Daily Archives: January 5, 2011

What Effect Will The Proposed UK VAT Increase Have On Your Supply Chain?

A recent article over on BBC news discusses yesterday’s VAT increase from 17.5% to 20% and how it is going to cost the average UK family £7.50 a week, or about £389 and how it’s going to hit living standards, hinder economic growth, cost thousands of jobs, and make it even harder for families to make ends meet when they are already feeling squeezed. I have to agree with these points, especially when PayScale UK reports the average office administrator as making only £16,150 a year, the average retail store manager as making only £21,477 a year, and the average designer a mere £20,006 a year (which is not much more than the median income of £16,400 a year). For these people, that’s another 1.8% to 2.4% of their annual salary lost to taxes. These people already lose at least 36% of their income to taxes (as per howitends.co.uk) through Tax and Personal Insurance Contributions. When you also consider that the average property tax equals almost 7% of their income, and add this new tax, the average UK citizen is now losing about 45% of their income to taxes — quite a burden in these tough economic times.

But the story doesn’t stop here. In many sectors, such as logistics and (grocery) retail, profit margins in a good year now sit at 3% to 5%. What is a 2.5% tax increase going to do to these business? Especially if, after having one or two bad years of barely breaking even, the profit margin is currently sitting between 0% and 1%? At the very least, you’re going to see jobs disappear. In the worst case, this is going to force more closures, which is going to be very disruptive at home and across the globe for certain multi-nationals. I have to agree with Labour leader Ed Miliband on this one — it’s the wrong tax at the wrong time. In most countries, the private sector is the only chance they have of getting out of the recession. If the private sector is taxed out of business, then there’s no way the country is going to recover (especially in the UK which has a long history of the public sector moving at a snail’s pace).

Should Private Equity Firms Get Into Supply Chain Finance?

I was recently asked what role the banks have in Supply Chain Finance (SCF), which I found to be a bit of an odd question as the role the banks should play in SCF has been well known for a long time. Quite simply, they should be lending more money to the supply chain, doing more financing on receivables, and be supporting the business that make and ship the products we all use everyday. However, instead of playing the long term game (and investing into these business which are pretty much guaranteed to make a return as long as we need to eat, clothe ourselves, and be entertained), they chose to dump money into high-risk mortgages, facilitate the hedge fund madness, and encourage high-risk start-ups during the boom in pursuit of high rewards that are not sustainable in the long term [even if they materialize in the first place].

As a result, they banks are almost broke (and Basel III is probably going to initiate another wave of bank failures, to add to the 139 that had been shut down in the US in 2010 as of October 21 [source: Reuters], because it’s coming into effect too late — the banks have already dug the graves Basel III is trying to prevent) and have turned the taps off completely even if you’re profitable, sustainable, and have been in business for fifty years. Even though the trade banks [could] strengthen customer relationships (as per the linked white-paper published by CGI back in 2007), they have pretty much chosen to turn their backs on their customers when their customers need them most.

As a result, we’ve seen the emergence of trade finance companies, including The Receivables Exchange, which offers a business quick receivables financing from public and private lenders willing to offer receivables financing at the requested rates and/or willing to participate in a reverse auction for the business, and Orbian, which purchases receivables from suppliers in exchange for non-recourse cash for the full invoice value at rates based on the buyer’s credit, which have emerged in an attempt to fill the void. However, these solutions are few and far between and have limited cash reserves as they have not gained wide-spread adoption with either banks or investors. As a result, they cannot come close to serving the true global market demand for trade finance [even though they are being under-utilized by companies hoping to be saved by the banks that abandoned them].

However, private equity companies generally have lots of cash on hand, which they typically use to buy troubled companies with solid products or services that can meet a substantiated market demand and turn a profit. Then, when the companies turn a profit, they take dividends to add to their cash pool or take them public for a profit. What if instead of buying a company, they bought trade finance institutions and/or created new ones? Considering that private equity firms currently sit atop an estimated 500 Billion (as per an article from July 2010 in economy watch), they could make a significant impact on global trade as this could (if converted to liquid assets) theoretically finance 20% of global trade if net terms, and payback, was 60 days or less (assuming annual merchandise exports are still hovering around the 15 Trillion globally).

What do you think? Should Private Equity get into the SCF arena? While they may only control assets less than 1/10th of the assets collectively controlled by the US banks, most of their assets are not at risk and leveragable. And they are generally much better managed.

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