50% Income Tax

24 04 2009

alistair-darling-budget-2009The increase in the rate of income tax for the high earners seems to be the most talked about topic of this year’s budget. The tax applies to all those who earn £150,000 or more. Add to that the National Insurance contribution and it equates to more than half of one’s salary. The aim of this rise, according to the chancellor Alistair Darling, is to contribute to the Treasury coffers to make up for the huge amounts of public sector borrowings, £175 billion this year itself.

But it looks like the aim of this move is to gather support from the majority of the public who seem to hold all those who earn huge amounts of money responsible for all the mess that the economy is in. A poll by the Times newspaper shows that 57% of the respondents back this increase in tax. The accountancy and tax experts will definitely see a rise in business since they will have many clients asking them to look for loop holes allowing them to dodge the tax. And who will then pick up the bill? The hard working majority of course.

A lot of measures have been introduced in the budget to help people, like the scheme for the 18-25 year olds, £2000 car scrappage scheme, ISA allowance, etc. But its one thing to announce something and another thing to actually implement it.

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But, its not whats in the budget that’s important, but what wasn’t included in the budget. If the money coming in is less than the money going out, it may be OK to borrow money in the short term to cover that deficit. But somewhere along the line, cuts in spending will have to be made. There is no clear indication where those cuts will be made.

To make a start, how about the MPs themselves cutting back on the expenses that they claim from the tax payer. I mean claiming back 88p for a bath plug, how ridiculous is that. Its like almost mocking the tax payers. It is understandable that an MP from, say Newcastle, should be able to stay in London when performing his duties and expect the tax payer to pay for that. But that doesn’t mean buying a second home and pocketing the profit made from it. Its means lodging in a hotel during the stay. And if the MPs really care for the taxpayers, why not take a pay cut? Its not a lot to ask. Many workers have taken a pay cut in companies so that their colleagues can keep their jobs.

The Treasury estimates that it will spend £119 billion of the £671 billion on Health services this year. How about asking those who drink excessively and then take up the resources of the NHS when their bodies cant take it to pay for the service. How about allocating resources to curb rising obesity so that money doesn’t have to be spent on treating illnesses arising from it. Distributing garden tools and seeds across the schools would provide physical exercise and free produce as well.

People who currently receive help paying their fuel bills could be provided with subsidies allowing them to purchase energy efficient appliances such as electric kettles. This would reduce the energy used which would reduce the bills which would reduce the amount payed by the Government. Subsidies over 50% could also be provided to buy solar panels which would make homes thatreceive fuel allowance self sufficient which means that they wouldn’t be requiring the help from the Government.

There are many other ways that the money can be spent efficiently by the Government. Asking a group of over-paid Government consultants isn’t going to help, ask the public for ideas. I am sure that a lot of constructive ideas will emerge.

In hindsight, if the Government had spent their money wisely when it was coming in and saved for a rainy day, there might have been a bit of buffer that the Chancellor could have used. We instead ended up with no savings and a massive hurricane instead of a rainy day. The budget doesn’t seem to be based on sound economics, but on hope and a prayer. If the Chancellors own figures are to be believed from last year, we should be in a recovery sometime soon. But instead, we are still in a deep recession. Yet, he hopes the economy will grow by 3.5% in two years time. How? Manufacturing is affected despite the weak pound and the financial sector is not as big as it used to be. Who will then lead the recovery?

Even if the figures are somehow achieved, it is still better to plan for a slow growth and be pleasantly surprised by the massive growth than to plan/hope for massive growth and then get it spectacularly wrong.

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Budget 2009

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Market Research

9 04 2009

the-apprentice-home-gymWatching the candidates of The Apprentice talk about themselves misleads one into feeling that not only are they the best, but that they are the best of the best of the best when it comes to running a business and that Sir Alan Sugar should feel lucky that they are willing to work for him. Yet, when it comes to doing a task, they forget the most basic of business concepts.

As seems to be the norm these days, the task involved designing a portable piece of fitness equipment for, surprise surprise, the cash strapped consumer. It was clear from the beginning that the whole task was about the product. It is no surprise then that team Empire, which came up with a Gym-in-a-box idea failed to sell even one unit to two of the three retailers they pitched to. The candidates failed to realise that the perfect product isn’t one that tickles their own fancy, or one which their family would like to buy, but one which addresses the needs of the consumer, hence filling a possible gap in the market.

Both teams failed to conduct even basic market research to help them develop their product. Team Empire should have realised that creativity wasn’t their strongest bit and rather than sit around the table bouncing useless ideas of each other, they should have sent two people to the local gym to talk to the members there about the kinds of products they would like to buy and what price they were willing to pay for it. Another team of around two people could have scoured the internet looking at the products that their competitors were selling at that price level. After all, the task was about designing a product for consumers who were finding the gym membership too expensive and were looking for low cost alternatives. Who better to ask about the product than those who are going to buy it in the end.

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Their lack of research was also evident in their pricing strategy. It felt as if they had just closed their eyes and picked the figure of £29.99 randomly for their product. At that price, there are numerous alternatives in the market which are certainly better looking if not better value for money. Even the promotional material, including the pictures, looked like something that came out of a secondary school student’s Media Studies project.

Although team Ingnite failed to do any market research either, they still won the task and were offered a deal of exclusivity by John Lewis. One of the reasons why their product succeeded was perhaps because it was simple. Their opponents product was a case of “Jack of all Trades, Master of None”, like a new mobile phone which offers to make you a cup of tea and take your dog for a walk. Ignite’s product was also more pleasing to look at and truly portable.

Two days to come up with a concept, build a prototype and pitch a product is indeed a tall order and both the teams did that with a lot of patience and commitment. Was firing Majid the right decision? Its not for us to decide. After all, this isn’t a talent show, its a long job interview and Sir Alan should keep those whom he feels would be right for his organisation.

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Ryanair

28 02 2009

ryanairRyanair, it seems, is very good at attracting negative publicity every time it comes up with a cost-cutting measure to “decrease the air fare for all its customers”. Its latest one is a plan to charge its passengers £1 for each time they want to use the in-flight toilet.

It doesn’t look as if it really makes commercial sense for Ryanair though. After all, it doesn’t give free drinks on board its flights, passengers are expected to pay for them. That means that consumption of liquids is decreased in the first place, which means less number of people would be using the toilets anyways. Or as Rochelle Turner from Which?Holiday pointed out, passengers may end up buying less over-priced drinks on board because they will then be charged to relieve themselves of it. This would make the move counter-productive.

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I am sure it would cost a considerable sum of money to install a coin slot machine in each of its toilets on each of its flights. How many £1 paying people would it take for them to cover that cost? And if the whole idea is to lower the air fare, how much would it lower it? Its not as if the maintenance cost of the toilets depends on the number of times it is used. The toilets would cost the same if they were used ten times or just twice. The only variable cost, if Ryanair is really counting its pennies, would be stuff like the toilet paper and soap. So why not just save their passengers the hassle and the negative publicity and offer them for free, like what all airlines do currently?

Ryanair’s spokesman was quick to reassure that they had no immediate plan to implement this, but felt that their move was justified since passengers were already used to paying for toilets at bus and train stations. Well, toilets at bus and train stations are used by more people than a toilet on a plane. And in addition to generating enough revenue for maintenance, another reason why passengers are charged at stations is to discourage misuse of the facilities.

Last week Ryanair announced that by the end of this year, it would be replacing the check-in counters at the airports with manned baggage drop-in area. All customers instead would be expected to check-in online. According to Ryanair, about 75% of its customers are checking-in online currently. In that case, it does make commercial sense to get rid of check-in counters since only 25% of the passengers are using it. The cost saved on staff could genuinely help reduce the fares.

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Ryanair is by now used to being in the news for all the wrong reasons. The most recent one being its staff engaging in an unpleasant exchange with a blogger who thought he had found a bug on Ryanair’s website. Rather than apologize to the blogger, Ryanair instead said that they had no time for “idiot bloggers”. Idiot or not, that is not the best way for an organisation to talk to its stakeholders. Of course, this all wont result in passengers suddenly switching Ryanair for another airline. Far from it. In these though times, more people would be attracted to the cheap price and not the customer service. Still, those within Ryanair that come up with the cost cutting measures should spend some time now pondering over their public relations.

“Spend a pound to spend a penny” said Michael O’Leary yesterday. If they don’t learn where to draw the line for the cost cutting, it may end up being “Penny wise and Pound fool” for Ryanair.

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Throwaway Fashion

21 02 2009

primarkThe Department for the Environment, Food and Rural Affairs (Defra) has launched a “Sustainable Clothing Action Plan” co-inciding with the London Fashion Week to highlight the increasing problem of “fast fashion”. Apparently, UK consumers buy around two tonnes of clothes every year, and throw away a massive 1.2 million tonnes of them every year.

Rapidly changing fashion trends means that many consumers have to keep on buying new clothes to keep their wardrobe up-to-date and to compete with their friends and peers. This means that new clothes are worn only a few times and as trends change, are then consigned to the bin.

Of the two million tonnes of clothing bought every year, only 300,000 are recycled. If the majority of the clothes are worn only a couple of times, surely more of them can be recycled. Due to the current economic crisis, donations to charities has dropped. Consumers are cutting back on their spending. If more clothes that are in a good condition are donated to the charity shops, they can then sell them on to consumers looking for a bargain which results in a win-win situation. The charity shops get their revenue, consumers can bag a bargain and there are less clothes ending up in the landfill site.

One of the reasons why consumers can afford to keep on buying new clothes and then throw them away is partly due to ready availability of cheap fashionable clothes on the high street. However, many fail to see the real story behind the cheap price tag. An investigation by BBC’s Panorama last year revealed how Primark’s suppliers used factories with unfair standards and also child labour to provide the consumers on the high street with cheap fashionable clothing.

Jane Milne, who is the business environment director of the British Retail Consortium, said that retailers should be “applauded, not criticised, for providing customers with affordable clothing, particularly during these tough economic times”. Sure, if the low prices are due to a better, more efficient production technique. But not if someone less unfortunate than us halfway across the world is subsidising the cost for us by being exploited and made to work in unfair conditions.

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Unemployment nears 2 million

13 02 2009

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According to the figures released by the BBA (British Bankers Association), deposits in the high street banks fell by £2.3 billion in January alone.

One of the reasons for this is that people who have lost their jobs are having to use their savings to supplement the loss of their income. Even those who are still employed, but have been forced to reduce their working hours or accept a pay cut, have to withdraw from their savings to meet the shortfall. Those who bought houses when the prices were at their peak are having to use their savings to bridge the gap when their mortgage nears renewal. Many are also dipping into their savings to pay off their credit card bills from Christmas and other unsecured loans.

Also, with the base rate at 1% most high street banks are offering almost no significant rewards to savers for their money. There is almost no incentive for people to save. So, those with savings are looking for alternative forms of investment, something that will at least give them a rate of return above or at least matching the inflation rate. 

A typical banking model is banks borrowing money from savers in the form of deposits and lending that money out to borrowers in the form of mortgages, loans, credit cards, overdraft, etc. The bank charges the borrower a fee, in the form of interest, for the sum of money that is lent out. The bank gives the depositor a reward, in the form of interest, for allowing it to use its money. The fee that the bank charges the borrower is slightly higher than the rate which it pays out to its depositor, and the difference is pocketed by the bank.

Banks are still finding it difficult to borrow from the money markets. And even if they can, its going to be really expensive, which means that the extra cost would have to be passed on to the borrower. So, if deposits are decreasing and savers are withdrawing more money, banks have very little to fall back on. Also, savers have, to a great extent, lost faith with the banks. They will no doubt feel that their hard earned cash is being used to pay bonuses and reward failure.

It seems like banks will have to go a long way in winning the trust of the consumer and offer more than the paltry rewards to attract their savings. Without the deposits, they’ll find it really hard to fund the lending. Unless, of course, the name of the bank is Northern Rock which has access to the pockets of the taxpayers. Northern Rock was nationalised and was lent some £28bn by the Government last year. It payed back most of it, around £18bn, by forcing its existing customers to move to other providers. This week it pledged that it would offer new mortgages which will be worth around £14bn over the next two years. It most certainly wont be anywhere near the 100% it used to offer.     

The overall sentiment seems to be that if bankers want their customers’ money, they will have to work really hard to get it, because the customers would rather spend it on themselves than paying the bankers to spend it for them.
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Hidden Costs of Redundancies

6 01 2009

jobcentre-plusThe number of people unemployed is rising everyday due to firms going bankrupt or businesses making some of their staff redundant as part of a “cost-cutting measure”. However, the Chartered Institute of Personnel and Development (CIPD) warned yesterday that redundancies could in fact prove to be a false economy for businesses.

It estimates that the actual cost of redundancy could reach up to £16,000 for each employee made redundant. This figure takes into account the redundancy payment and the costs involved in recruiting and training replacement staff. But, redundancies can also lead to lower staff morale because when employees see some of their colleagues being made redundant, they fear about the security of their own jobs. This leads to a drop in their productivity which in some cases would lead to the business losing its competitive edge over a period of time. The CIPD’s figures doesn’t take these factors into account.

For most businesses redundancies are the most straight forward ways of cutting down costs in the short term. Less staff means less wages to be paid each month. Although analysts and bankers and politicians cannot agree on how long it will take for the economic condition to improve, they all agree that it will improve in the near future.

When the situation does improve, a business should be in a position to meet the upsurge in demand if it wants a share of the increasing market. This does not only mean having enough number of staff, but staff that are properly trained and equipped with necessary skills to help them do their jobs to the best of their abilities and be efficient. So, when employees are made redundant, they take the skills that they have acquired at the firm’s expense with them and this is another indirect cost to the business.

When the economy is booming, there is demand for staff from businesses who want to grow. For those businesses that require staff with special skills, this could prove to be a costly affair because people with those specific skills might be hard to find. Also, if people with a particular skill are in high demand, the business would have to be prepared to pay a higher salary or offer lucrative perks or else the prospective employee might end up working for the competitor.

Most businesses have a Human Resources Department which looks at the company’s long term objectives and then works out the staffing needs like the kind of staff required, the kind of skills required, etc., to achieve these objectives. Rather than just making staff redundant, businesses looking to grow in the near future should perhaps evaluate their long term goals and view the currently unemployed people as a pool of highly skilled employees and recruit them cheaply to make the best of the up turn. To help realise the true cost of redundancy, the CIPD has created a formula for employers.

Real cost of redundancy = (n ×R) + (x ×H) + (x ×T) + ny(H + T) + Wz(P – n)

Where:
• n = number of people made redundant
• R = redundancy payments
• x = number of people subsequently hired
• H = hiring costs
• T = induction/training cost
• y = percentage quitting post redundancy
• W= average monthly staff salary
• z = percentage reduction in output per worker caused by lower morale
• P = number of people employed prior to redundancies

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High Street Blues

23 12 2008

BRITAIN-BUSINESS-RETAIL-SALESThe trading that occurs in the run up to Christmas is very crucial to retailers even in the “normal” years. It allows them to make up for the losses they might have incurred over the year and helps them prepare financially for the coming year. 2008 has been, by any standards, anything but a normal year. Huge banks have become small banks, some have been swallowed up by bigger banks, some have merged with other banks while some have disappeared altogether.

Little surprise then that the past few weeks have been really tense for the retailers. The number of shoppers visiting the shops have decreased. As a result, retailers have been forced to cut their prices to attract shoppers. According to Experian, the number of shoppers during the weekend, the last weekend before Christmas, was down by 8.7% as compared to last year. However, the number of shoppers yesterday were up 13.6% as compared to the same Monday last year.

It’s a bit unfair to compare the two corresponding Mondays because last year the Monday was Christmas Eve. The kind of shoppers who go shopping on Christmas Eve are generally those looking for food items or ingredients for their Christmas dinner, last minute shoppers or those looking for last minute bargains.

Even though the number of shoppers increased, it still remains to be seen how much revenue that translates into. The main reason why more consumers went out to shop perhaps has a lot to do with a last minute heavy discounts by retailers in desperate attempt to attract shoppers. According to the accountants Ernst & Young, the average discounts were 40%, up from 38% last year. It means that even though people had more shopping bags in their hands, the retailers wouldn’t have made a lot of money from that.

Although the high street is seeing a decline in the number of shoppers, according to Hitwise, the number of people visiting the websites of high street retailers has increased. Between Dec 18 and Dec 21, traffic to online retailers(including internet-only and high street) increased by 2.2% on average as compared to last year. Websites of high street retailers saw their traffic increase by 2.7% on Saturday and 5.9% on Sunday as compared to last year.

When it comes to prices, mostly the online retailers clearly have an advantage over their high street rivals. But their biggest drawback is that the items have to ordered before a certain date to ensure that they are delivered in time for Christmas. On the other hand, the websites of high retailers allow the shoppers to book their products online and pick them up instore. It may not be cheaper than the internet-only retailers, but it certainly is more convenient. One of the put-offs of shopping on the high street before Christmas is clearly having to navigate through crowded streets and aisles holding your shopping bags. It is also very hard to compare prices across different retailers and browse the items leisurely.

The rise in the number of shoppers will definately be of some relief to retailers. But it will by no means make up for the dismal sales and revenues they have generated over the past few weeks. Woolworths and MFI have gone bankrupt and Whittard of Chelsea is said to be on the brink of administration. And it is clear that more will have the same fate in the new year, what remains to be seen is who they will be.

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