SMEs need to plan for the year ahead

The economic headwinds are still blowing strongly, meaning business leaders must be on their toes, writes John Finn

Is Ireland, as Taoiseach Enda Kenny is so fond of telling us, really the best little country in the world in which to do (big) business?

The outlook for 2015 looks promising — certainly the most promising for years — but there is no time for complacency.

On the positive side, euro interest rates are likely to remain static at current low levels, which is good news for borrowers (including tracker mortgage holders). Lending will increase, as banks have reduced their loan books too much over the past few years and need to boost lending levels to increase their profitability. The euro has weakened, which has had a positive impact on the bottom line for exporters and the outlook is for further dollar strength, with a more uncertain view on prospects for sterling. More anon.

Oil prices have almost halved in dollar terms over six months, with the rise in dollar against the euro only partially offsetting this, so lower energy prices should persist in the short term at least.

Economic growth in the UK and US, key markets of Irish companies, is much better than in eurozone countries so our recovery is getting better momentum.

The 2016 UK referendum on EU membership, forthcoming should the Tories win the general election due to be held in May, could be positive for inward investment here — foreign companies need access to this market of 500m people but won’t get it easily from the UK if they vote to leave.

The risk disappears if such investors opt to locate in Ireland rather the UK.

So where are the potential storm clouds?

1. Low market interest rates need to translate into low borrowing rates for SME customers. This has not happened to date and rates are higher than for our eurozone peers, according to EU data, thereby increasing bank profitability again in this country (this is necessary to an extent but needs to be balanced).

2. An extension of the above is that it is the SME sector which will pay for increasing bank regulation as the larger firms won’t — they can (and will) haggle.

3. Lending to the SME sector has fallen continuously since 2008 — recall that the massive bank recapitalisation programme was deemed necessary by successive governments in order to free up lending to this sector. As a strategy, this has utterly failed.

4. Who will own the main banks operating here at the end of this year? Private equity involvement in any of them would not be good. If you want proof, look at what is happening to the property rental market in Dublin as such funds buy up large loan books. Their focus is simple — make money. There are no social imperatives for these guys

5. The taxation system for SMEs (and their owners) is still not fit for purpose. Higher marginal tax rates have no welfare benefits, tax is payable before any pensions can be provided for (USC), and the corporation tax system actually penalises small companies for keeping profits in the business by levying a surcharge on such profits — even though banks want to see more equity in the business. In effect, this makes bank borrowing (indirectly) even more expensive.

6. Reaction of markets if the Conservatives win the next election. The Tories have left themselves hostage to fortune by promising the EU referendum. Expect business in the UK to start campaigning against it, but the impact on the British economy of a vote to leave would be huge. Exporters to this market should take note.

7. Will we have another bout of eurozone wobbles? We’re not out of the woods just yet.

8. Politics. Not just national but international also. An election is quite possible here, on the way in the second quarter in the UK, and the US presidential campaign also gets under way soon.

So, with all this in mind, what are the action items for your SME to target? n Up your game if borrowing. Banks will lend but the experience of my larger clients is that the banks expect quality loan applications and financial projections. n Watch out for sterling weakness. Don’t assume that the euro will stay weak. n Maybe hook up with UK firms from a commercial perspective if the Tories get back into power. British companies may welcome strong Irish relationships as a hedge against a UK vote to exit the EU. n Is it possible to fix energy costs, including diesel and petrol? n Don’t fall into the same trap of repeating mistakes. There is a distinct danger of there being a repeat of mistakes at a macro level here (the Irish banking system is more concentrated than ever, while the property sector gets a tax break with CGT exemption).

Develop your company’s strategic plans but keep them real. And SME owners need to assess their pension planning this time around. Work to a plan.

John Finn is the managing director of Treasury Solutions

Economic growth in the UK and US is much better than in eurozone countries


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