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Prices, costs and business failure – a few examples from Ireland

In recent years hard economic times have hit Ireland and other developed economies. According to an article in the Guardian over a year ago now, the number of businesses failing in Ireland was 5 times that in 2010 – a huge chunk of these being construction firms. I hope have some sympathy for many of the hard-working business people who perhaps have seen a lot of their money lost. But, there is a  part of me (probably the accountant) who is not at all surprised at so many Irish businesses failing.  Why? Am I getting more cranky (Yes, of course I am)? Well, let me give me a few of many examples I have encountered over the last few years which seem to show poor decision making.  But before I do,  I should say that many Irish businesses who started during the “boom” years were already doomed to failure due to a pretty high cost structure e.g. rent.

The first example dates back about 2-3 years now. In the area where I live, we collect an amount of money each year to help maintain the common greens in the area. The landscaping business doing the work was charging about €7000 per annum and a new landscaper offered to do the work for €4500.  Both were sole traders with similar costs (as best I could guess at least).  The original landscaper said he could not do the work for that price and would not even reduce his current price, so the business was lost. Now I don’t know what either landscaper was thinking, but it fairly obvious that the original landscaper was living in the boom years in my opinion. He could have reduced his price by some amount, say €1500. This would mean his net contribution would fall by €1500, but instead he lost €7500 – a bad decision.

The second example relates to a really nice bakery I visited recently in a more affluent part of Dublin. Yes, the price is of course going to be affected by the area, but having paid €4.60 (ok my wife bought it) for a loaf of sour-dough bread I thought this is not a sustainable business. Even people in affluent areas cut back on spending in lean times. The point here is that I thought the price was more reflective of a time four or five years ago.

The third example relates to an employee within a business. The employee left as €900 per week income was not “enough” for him. The job involved manual labour and some skills, but nothing that could not be replaced readily. The right decision was made by the business owner, which was adiós amigo.  The employees decision was rather silly though, as the immediate income from social benefits would be way lower.

These three examples to some extent portray how high prices may have become engrained in the minds of business people following many years of the Celtic Tiger.  I like to study how practices have become accepted/taken-for-granted, or institutionalised.  When practices become institutionalised, there are hard to change. So I wonder are businesses in Ireland failing because some business owners cannot make the change in their minds to reduce costs or prices? In other words, they are finding it hard to break the institutionalised practices associated with past more affluent times. I know there are many other factors, but based on my experience, at least some business failures in Ireland result from a failure to change mindset.

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How business models can (climate) change

Following on from my last post on what is a business model, here I recount two articles I had saved from last year on how climate change can force businesses to change – and in some cases even change the business model.

The first article comes from Time (Sep 04, 2011). It recounts how Spanish winemaker Torres are increasingly moving their crops to higher, cooler areas of Spain.  Due to global warming, the hotter climate means sweeter fruit and earlier ripening. At the same time, the early ripening of the fruit is offset by the fact that the seeds and skin (which give flavour) are not ripe. Thus, as a possible solution, vines are being planted at a higher, cooler altitude in an effort to offset the warming experienced in traditional regions.

The second related article  comes from The Economist (Sep 10, 2011, online). In this articles, you can read how English wine is being produced in increased volumes and better quality – with locally grown grapes.  Again, it is climate change – bringing warmer climes to Southern England – meaning that more traditional grape varieties can be grown in England as opposed to the typically acidic German varieties. The result has been a product of increasing quality, and a tendency to produce higher margin sparkling wines – something that was not so easily done before. Thus, the business model of English vineyards may have changed from one where imported “grape juice” was added to make local wine, to one where high quality, high-margin product is the norm.

Dealing with a currency crisis/hyperinflation – a quick historical note and IAS29

Over the years, economies have suffered many currency crises, soaring interest rates and hyper-inflation.  Luckily, in my time as an accountant I have not had to deal with financial statements or other accounting information where the value of money became, well worthless. Runaway inflation for example occurred in Germany in the 1920’s and today it is still present in countries like Zimbabwe.  In times of hyper-inflation, accounting standards do give us some guidance. IAS 29 suggests hyperinflation may have several characteristics

1) the general population prefers to keep its wealth in non-monetary assets or in a relatively stable foreign currency. Amounts of local currency held are immediately invested to maintain purchasing power;

2) the general population regards monetary amounts not in terms of the local
currency but in terms of a relatively stable foreign currency. Prices may be quoted in that currency;

3) sales and purchases on credit take place at prices that compensate for the expected loss of purchasing power during the credit period, even if the period is short;
4) interest rates, wages and prices are linked to a price index; and
5) the cumulative inflation rate over three years is approaching, or exceeds, 100%.

Without going into too much detail on IAS 29, when such hyperinflation exists, the financial statements have to be restated to a monetary value using some form of price index.

I recently had the good luck to see real financial statements prepared during a hyperinflation period. The accounts were if a German brewery and dated back to 31/12/1923 – long before IAS 29 was even thought about. The inventory figure had 18 digits, which I think is called a quintillion. I cannot imagine what it must have been like to deal with figures like this. Mind you the kinds of figures being thrown around nowadays on sovereign debt are getting close to these kind of numbers. Just out of interest the accounts on 1/1/1924, showed a figure of about 2 million marks – a new mark was issued and pegged to gold I think.

 

 

Germany’s Finances Not as Sound as Believed

 

I could not help but share this.  It’s a kind of “get your own house in order first ” message.

Flawed Role Model: Germany’s Finances Not as Sound as Believed – SPIEGEL ONLINE – News – International. (Image from Spiegel Online)

So are we (Ireland) getting it right……

A small delve into economics, sorry. I read this article on the Wall Street Journal about my homeland (well, my dear home too!) and it make me think, well, we not total gobshites! Of course, we’re not, no matter what Fr. Jack (left says!). But in all seriousness, I can’t help but compare what the articles says to my own experience of talking to and helping small Irish businesses.  I don’t know anyone who is not worried about the future of their business, but yet they all pulled-up their socks and did what any management accountant would advise – look at your costs, your processes, what you do and so on. I know two businesses who realised  they needed to work 3-days weeks for almost a year, but they are now fine again. Others dropped price, or just worked smarter. I also can think of others who just would not adjust their cost structure, prices, staff or anything. Where do you think these guys are? Well nowhere simply. Of those businesses that adapted to survive, they have learned a hard lesson on cost structures, doing things well, adjusting price and looking after customers. Those, like the WSJ article say about Ireland, will be the stronger firms in the future ( I hope ).

Some “practical” economic indicators

Here’s an interesting blog post marking 25 years of the Big Mac index – http://www.accountingweb.co.uk/blog-post/mac-roeconomic-indicators

Pension problems

I don’t write very often about economics and politics- not really my thing. However, while on holidays I read a great article in the Guardian about the on-going pension problem/debate in the public and private sector. Have a read, I think it is a great summary of the many issues with our future pensions. Here us the link http://m.guardian.co.uk/business/2011/jul/03/pensions-unions-government-young-sacrificed?cat=business&type=article

Who makes what for the iPhone, and how much does it cost

As a management accountant, I’m always interested in what products cost to make. In today’s global manufacturing economy, it’s even more interesting as product components are sources from all over the world.  Time [May 16, 2011] provides a great example, the iPhone. According to the article, the total cost of the iPhone 5 is $179. Of this amount, $61 goes to Japanese suppliers, $11 to US  suppliers, $30 to Germany, $23 to South Korea, $7 to China [where the phone is assembled], and $48 goes to other unknown sources. Given that the selling price is around $500, this means that the loins share of the added value in an iPhone about, or $321, stays within the US company. I have to say I was surprised that China contributed so little to the final value.

A comparison of taxes and take-home pay

Just a short post today, as I’m enjoying some holidays. We hear a lot about the relative amount of tax we pay (in Ireland) as a portion of our take-home pay. An article  in the Economist of May 12 last puts Belgium at the top of the OECD countries in terms of how much of the total labour costs is taken in taxes and social insurance. It’s 55% in Belgium. Ireland is much lower at 29%. The UK stands at 33% and Germany at 55%. These figures are for single persons. Things change a little bit when you look at families, but not too much. This spreadsheet from the OECD’s website provides the full details. Take a look at “Tax Wedge overview” sheet in particular.

The Economist on Germany, the Ireland bailout, the Euro and all that.

I don’t normally deal with economics on my blog, but I could not resist this . I should first say that my better half is German, so we have German TV in the house. I seen the news report live on ZDF (a German state channel) a few weeks ago when Angela Merkel suggest that bond-holders must suffer and pay. While my heart agreed, my head (and I’m no finance/economics expert) oh feck, that’s Ireland in the deep stuff. Two weeks later, a ‘German’ bailout.  And Merkel and her French counter-part still want some bond-holders to suffer. Fair enough, but as the piece in The Economist says domestic politics needs to be put to one side for the greater good of Europe as a whole – just because Merkel is under pressure at home does not mean the whole of Europe should suffer from the onslaught of the markets. One final point, back in the 1990’s when I was in college, the whole EMU thing was a big part if our economics course. Our lecturer at the time was suspicious of the whole thing. He thought economic and monetary union without political union would fail. I now hear lots in the media about the need for fiscal union. Have the chickens come home to roost!

New business ideas: renting a car by the hour

I read this article in The Economist recently about businesses renting out cars by the hour. It’s a good story from many angles – threatening car manufacturers; reducing emissions; new business ideas. Have a read and see what you think.

The use of the word ‘fair’; some thoughts for accountants

In accounting we use the word ‘fair’ a bit. ‘Fair value’ and ‘true and fair view’ are two key concepts that come to mind. But what is fair, and what is unfair. What might be fair to you, is unfair to me and so on. And then, what if we try to translate ‘fair’ into other languages. Does it retain it’s meaning. I don’t know to be honest as I’m not a linguist. But as an accountant, I’m sort of programmed to think logically and look for a definite answer. But maybe there isn’t one.  To get you thinking, have a read of this piece from economist.com. It’s a bit a bit of fun on the use of the word ‘fair’ around the recent emergency budget in the UK.

Emerging markets – are they still emerging?

I don’t normally delve too much into the world of economics and marketing, but this piece from The Economist (April 15th, 2010) caught my eye.

Antoine van  Agtmael, a Dutch investment banker, actually coined the phrase “emerging markets” almost 30 years ago.  In this time some of what were emerging markets are now the largest markets in the world – China and India for example.  Market knowledge is a must for any business, even small ones, but when a business gets to the global level a detailed knowledge of (and arguably a presence in) all global markets is a must – emerging markets included. Van Agtmael cautions though on the use of the term “emerging markets”. Some markets, for example China, Brazil, South Korea and Mexico, have not only emerged, but upstaged developed economies. For example, the SamSung brand from South Korea is one of the worlds best known electronics brands. Perhaps a mindset change is needed to appreciate the business challenges of  some economies which have now well and truly emerged.

Here’s a link to the full article: Schumpeter: An emerging challenge | The Economist.

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