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BUSINESS & ICAEW.COM/BAM ISSUE 273
MANAGEMENT APRIL 2019
FACULTY
PUBLICATION
Business &
Management
PLASTIC FANTASTIC WELL SECURED
BUSINESSES RIDING EMPOWERING
THE ANTI-PLASTIC EFFECTIVE CYBER
WAVE TO SUCCESS RISK MANAGEMENT
FALLING DOWN
What happens when a business
enters administration?
CONTENTS
April 2019 Issue 273
16
ENTER CHAOS?
08
TOP TIPS
Pádraig Floyd looks
at what happens
when businesses go
into administration
Neil Hare-Brown provides
a guide on how boards
should empower effective
cyber risk management
04 Editor’s letter
Dipak Vashi on how the
trusted accountant must
evolve to survive
26
28
PLASTIC PROGRESS
05 News
Faculty and world news
FUN WITH WORDS roundup
In part two of our
When it comes to
plastics series, Alison 06 Events
cryptocurrency, it can
Coleman speaks to Dates for your diary
be tough to navigate
innovative companies
conversations. Here,
about combatting the 07 Wise beyond your years
Matthew Leitch
plastic problem and Acas provides guidance for
clears up what certain
turning a profit tackling ageism
terms mean
10 Role players
What can FDs and CFOs
bring to the M&A process?
20 Setting it out
Tips on building an effective
12
CATWALK TALK
online marketing strategy
22 Relationship advice
Lucy Douglas How technology can improve
explores the ‘fast the relationship between
fashion’ model that CFOs and marketing chiefs
allowed clothing
retailers to build 31 Technical updates
strong profits on the A roundup of legal and
COVER: EDWARD TUCKWELL
back of couture style regulatory changes
34 Book ends
An interview with James
Manktelow and a look at
Sahar Hashemi’s new book
ICAEW.COM/BAM 3
WELCOME
The evolved role
In these days of business and economic
volatility and unexpected events, the role of
the chief financial officer (CFO) – and indeed
accountants as a whole – in shaping the
success of the business has never been more Business &
important. Management
Accountants have always been trusted and
Faculty
THE TEAM
relied upon to present accurate numbers
regarding the state of the business, as well Dipak Vashi
Technical manager
as producing management information and forecasts on the expectations +44 (0)20 7920 8587
for the year ahead. But the role of the accountant is undoubtedly dipak.vashi@icaew.com
changing, and for the better. The CFO and their team are now widely Caroline Wigham
trusted on a wide range of business issues, and their advice is becoming Services manager
invaluable. Therefore, to be successful in the finance industry, and to +44 (0)20 7920 8508
caroline.wigham@icaew.com
climb the greasy rungs to the top, the accountant of the future must be
multi-faceted and hold skills in a variety of areas. Rick Payne
Finance direction programme
We touch upon this in this issue of Business & Management. First, the +44 (0)20 7920 8451
role of the CFO in M&A deals is analysed. The finance function is relied rick.payne@icaew.com
upon to provide cutting edge and timely information to executives during THE COMMITTEE
a deal, and this can often make or break said deal. David Carr
Chairman
I suspect the relationship between the marketing and finance
departments at many businesses would not be described as ‘close’. Steve Bastian, Emily Brooks,
Laura de Poitiers, Chris Ford,
Anecdotal evidence refers to the CFO signing off a budget related Amy Griffiths, Emily
to marketing simply as an expense or a sunk cost. However, Chris Mackinson, Rashad Shamim,
Helen Stevens, Nick
Lawson explains why this may be missing the point. He explains why the Wildgoose, Martin Wheatcroft
relationship between the two departments could – and in fact should – be
SUBSCRIPTIONS
much closer to unlock the full value of marketing, ensuring accountants Annual membership of the
know exactly what value the money is gaining and how to get more from it. faculty costs from £101 for the
Unfortunately, businesses going into administration on the British high whole year.
street and beyond has become a routine feature in business news pages FACULTY EVENTS
of late. Accountancy practitioner firms have long been a central part of AND WEBINARS
Events and webinars are listed in
this process and a key cog in ensuring as much of the business falling this publication; details can be
into administration can be salvaged and safeguarded. The cover story found on page 7
by Pádraig Floyd details the steps that are taken when an administration B&M ADVERTISING
occurs, and what happens on the inside. Advertising enquiries to
advertising@progressivecontent.
CFOs and the finance team are vital, and that will not change in a hurry. com
However, that does not mean the accountant of tomorrow cannot redefine
BUSINESS & MANAGEMENT
their existing relationships with the rest of the business to solidify their FACULTY
importance and meaning. This will not only benefit yourself and your Chartered Accountants’ Hall
Moorgate Place, London,
career progression, but the business as a whole. EC2R 6EA
+44 (0)20 7920 8508
@icaew_finman
bam@icaew.com
icaew.com/bam
ISSN 1471-1818
TECPLM16468
Printed in the UK by
Sterling Solutions
Dipak Vashi
Technical Manager
© ICAEW 2019 All rights reserved. The views expressed in this publication are those of the contributors;
ICAEW does not necessarily share their views. ICAEW and the author(s) will not be liable for any reliance you
place on information in this publication. If you want to reproduce or redistribute any of the material in this
publication, you should first get ICAEW’s permission in writing. No responsibility for loss occasioned to any
person acting or refraining from action as a result of any material in this publication can be accepted by
ICAEW, the publishers or the author(s). Whilst every care is taken to ensure accuracy, ICAEW, the publishers
and author(s) cannot accept liability for errors or omissions. Details correct at time of going to press.
To comment on your magazine, please email publishing@icaew.com
4 APRIL 2019 BUSINESS & MANAGEMENT
NEWS & EVENTS
£29M FINE FOR
BUSINESS WORLD
CARPHONE
WAREHOUSE
Carphone Warehouse was
handed a £29m fine from
the Financial Conduct
NEWS Authority (FCA) for
insurance mis-selling after
a former employee blew
the whistle. An FCA
investigation found that
sales consultants were not
given adequate training by
the firm and pressured
customers into buying
cover, which they already
had through other policies.
A high percentage of these
sales were cancelled within
the first three month – a key
indicator of mis-selling.
FACULTY NEWS
BOEING IS GROUNDED
OUT NOW: SPECIAL REPORT CONTENT UNLOCKED: Following the Ethiopian
ICAEW
You will have hopefully
BUSINESS AND MANAGEMENT
FACULTY
FINANCIAL REPORTING Airlines crash last month,
found the latest B&M
Managing people The Financial Reporting Faculty is US plane maker Boeing
Faculty special report running several webinars this spring has grounded its entire
enclosed with this that will be of interest to Business & £29m fleet of 737 Max aircraft.
month’s Business & Management readers. CARPHONE The decision followed new
Management. WAREHOUSE
... the road to wellbeing
You can listen back to the recording FINE FROM Federal Aviation
Our first such report of the March session on UK GAAP. THE FCA FOR Administration data
INSURANCE
SPECIAL REPORT
APRIL 2019
of 2019, Managing The session on the top 10 hot topics coming to light in its
MIS-SELLING
people, covers team management, was delivered by Jake Green and investigation of the crash,
dealing with difficult people, talent Danielle Stewart OBE. Visit tinyurl.com/ which was the second,
management, the effect of technology BAM-GAAPWeb following the Lion Air crash
on recruitment, dealing with change, The next session, ‘FRS 105: The last October. Boeing states
corporate culture and more. Two Micro-entities Regime – all you need to that this is a precautionary
further special reports – Smarter know’, takes place on 18 April and will measure, and has full
reporting and Remote working – are also be recorded. See tinyurl.com/ confidence in the safety of
scheduled to be bundled with your BAM-FRS105Web the aircraft. The US
magazine later in 2019. Sessions are available to ICAEW government has ordered a
members for just £30 + VAT. review of how the 737 Max
got its licence to fly.
YOUR VIEWS SOUGHT ON IR35
HMRC has published a consultation 126%
PAY INCREASE
document regarding IR35 changes in THAT SHELL’S
126% INCREASE FOR
the private sector, due to come into CEO BEN VAN SHELL CEO PAY
force on April 2020. The Tax Faculty BEURDEN Ben van Beurden, Shell’s
RECEIVED
has summarised the issue at IN 2018 CEO, saw his pay increase
tinyurl.com/BAM-TaxT by 126% in 2018 to a total
If readers of Business & Management of €20m. This was mainly
have any views on the changes, due to a $10bn boost in
comments can be sent directly to the annual profits for the oil
Tax Faculty via the link above. company, which meant
The next meeting of the
long-term incentives
faculty committee is on kicked in for the boss.
23 April. Attendance is Van Beurden’s pay was
only open to committee
members, but your views 143 times more than the
on the faculty’s work are average Shell employee,
welcomed. Please send and comes at a time of
comments by 17 April to
dipak.vashi@icaew.com increasing controversy and
public focus on CEO pay.
ICAEW.COM/BAM 5
WEBINARS: THE COMING MONTHS
EVENTS &
ICAEW.COM/BAMWEBINARS
WEBINARS The Business & Management Faculty is keen to keep providing its
members with relevant and timely sessions that can easily fit around
the pressures of your working day. If you would like to suggest further
topics, send your ideas and comments to Dipak Vashi via dipak.vashi@
ALL WEBINARS AND EVENTS icaew.com
ARE FREE FOR FACULTY MEMBERS The following sessions are already in the pipeline and available online to
EXCEPT WHERE STATED book now.
60-MINUTE WEBINARS 20-MINUTE WEBINARS
Morning webinars run from For a spot of CPD while you have
10:00 until 11:00, and are free for your sandwiches, these sessions
Business & Management Faculty run between 12:30-12:50.
members and those subscribing
to Faculties Online. Go to our 8 May
webinars page to book. Anti-money-laundering update:
what every business needs to know
1 May
Manage change effectively 15 May
Influencing and persuading:
5 June promoting your brand
Economic update
LAST CHANCE TO BOOK 19 June
3 July How accountants can become
WHY DON’T STAFF Dealing with difficult situations digital leaders
ALWAYS DO WHAT YOU
TELL THEM TO DO? 9 October 16 October
Conflict resolution Five key questions all boards
23 April 18:00-20:00 should ask about fraud
Chartered Accountants’ Hall
In this evening lecture, chartered
accountant and chartered HR
ADDTIONAL ONLINE LEARNING WEBINARS
professional Angus Farr will
identify the three underlying 21 and 22 May (£85+VAT for BAM members)
reasons why staff don’t always Rapid month-end reporting – by day three or less: tinyurl.com/BAM-RapidRep
do what you want them to do.
Angus will suggest tactics and
an approach to motivation that
gets us beyond Maslow’s FROM THE ARCHIVES Practical Excel tips
hierarchy of needs. Stats skills in Excel (various
This session is particularly There’s a wealth of other online sessions)
aimed at those who are, or are content available in your faculty Team leadership and
becoming, responsible for staff. member area on various topics. management
See tinyurl.com/BAM-DontDo If you missed any of the following Bring your own devices policy
to book your place. sessions or want to hear them Financial fraud: common red flags
again, simply log in at tinyurl.com/ Managing currency losses
EVENTS BAM-WebArchives Making the most of your board
ICAEW.COM/BAMEVENTS
COMING SOON
Managing virtual teams IF YOU MISSED OUT…
19 September Last year’s two-day webinar sessions were recorded, meaning you can
still access content on: Planning and forecasting in the 21st century and
Resilience and fortitude Leadership in an era of distraction. Login and payment of £85+VAT is
26 November required. See tinyurl.com/BAM-Par1 to book.
6 APRIL 2019 BUSINESS & MANAGEMENT
AGE DISCRIMINATION
SAGE AGE ADVICE fair chance to reach and maintain an
acceptable standard” if performance
falls below where it should be.
Ageism is one of the most common forms
RETIREMENT
of unfair workplace treatment. Business & According to Acas, there is uncertainty
Management shares renewed guidance among a number of employers about
the law in relation to retirement.
on the topic issued by Acas Businesses are not allowed to assume
someone will retire, nor to suggest or
force retirement on a worker. Many
workplaces now have no set
retirement age. This means most
employees can decide when to stop
working. It is entitlement to their work
pension that is determined by the
Equality Act and the rules of the
pension scheme they are in.
WATCH WHAT YOU SAY
Employees and employers need to be
mindful of the language they use,
both during the recruitment process
and in everyday interaction. Acas says
telling older colleagues that they are
Wording of application over the hill or calling younger
The Advisory, Conciliation and employees poor little snowflakes are
Arbitration Service (Acas) has recently forms, adverts and job both examples of age discrimination.
refreshed its guidance on age descriptions must use
discrimination, saying that it is still rife EXCEPTIONS
in the workplace. The materials are inclusive language While age is a protected characteristic
designed to help people navigate under the Equality Act, Acas says that
real-world situations, such as with age things can become
recruitment and promotion, and decision to offer training or promotion. complicated in that there are “some
avoid acting on misconceptions. Restricting training only to younger exceptions where different treatment
staff means that assumptions have because of age can or may be lawful”.
JOB APPLICANTS AND ADVERTS been made about the ambitions and They include: the National Minimum
There are many opportunities to get needs of older workers. Conversely, Wage and National Living Wage; pay
things wrong during the recruitment discouraging someone young from and extra benefits and perks linked to
process. Wording of application applying for a challenging role based certain periods of time with an
forms, adverts and job descriptions on their age is also frowned upon. If employer; sometimes in relation to
must use inclusive language. A tip is they have the necessary skills, redundancy; or under legislation
to specify the kind of experience you knowledge and experience they are around an occupational requirement.
wish candidates to have, rather than a entitled to be considered. Acas has more detailed guidance on
set number of years. This helps to these specific circumstances.
stop people nearer the start of their PERFORMANCE REVIEWS
careers being excluded. Similarly, Age bias must not be allowed to creep
qualifications should be specified only into staff appraisals. All workers are
when necessary and it can be proved entitled to have goals set for their
in law that they are essential to a role. future performance. It is acceptable to ONLINE RESOURCES
Acas says applicants “should be given ask a worker what their plans are in
the option to demonstrate in another the short, medium or long term to Listen to the recording of a recent
way the knowledge and aptitudes help with planning for the needs of live-streamed discussion on age at
required – for example, through the business. But this should not facebook.com/acasorguk
equivalent qualifications, or skills and stray into asking people if they plan Acas has also produced
knowledge from work experience”. to retire. downloads on key pointers,
Additionally, any issue relating to obligations for employers and a
WORKPLACE TRAINING performance must not be ignored myths factsheet. See the guidance
Age, length of service or the amount because a worker is older or younger at tinyurl.com/BAM-Disc
of time someone has spent in a role than others. Acas says that anyone, Look for @acasorguk on Twitter.
should play no part in an employer’s regardless of age, should be given “a
ICAEW.COM/BAM 7
SETTING
CYBER
STRATEGY
Neil Hare-Brown looks at the various
ways boards should be empowering
effective cyber risk management
best serving the war effort if they
Cyber security standards and spent most of their time on the
best-practice are often considered front line.
too complex and technical for What board members really
boards to effectively digest. As need is a way to assess the key
a result, many business leaders strategies that form the
are uncertain as to whether their foundations of good cyber risk
organisations are adequately management, without getting
protected against cyber attacks or bogged down in the detail, and
whether they are supporting the a cyber team they can trust to lead
right risk management decisions. the charge.
In a world where the number of
cyber attacks leading to data KEY STRATEGIES
breaches, fraud and extortion Effective boards are in control of
crimes has risen significantly, several strategies or business
businesses need to safeguard levers, which they adjust and
against the reputational harm measure in feedback. Board
that can be the consequence members need to know how to
of a cyber incident. operate these strategies, so they
can be confident that cyber risk
THE BIG PICTURE management will be mandated,
While the general approach from operated and monitored in the
the cyber community is to both most effective way possible within
evangelise and empower board their organisation.
members with knowledge of the Business leaders are increasingly
technical aspects of cyber security, realising that effective cyber risk
this is not always appropriate or management is not just about
practical. In order to manage cyber technology. Other protections,
risk effectively, boards need to including staff skills, awareness
understand, implement and and cyber insurance, are also
monitor key strategies. However, important considerations. From a
they should not be concerned with cyber insurance point of view this
tactical and operational level is crucial as the insurance portfolio
controls that – while also vitally of an organisation is usually the
important – use technical jargon responsibility of a board member.
they don’t need to master. We have identified seven key
Analogous to a military strategies that, if overlooked, will
hierarchy, while a general may significantly expose an
FERGS/IKON
need an appreciation of the organisation to high levels of
challenges in the positioning and cyber risk. These are called the
use of artillery, they would not be Cyber|Seven:
8 APRIL 2019 BUSINESS & MANAGEMENT
TOP TIPS
Business leaders are
increasingly realising
5
IT STAFF COUNT RATIO
that effective cyber risk Too many organisations are
massively understaffed, leading to
management is not stressed IT teams who make silly
just about technology. mistakes and leave organisations
vulnerable to cyber attack. IT staff
Staff skills, awareness and cyber security staffing is a key
and cyber insurance risk management strategy.
are also important
6
IT SKILLS & STAFF AWARENESS
Most organisations also
considerably under-invest in
ongoing training for IT staff. They
need to support staff and make
skills acquisition a prerequisite for
career growth and good job
performance. Furthermore, all staff
need to be given awareness
1
RESPONSIBILITY
training to enable them to spot
cyber incidents and scams.
Effective cyber risk management
needs ownership. Boards must
appoint a cyber champion who
7
TECHNOLOGY UPDATES
is responsible for oversight of The older the technology, the
cyber risk management, including longer hackers have had to find
budget, staffing, security vulnerabilities in it. Staying current
protection, cyber incidents and means keeping the organisation
cyber insurance. ahead of the attackers. Boards
do not need to know the details
2
INFORMATION ASSET
but do need a strategy that rejects
suppliers who do not support the
latest technologies.
AWARENESS
Boards must be aware of their To enable boards to self-assess
intangible data assets and ideally effective implementation of the
sort them into broad categories Cyber|Seven strategies, we have
and criticality. built a simple, secure online tool,
which is free and anonymous at the
3
ADEQUATE IT BUDGET
point of use: cyberseven.global
Notoriously under-funded by
boards, information is the
lifeblood of pretty much all
modern organisations and
information technology
needs adequate funding to
ensure resilience.
4
PAYMENT CONTROL
Because many payments systems
Neil Hare-Brown,
are now carried out online, and CEO, cyber risk
almost all cybercrime is simply specialist STORM
cyber-enabled fraud, payment Guidance, creator
of Cyber|Decider,
controls such as segregation are the cyber insurance
more important than ever. comparator
ICAEW.COM/BAM 9
M&A AND THE CFO
Successful integration requires a careful
examination of people, systems and data –
just the sort of insight FDs can bring to the
table, reports Beth Ashmead Latham
control investor, who helps dictate takes time and effort to communicate
Mid-market firms looking for a business strategy and owns a majority, or a regularly but in our experience it’s worth
boost have found M&A to be an strategic partner, who has a stake but isn’t the investment,” he adds. Honesty is also
appealing solution. Take JD Sports’ in charge. “It’s good to have a clear idea important on sensitive topics like
acquisition of Go Outdoors for £112m in of how you want the relationship with that restructuring. For Yates, this meant
November 2016. A year on, Go Outdoors investor to work, and therefore pick the acknowledging restructuring was part of
sales had risen 5.7% after an expansion of right investors to go and talk to,” he says. the business case. “We believe it is crucial
stores – and by February 2018 turnover to deal with people respectfully, openly
was up from £213.8m to £232.5m. PREPARE FOR CHANGE and honestly,” he adds.
For vendors, a merger offers access to It was last autumn that Gordon Dadds LLP, To support any M&A, many finance
better systems, support and cash flow; part of Gordon Dadds Group, announced functions will need advisers to help
while for buyers, it can help them diversify a merger with Ince & Co International LLP, because the CFO has to carry on
and grow. But how can FDs and CFOs and commenced negotiations. By running the business while the process
bring added value to the process? January, things had changed. Gordon goes on, explains David Petrie, ICAEW
According to Christopher Yates, group Dadds was to acquire Ince UK, including head of corporate finance. It is also
finance director from Gordon Dadds its Beijing and Shanghai branches, for important for the finance department
Group, early planning provides detailed £27.3m, with the two firms trading as Ince to be properly resourced, adds
knowledge of each aspect of the deal – Gordon Dadds. The remainder of Ince Petrie, so it is able to deal with all the
and the chance to resolve potential International was subsequently placed additional requests for information
problems before it’s too late. in administration. during an M&A.
While Gurinder Sunner, who leads the “Have a plan but be adaptive,” says Yates notes the value of professional
Midlands practice for investment Yates, who explains the evolution of its project management support for all
company BGF, argues that vendors must deal required clear routes to raise issues functional leads during integration,
be clear about whether they want a with the executive negotiating team. “It including finance, with focused daily calls
10 APRIL 2019 BUSINESS & MANAGEMENTMERGERS AND ACQUISITIONS
helping to highlight and resolve cross routine conversations. The larger AFH is “Overpromising and
functional issues. an attractive buyer because it employs
overhead teams and frees up new underdelivering during a
NUMBER CRUNCHING PAYS OFF acquisitions to focus on their main process is a sure-fire way
Additionally, finance functions must be all activity. As part of its integration
over their data, says Sunner. It is crucial to acquisition model, vendors have upfront of getting it to fail, which
be able to highlight trends and key clarity about integrating systems, hurts confidence”
performance indicators (KPIs) with branding and processes.
well-managed, historic data to meet
potential buyers’ diligence requirements THE VALUE OF GREATNESS
– as well as instilling confidence and help A great CFO can be distinguished from
ensure a smoother process. an average one by how they reflect their buyer is knowing what they have bought.
Sunner believes well-prepared company culture, Sunner explains. Low Sunner says: “Over promising and under
companies are clear about what they employee churn is a good measure of a delivering during a process is a sure-fire
want. They depend on finance functions CFO’s ability to do this well. It’s also an way of getting it to fail, which hurts
regularly updating information, with a few indicator of a CFO’s emotional confidence.”
key KPIs to understand what is driving the intelligence, and commitment to Wright has found this goes beyond the
business – and so put themselves in a scrutinise episodes of high staff turnover. vendor simply hitting targets. AFH’s
better position to negotiate. This reduces recruitment and training reputation depends on good client
Too much irrelevant information, costs, freeing up money to create a great relationships, so it scrutinises how
suggests AIM-listed wealth management working environment and loyal vendors meet those targets.
business AFH, can be an indication of a workforce. A CFO who gets this will be Contractual mechanisms also ensure
potentially bad vendor. Poring over much more attractive to buyers. the buyer pays the right amount. Wright
reams of M&A detail is something AFH For Gordon Dadds Group, a “cultural described a deferred payments model,
knows all about, having acquired 14 and intellectual fit” is just as crucial. Yates where an instalment is paid up front,
smaller businesses in 2018 alone. CFO explains: “We have been careful not to with remaining instalments conditional
Paul Wright confirms: “We expect neglect the softer issues, such as on performance, paid during an
potential vendors to give clear financial corporate identity and communication, agreed period.
information about the business and the because of their impact on morale “We look at how they manage their
portfolios that the business is managing and productivity.” clients’ money, the way they deal with
for their clients, going back years.” This means communicating the clients and their investment portfolio,”
With its high levels of acquisition alignment of systems and processes, says Wright. “If the business is profitable
activity, AFH has well-established which Yates notes meant a lot of effort in because it charges clients management
processes, including a specialised finance bringing businesses together with regular fees that we wouldn’t charge, then we
acquisition team within the finance briefing sessions to share knowledge on would not be interested because they
function to review potential vendors’ niche parts of the business. would never meet their financial claims
responses to established surveys and However, a key success factor for the with the way we operate.”
WHAT’S DRIVING M&A? British companies 20% cheaper moment, with Petrie noting that banks
overnight, making returns instantly have significantly scaled back their
For UK companies, Brexit is the attractive to overseas shareholders. lending as the high street continues to
backdrop to the M&A landscape at This meant listed companies with face challenges.
the moment, says David Petrie, ICAEW good quality earnings generated “When deals get done, it’s usually an
head of corporate finance. outside the UK in stronger currencies opportunity to recapitalise in business,
The beginning of 2019 has been looked significantly cheaper. which includes replacing existing debt
much quieter with companies seeming Petrie has seen activity from overseas facilities,” he says.
to be waiting for greater certainty on enquirers about British businesses in Some larger UK companies are
the timing and shape of Brexit. specialist and high technology seeking to acquire businesses outside
Gurinder Sunner, from investment manufacturing, with the UK offering the UK to diversify their earning stream
company BGF, agrees that, following a good value for money after the in markets unaffected by Brexit.
rush of activity from the end of pound’s devaluation. Another driver for outward
December and into January, many Companies that continue to export investment is sustaining logistical or
businesses are now having high-tech products abroad are legal capability by acquiring companies
conversations without transacting attractive for overseas investors, and with an established regulatory presence
anything until they have a clearer Petrie feels the UK boasts a very in EU Markets, and licenses and
view on Brexit. mature and significant specialist permissions already in place.
OTTO STEININGER/IKON
Overall, Brexit’s impact seems to be manufacturing market. Petrie notes this is an attractive
sector-dependent. But why is that? In contrast, the retail and consumer option for regulated and licensed
Petrie explains that the devaluation of sector is finding it more difficult to industries like banking, finance
sterling after the referendum made attract external investment at the and insurance.
ICAEW.COM/BAM 11Fast fashion presents a
rare success story amid the
UK’s tricky retail climate.
COSTS
Lucy Douglas explores how
retailers maintain profitability
despite sustainability concerns
12 APRIL 2019 BUSINESS & MANAGEMENTBUSINESS MODELS: FAST FASHION
requires a complex supply chain. Tactics point putting them on a plane, which
On 15 January, online fashion retailer to bring down production and operating would obviously cost a lot more,
Boohoo released a trading update. costs – such as bulk buying and slow because they’ll still be in fashion in
The numbers were good: for the four shipping – are used on some items to eight weeks’ time.
months ending 31 December 2018, the offset the higher costs of trend-led pieces “There’s a theory that 80% of your sales
group’s revenue was up 44%. It saw that need to be produced quickly. will come from 20% of your stock,” Stiles
double-digit growth across all of its Elizabeth Stiles is a retail supply chain continues. “So 20% of the range will make
brands and all of the territories it operates consultant who used to work in buying the most amount of money – things like
in, including the UK. for the likes of Next and George at Asda. black leggings, white T-shirts, and maybe
The success of Boohoo stands out She says that the brands selling at the one anomaly trend piece that’s gone wild
against a wider retail landscape that has lowest price points generally aim for because a celebrity has worn it. Retailers
been characterised by its ongoing lower margins than the mid-range know the majority of their sales are going
struggles. According to the Centre for retailers – around 30-40% – and rely on to come from a handful of items.”
Retail Research, store closures and job vast economies of scale.
losses are both predicted to rise 19% in Often it’s not the apparel with the IN WITH THE NEW
2019. Factors including rising rents and highest recommended retail prices that Historically, fashion retailers bought and
business rates are pushing up operating make the most money. Basic items that launched two new product collections a
costs for high-street businesses and, as customers want season after season, year – spring/summer and autumn/winter.
more customers go shopping online, which often have the lowest retail price, Then Zara changed the rules. Its parent
it becomes harder to justify a large can be ordered at huge scale with a much company, Inditex, accelerated the brand’s
store footprint. lower cost per unit. “Take, for example, a operations to an unprecedented speed
According to Lisa Hooker, partner, black pair of leggings,” Stiles explains. – working with suppliers in nearby Turkey,
head of consumer markets at PwC, “Buyers know those leggings are a safe Portugal and Morocco to get thousands
consumer spending might be more bet. They are going to sell. You’d buy of new items from the design tables to
resilient than some observers expect. She 30,000 units and obviously you’d want stores in as little as a week, steadily
notes that the under 25s are more quite a decent margin on that.” throughout the year.
positive than any other customer One buyer said the largest fast fashion It’s a tactic that online-only retailers
segment and the only group that still players can place orders for as many as a such as Boohoo, Asos and Missguided
prioritises buying fashion. million units of basic items. have been able to replicate, working
Part of Boohoo’s appeal to younger Other strategies include bulk buying with factories in the UK to produce
consumers is its prices: dresses and tops fabrics that can be used across several garments quickly, giving them an edge
are as little as £5. Missguided, H&M and different products. “Fabric might make over legacy players that can’t match the
Primark also sell items for as little as a 50% of the cost price of your garment, so speed to market.
couple of pounds. if you can get a really good price on it, “The people who are spending
According to the latest McKinsey you’re going to have a much better deal,” money – young people who are driving
Global Fashion Index, value is the only explains Stiles. the market – can see new stuff all the
segment of the fashion market predicted Then there’s shipping. An item like the time and they expect it,” explains
to see increased year-on-year growth in hypothetical black leggings, Stiles says, Kien Tan, director for retail strategy at
2019. But while value retailers are happily might be produced by suppliers in PwC. “It’s harder for the legacy high
enabling their young consumers to buy low-cost countries like Bangladesh and street businesses to reorientate their
cheap and often, their business models shipped back by sea freight. model,” he says.
are coming under increasing scrutiny. “A boat could take anything up to eight Being online-only also insulates
McKinsey data suggests the number of weeks. If something is selling quickly, you companies like Boohoo and Asos from
garments produced each year doubled don’t want to wait eight weeks for it. But some of the risk of releasing new designs.
between 2000 and 2014. The average with something like leggings, there’s no They have limitless space in which to
consumer purchases 60% more garments display their stock, meaning they don’t
than at the turn of the century, but keeps have to sell through old lines to make way
each item for half as long. In the UK alone, for the new and can trial limited runs of
300,000 tonnes of textiles are sent to new items, sometimes buying as few as
landfill or incinerators each year. 50 units of a garment, then make larger
The Environmental Audit Select orders depending on what is selling well.
Committee completed an eight-month “When you’re not seeing an increase in
investigation into the fast fashion sector in the amount that people are spending
February, which revealed allegations of overall, creating a reason to shop
unscrupulous – and illegal – practices by “When you’re not seeing because of newness is critical,” says
some value retailers and third-party
suppliers to keep costs down. Time could
an increase in the Hooker. “And then being able to test
and repeat to avoid unplanned
be up for the fast fashion party. amount that people are markdowns is important.”
HARRY HAYSOM/IKON
Increasingly, retailers are able to use
BASE RATES spending overall, creating data tools to make their buying more
Selling fashion to fickle customers that
demand the latest styles at the lowest
a reason to shop because efficient and capitalise on trends more
effectively. Companies like Edited offer
possible price while turning a profit of newness is critical” retailers AI-based insights into how
ICAEW.COM/BAM 13BUSINESS MODELS: FAST FASHION
£90,000
customers are responding to different for mandatory environmental targets
styles and price points to, hopefully, for large retailers, tax incentives to
reduce the chance of being left with support recycling, repair and reuse
mark-downs and unsold stock. Amount paid out by UK-based garment among retailers, and a new charge of
“Animal print, for example, has been factories as a result of failing to comply 1p per garment to fund better textile
trending for a while and our software has with national minimum wage legislation recycling facilities.
been able pinpoint exactly where it’s Some retailers are already ahead of the
performing well, what categories are the game on this. Swedish retail giant H&M
most stocked in the print, where it has been leading the way, with ambitious
reached its peak and if the trend is on its targets such as aiming to use exclusively
way out,” explains Edited’s chief recycled or sustainably sourced materials
operating officer Julia Fowler. by 2030. Its new concept store, opened in
West London in December 2018, features
END OF THE PARTY? a repair and remake service to mend
There’s another challenge pressing H&M garments for customers.
on the doors of the fast fashion According to the State of Fashion 2019
retailers. Conversations about the report by McKinsey and Business of
environmental and social impact of Fashion, nine in 10 consumers from
their operations are going mainstream generation Z (those born between
and the tide of consumer sentiment is mid-1990s and 2010) believe companies
beginning to change. have a responsibility to address
The Environmental Audit Select environmental and social issues.
Committee’s investigation put a spotlight “It’s reached a tipping point where
on the supply chains of UK-based sustainability is not optional anymore,”
low-cost retailers, revealing evidence says Deloitte’s director of retail
from HMRC showing UK-based garment leadership, Kelly Meily. “Watching that
factories had been forced to pay out a play out in fast fashion will be very
total of £90,000 to employees for failing interesting. Because it requires greater
to comply with national minimum wage visibility of the supply chain, buying
legislation. Further evidence said that differently, not buying excess where
underpayment of garment factory possible, looking at different models of
workers in Leicester was an “open secret”. how to exit inventory. And I think it’s
In February, the committee published a also easy to see in terms of brand loyalty
report, Fixing fashion: clothing that, if you take a misstep, the backlash
consumption and sustainability, calling can be quite strong.”
SUSTAINABLE STYLE: END OF OWNERSHIP are hoping to help drive change in too. Players like Hardly Ever Worn It
consumer behaviour and sate an and EditSecondHand specialise in
The sustainability challenge is driving appetite for new products in a pre-owned luxury fashion; Vestiaire
the public to think critically about how sustainable way. Collection, another player in this
they consume fashion. McKinsey and The US is much further ahead in space, has some seven million
Deloitte have both identified “the this space; Rent the Runway, launched members. There’s also Thrift+, a new
end of ownership” as a key trend for in 2009, is reportedly valued at $750m. digital social venture that sells
fashion in 2019. Here are some of the Founder Jennifer Hyman famously pre-owned fashion and donates half
frontrunners in alternative fashion said she aims to put Zara out of the fee to a charitable cause chosen by
business models: business. It’s a business model that the previous owner of the item.
requires highly efficient logistics to Serving the whole market are
RENTAL succeed at scale. the likes of Vinted and eBay.
Identified as a growing trend by Social-first Depop, which has a
analysts and forecasting firms, RESALE customer base that’s 80% under 25s, is
fashion rental is in the rise in the UK. According to US-based digital partnering with apparel brands that
Renting suits for occasions is a second-hand retailer ThredUp, apparel are prioritising sustainability to
long-standing practice in menswear, resale is growing its market share. It is encourage more people to resell items
but it’s beginning to gain traction for expected to achieve 15% annual they stop wearing.
womenswear and accessories too. growth, increasing the market from
Shopping centre Westfield ran rental $20bn in 2017 to $41bn by 2022,
pop-ups at its Stratford site in compared with 2% expected annual $41bn
December 2017 and again in 2018. growth in the overall apparel market. Projected market
UK-based startups like Hirestreet The market of platforms available to share of apparel
(founded in 2018) and Wear the Walk buy and sell through has expanded resale by 2022
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which is authorised and regulated by the Financial Conduct Authority. For UK residents only. 19879 03/19All fall down Business is easy – as long as your assets exceed any liabilities. But what happens when they don’t? Pádraig Floyd explores the unsettling subject of administration 16 APRIL 2019 BUSINESS & MANAGEMENT
COVER STORY
and prevents any legal action against the
company from proceeding, unless
authorised by the administrators or the
court. Creditors may not take legal action
to recover outstanding sums while a
company is in administration.
TIMING IS EVERYTHING
The decision a business makes about
insolvency should be based on hard facts.
It revolves around the stage at which A BITTER-SWEET TALE
solvency will return or an injection of
capital or credit – and the sooner a Patisserie Valerie is a lesson in
decision is taken the better. Insolvency how an insolvency event can
practitioners (IPs) say that far too escalate very quickly indeed.
many businesses wait too long before Last autumn, the group,
seeking advice. owned by Risk Capital, had
A
“If you leave it too late, it could very 206 stores, 2,500 staff and
dministration is a word that well be terminal,” says Allison Broad, was worth £446m. However,
strikes fear into business senior manager, professional standards at on 10 October, its shares were
owners and employees alike. It ICAEW. “By then, liquidation may be more suspended at 429p after
signifies the end of a company, appropriate than administration.” “significant, and potentially
employment and all the associated hard In order for a recovery or sale, you need fraudulent, accounting
work – even if that is not necessarily the a good underlying business with assets irregularities” surfaced in the
reality. And there’s a lot of it about. someone will want that aren’t charged to wake of a HMRC winding-up
The high street is suffering sustained the hilt – something that fewer businesses petition for £1.14m of unpaid
instability as it adjusts to different have in these days of asset finance and taxes. Instead of the £28.8m
consumer shopping patterns and the invoice finance. “The earlier you enter supposedly in the bank, the
onslaught of online traders. that process, the greater the flexiblity,” company was £10m in debt.
The casual dining sector – pubs, cafes adds Broad. Majority shareholder Luke
and restaurants – is also struggling. In the ICAEW conducted a project in 2018 to Johnson pumped in £20m
past year, TV chef Jamie Oliver lost one of encourage directors to engage with while external shareholders
his Barbecoa restaurants – and very nearly professionals at a much earlier stage to contributed an extra £15.7m.
his Jamie’s Italian chain but for a company keep their options open, with a series of Within days FD Chris Marsh
voluntary arrangement. Meanwhile, real-life business case study videos was arrested and released on
Patisserie Valerie imploded after a financial available at tinyurl.com/BAM-InsVids bail before he resigned. The
scandal was discovered (see A bitter-sweet cause of the collapse was
tale, right) and fell into administration. NOT THE END OF THE ROAD two overdrafts totalling £9.7m
Travel is also under intense pressure If a business cannot raise money, then neither the board nor auditors
from rising fuel prices, Brexit and administration is an obvious route to were aware of. The scale
currency fluctuations. FlyBMI recently rescue a company as a going concern. spooked creditors, and on
entered administration, while Flybe was If that cannot be achieved, the next 22 January, Patisserie Valerie
sold to Connect Airways. target is to achieve a better result for the fell into administration with
Insolvency is quite simply the inability company’s creditors as a whole than the closure of 70 sites and the
of a business to cover its debts. There are is likely to be achieved by liquidating loss of over 900 jobs.
two tests. The first is assets not exceeding the company. A £15m Sports Direct offer
liabilities, but the most common one used If that, too, is untenable, an was rejected by administrator
is the cash flow forecast. administrator must release property in KPMG as being £2m too low.
In 2018, company insolvencies rose to order to clear some of the debts held by the However, on 14 February, a
17,439 and administrations increased by secured or preferential creditors. To have a management buy-out, backed
11.2% (see table overleaf ). But what exactly realistic prospect of selling a business by Dublin-based Causeway
is administration? requires more than just attractive assets, Capital, acquired 96 Patisserie
says Stuart Frith, president of R3. “The first Valerie cafes. Food wholesaler
DECISIONS, DECISIONS AF Blakemore acquired sister
A business enters administration with business Philpotts, securing
the appointment of an administrator as 210 jobs across 21 shops. The
ordered either by a court, a qualifying
“If you leave it too late, it two transactions raised £13m.
floating charge holder (for example, a could very well be terminal. A day later, the Department
EDWARD TUCKWELL
bank) or the company/directors. By then, liquidation may of Coffee & Social Affairs
The administrator oversees the process, acquired its coffee shop chain
which is designed to save the business as
be more appropriate Baker & Spice for £2.5m. In all,
a going concern. It protects the company than administration” the deals saved 2,000 jobs.
ICAEW.COM/BAM 17is the integrity and reliability of NEW COMPANY INSOLVENCIES IN ENGLAND AND WALES
management,” says Frith. “Then, and this
Number of insolvencies
is crucial, you need good and reliable % change
management information.” 2014 2015 2016 2017 2018 (2017 to 2018)
This covers not only trading, but profit Total new company 16,293 14,588 16,420 17,317 17,439 0.7
insolvencies
and loss, and most critically, cash flow
SOURCE: INSOLVENCY SERVICE AND COMPANIES HOUSE
forecasting. It is one of the most basic of Underlying total 16,293 14,588 14,716 14,631 16,090 10.0
insolvencies
requirements for running a business. Yet
Compulsory liquidations 3,755 2,889 2,930 2,806 3,117 11.1
IPs regularly encounter businesses where
the directors have delayed seeking advice Creditors’ voluntary 10,356 9,904 11,794 12,886 12,501 -3.0
liquidations (see note 1)
and yet haven’t done the numbers to know
Underlying CVLs 10,356 9,904 10,090 10,200 11,152 9.3
how bad things might actually be.
“If they haven’t got a cash flow forecast, Administrations 1,601 1,412 1,346 1,316 1,464 11.2
you don’t have the most basic tool for Company voluntary 559 372 345 307 356 16.0
arrangements
turnaround management or even assessing
how long the company has before if hits Receiverships 22 11 5 2 1 -50.0
the brick wall of insolvency,” says Frith. Notes
1 – excludes creditors’ voluntary liquidation following administration
After that, a supportive workforce and a 2 – 2018 figures are provisional
recognised and supportive customer base
are important qualities that will make a
business saleable. administration can be a good way to keeps the cost down and makes the sale
preserve a company’s goodwill. “We often quicker and easier. It might even increase
TIME IS NOT ON YOUR SIDE sell the goodwill of the business as part of the price because the buyer isn’t taking on
Once a business enters into administration, administration, purely on the basis it is the the risk of all the liabilities.
the clock is ticking: creditors need to be only way of keeping the business trading.
informed and alternatives pursued. You don’t actually have to shut the doors.” SHOW ME THE MONEY
Administrators will want a swift Bushby recently sold an online Many insolvencies are prompted by banks
resolution as they will become personally education business purchaser, took on all making a decision where directors have
liable for operational costs, such as payroll the existing customers, all the existing failed to, or agencies – such as HMRC –
and tax if a buyer is not found. There is courses, kept the goodwill and paid for fear they won’t see any money unless a
also a danger that goodwill seeps away it outright. A major advantage of company is wound up.
the longer the company remains in administration is that the seller does not Banks have greatly reduced the amount
administration. Graham Bushby, head of need to offer any warranties, says Bushby. they lend to business, especially SMEs,
RSM Restructuring Advisory, says that In particular, the buyer doesn’t need to in recent years, but there is still money
though it may seem counterintuitive, do as full a due diligence exercise, which available from assets lenders, investment
MY EXPERIENCE OF when you’re facing the that they should not trade straightforward, and justified
ADMINISTRATION destruction of everything irresponsibly. “That was what he sees as a good
you’ve grafted so hard for sound advice I‘d pass on to decision made at the
– 70 hours a week for nine anyone who’s in the same appropriate time.
Tom Rodgers co-founded years,” says Rodgers. “When situation,” says Rodgers. “It still hurt, because it was
salfordonline.com, a it’s all coming to a close, The rest of the process my baby,” Rodgers says. “But
hyper-local news site in everything looks very bleak.” was relatively easy to looking back, I can see that it
2008 offering daily news to He took the sensible route navigate. As there were few was absolutely the right
the city of Salford’s and sought advice from his creditors and few staff, the decision to make. It was a
226,000-strong population. accountant, who agreed that process was made simpler. loss to the community – and
The innovative model they would probably not Rodgers admits to being not to forget my ego – but
involved using social media trade out of the situation and nervous about the time heals.”
to gather news and involve announcement. He says: “I He adds: “You’ve got to
the local community. had absolutely no idea what be realistic about what’s left
Rodgers and his business the process would look like in the business and how far
partner ran the enterprise and imagined creditors lined you might be able to go to
for nine years. While it up outside the offices trade out of it. But if you
picked up many readers, it banging on the door waving want to protect people, and
never really generated bits of paper. In the end, it your reputation, then you’ve
enough revenue, leading to wasn’t like that at all.” got to make the right
the difficult decision of As the administration decision. For us, that was to
shutting down the business. process is highly structured, go through administration
“It can be very stressful he found it to be and be wound up.”
18 APRIL 2019 BUSINESS & MANAGEMENTCOVER STORY
funds and private equity houses. “They’re
driving a hard bargain, but there’s quite a
lot of money looking for opportunities,”
says Bushby. In particular, he is seeing
more mandates for what he calls
accelerated sales for businesses that are
not looking for funding, but an exit.
“There are plenty of businesses around
the world putting money into the UK,
looking to purchase businesses that are
heading towards distress on the basis they
think it presents a good opportunity,” he
says. “A lot of it is American money at the
moment as there is a good exchange rate
for them.”
In recent years, peer-to-peer funders
have become very prominent, but just
because they know how to lend money
doesn’t mean they are as proficient at FOOTBALL – THE NOT-SO to 12 in 2015. In most cases,
collecting it. Michael Mulligan, a partner BEAUTIFUL GAME this causes a struggling team
at law firm Shakespeare Martineau, says: to face relegation at the end
“They’re not generally insolvency-savvy It may be considered “a of the season.
nor geared up to enforce and deal with funny old game”, as the The other obstacle is the
defaults. That part of the lending sector has Jimmy Greaves saying goes, football creditors rule. This
a real need for insolvency practitioners and but football is definitely one prevents any club that comes
advisers to hold their hand through of those businesses where out of administration from
increasing defaults as the economy suffers the heart often (over)rules rejoining the league until all
and heads towards a recession.” the head. debts to players and clubs
It is certainly a game of two have been discharged.
PRE-PACKS MAY BE THE ANSWER halves – the haves and have Portsmouth is the only
If an administrator cannot find a buyer nots – a separation that has Premier League club to have
for the business as a going concern, a become more pronounced entered administration and is
pre-packaged administration – or pre-pack as money has flooded into now languishing in the third
– may be possible. the Premier League, but also tier of British football.
Pre-packs have attracted considerable the Championship. The once-mighty Leeds
flak in recent years. Creditors often don’t United fared no better
like them, as they have no control over the A Herculean task following two consecutive
process and hear about the sale relatively Since 1984, more than deductions – one of 10 points
late in the proceedings. Some also suspect 40 clubs in the football for entering administration,
a more thorough sales process might have league, and others just the second of 15 points for
brought them better returns. outside it, have spent time failing to leave it before the
The other concern surrounds phoenix in administration. start of the new season with a
companies rising from the embers of the Clubs that have entered company voluntary
previous one, says Broad. “The concern administration often face a association.
has been that they’ve been sold back to the greater struggle to get out
directors of the previous company,” she of it again and be able to Play to the whistle
says. “One day you’re trading with ABC continue for two key reasons. As with all businesses,
Ltd. Then it becomes insolvent and, after a The first is that the league administration does not
pre-pack, you could be trading with the imposes a points penalty mean the end for football
same people the next day.” on any club entering clubs. Leeds are again riding
It must comply with a Statement of administration. This is high in the second tier and a
Insolvency Practice 16 (SIP 16) that clearly designed to prevent any strong contender for the
sets out the requirements for making such club making use of the playoffs, if not automatic
a sale. The creation of the pre-pack pool, protections of administration promotion this season.
an independent panel of business experts to gain an advantage over Huddersfield Town may be
to provide a view on the deal, has also their sporting rivals. nailed to the bottom of the
provided greater protection against Premier League, but 15 years
phoenix companies, adds Broad. It’s only fair ago the club was minutes
While not every company can be saved, With the adoption of the from liquidation before it
administration offers a safe and structured financial fair play rules, which turned itself around.
environment that helps directors to secure European football governing All of which goes to show
the business’s future, even if it brings their body UEFA established, this that things aren’t always as
involvement to an end. penalty rose from 10 points bad as they may seem.
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