes are going to bring the most growth to our economy. So very quickly advanced manufacturing, clean energy, creative industries, defense, digital technologies, financial services, life sciences, and then ours, professional and business services. So those are the 8. But along with that, what I'm actually seeing is, there's a drive by the Government to provide more support locally and through the agencies. So what you're going to see is these big agencies like the National Wealth Fund, the British Business Bank, Gb. Energy, innovate. Uk, all these and more of them are going to be directed to link up and do more collaborative work, I think, and make sure that there is that spread of available funding and schemes throughout. The whole of the owner managed business and Sme economy. and then the importance of what I've said for a few years. This was always going this way, even with the previous government, that the mayoral city regions, the combined and local authorities and the growth hubs are going to be where the local money is, and they're all looking to crowd in private money from large corporations and private equity.

Now, I'm usually quite cynical about these things. There's been a lot of schemes in place in the past, and it doesn't really tend to result in much on the ground. But I do think there is something quite unusual happening here, and it does seem to be quite quick.

So start thinking about strategic planning with your clients more than you've ever done before.

Determine what funding they're going to need to roll out their strategy. And then how much funding they can provide themselves.

how much they're going to need from 3rd party lenders. And then also, perhaps think about joint ventures and things like that. I was speaking. I was at an event last week, and I heard the CEO of the National Wealth Fund speak, and I was talking to others in the room that were mainly Pwc Kpmg, and so on.

 And he was talking about a minimum 25 million ticket size for loans or equity that they give out. And these people I was in the room with were already dealing with the National Wealth Fund for their clients.

 But he also said, they're putting money into local authorities, and that's a much smaller ticket size. So the local authority might be setting up infrastructure or green schemes, for, like their local businesses to benefit from.

So an example, let's say your client installs ground source heat pumps. Is there any way that they can scale a little bit? So they're not a micro business. So maybe they could acquire another business, become part of a larger concern or a larger group, because they're going to be more attractive and able to access some of these schemes.

One of the little bonuses is my regular blog for making smarter, you know. I always keep talking about this. I think it's fantastic started in the Northwest in Yorkshire, and now it's been rolled out nationally. If your manufacturers haven't yet utilized that please introduce them to their regional contact. There's a lot of opportunity for them to get advice and funding to help them look forward to advanced manufacturing. and on a slightly different tax. So my world is corporate finance and Barda relief. The business asset disposal. Relief doesn't increase until April, so capital gains tax went up at midnight on the day of the budget, but what used to be called the entrepreneurs relief barter relief doesn't increase until April. So there's currently a 14% saving if a business owner sells their shares by the 5th of April.

 Now, if your clients are considering an acquisition, get a funding line ready for them now, and just go for it because there are going to be a lot of smaller business owners looking to exit, and they're going to want a quick, smooth exit, and therefore their price requirements might not be as much as it would be normally so. Your clients, if they're looking to acquire, could really benefit from this. So talk to us about acquisition finance. If you need that as well.

Have we crammed enough in there? Let's hope it's going to get a little calmer as we work. Towards the end of the year Paul.

Paul Surtees: This was one of our longer accounting bites, but it is reflective of what's going on. So thanks very much for co-hosting with me, Kirsty, and thanks everybody for listening, and we look forward to seeing you next time.

Kirsty McGregor: Brilliant insights. Paul, as usual. Thank you very much.