Grant Thornton expert Phil Sharpe on Cambridgeshire business growth and the impact of Brexit
PUBLISHED: 22:11 09 May 2017 | UPDATED: 22:11 09 May 2017
Iliffe Media Ltd
We get a masterclass in business development from Phil Sharpe, a director in advisory and the growth lead for Grant Thornton in Cambridge.
Most businesses aspire to it but many struggle to achieve it. So how can you put your company on the road to growth?
First, we need an understanding of what growth means.
“It’s different things for different businesses,” says Phil. “You can look at growth in terms of revenue but in Cambridge in particular we’ve got a number of pre-revenue businesses or very early-stage businesses so for them it may mean further development of technology, it may mean them growing the number of people they’ve got, or it may mean greater market coverage.
“For other businesses, it may mean growth in terms of the value of the business – that might come through in terms of investing in new equipment in advance of revenue growth or through improving profitability, so they are a more efficient business.”
As leader of the advisory team at Grant Thornton’s office on Cambridge Science Park, Phil’s role involves supporting companies to develop.
“A lot of our advisory business is around supporting growth through a combination of fundraising, strategy or finding partners to grow with or to provide additional finance,” he says.
“At one end of the spectrum I’ve got a manufacturing company operating in the smart switch sector. There’s a global plan to switch everyone to smart meters. That sector is going through a massive increase because this has been mandated by governments around the world. They are at an early stage and have developed technology that sits in the smart meter.
“They’ve got challenges around manufacturing in an efficient way – and they are setting up a facility in India now. There’s almost too much for them to go for as a small business so focus is a key thing for them.”
At the other end of the spectrum, Grant Thornton’s clients include Mick George, which supplies services to the construction industry.
“It’s been through a massive growth curve,” says Phil. “So it’s a business with different challenges. It’s established already and wants to go into new areas and markets, so how does it continue that momentum?”
Is all business growth welcome then?
“The old adage is revenue is flattery and profit is sanity. Cash is king, ultimately,” cautions Phil.
“Good growth is growth that adds value to the business: It may not be purely cash or profit generation. It may relate to customer acquisitions, innovation or other ways in which you can see the business improving.
“Bad growth is where people spend a lot of time chasing things that may not generate added value to the business.
“Not all growth needs to be sustainable. Looking at the smart meter marketplace, there is a fantastic opportunity in that area but there is a lifetime associated with that product.”
Shorter-term opportunities can be just what a company needs, however, to establish themselves for longer-term success.
“There is a business in Royston that did a lot of switching over of set-top boxes to Channel 5 back in the late 1990s,” recalls Phil. “There was fantastic growth in a very short period of time but it was for a finite period and there was the potential for a massive decline afterwards. However, they used it as a platform to grow the business into areas that were sustainable. So you can use a short-term opportunity to give you the cash and ability to move into a longer-term plan.”
Grant Thornton measures the business health of Cambridgeshire Ltd each year and publishes its top 100 companies list, based on turnover. The businesses featured in this section all made it into the list.
“Overall, as a region, Cambridgeshire is performing very strongly,” says Phil. “You can look at the levels of investment going on as an indicator. The amount of inward investment is massive, there is a lot of infrastructure building going on and the vast majority of what we hear from clients is very positive.
“The Cambridgeshire 100 is our best point of reference. We had a strong growth theme last year in terms of revenue and number of employees.
“We also had very strong growth in terms of investment in the region. Balance sheet values were increasing through a combination of retained profitability and investment into acquisitions and into plant and machinery.
“We saw people feeling confident to invest. During the last decade of coming out of recession and slow growth, businesses trimmed a lot of fat and became a lot leaner so when they started seeing economic growth, more of it has dropped to the bottom line. They’ve then taken that profitability growth and invested it for the future.
“We’ve seen some really exceptional growth in profitability. I’ve got a client who went from £6million revenue to £50million in four years – based on very strong markets and products.”
And there’s more good news: We’re not saddled with heavy debts here either.
“The balance sheet for Cambridgeshire has a net nil debt cash position,” reveals Phil. “Cambridgeshire as a region doesn’t borrow that much and what it does it could pay off from cash reserves.
“Regions vary – if you look across to Norfolk and Suffolk, they are much more conservative. If you look at Essex, there is a lot more debt on the balance sheets.
“In this region we have a lot of early-stage businesses with limited debt capacity and therefore don’t borrow so much.
Looming large, though, is Brexit. What impact has Britain’s vote to leave the EU had?
“It depends on whether you are a net importer or net exporter,” says Phil. “Manufacturing exporters have done very well because their prices are now cheap relative to the market they are going into as the value of the pound has fallen.
“One of the questions for those businesses is: Are they making the most of the opportunity? They’ve seen good growth but they’ve passed on too much benefit in some cases. They are not revisiting their pricing structures: It’s a missed opportunity.
“Others that have seen strong benefits from exchange rate movement are some of the software businesses where revenues are in dollars. You can look at the impact on the FTSE and it’s the consequence of the repatriation of funds to the UK.
“One client has seen a £2million improvement in profitability from the dollar exchange rate movement – and that was on a relatively small business with £20million revenues.”
Will that last?
“Different economists have different views. Some take the view that the pound could fall slightly further. It’s difficult, for me, to see that happening. But there’s so much uncertainty around, it’s impossible to call.
“When Donald Trump became US president, the dollar actually improved its valuation but has fallen since because he’s finding he can’t put through the changes he wants to.
“Sensible businesses will look at their prices and hedge. You don’t want your business to be a currency.”
What of net importers, like many food and consumer businesses?
“They have more challenges. They are now seeing inflation because their bank hedging positions have now expired and cost pressures are coming through that are difficult to pass on.
“There’s an awful lot of pressure on supermarkets from consumers to keep the prices low: It’s an incredibly competitive marketplace and there’s a lot of focus on value in that sector,” observes Phil.
As consumers then, we may have to get used to higher prices at the tills in a post-Brexit era.
“We are seeing it coming through – some of it in price increases but also as reengineering of products as well,” says Phil. “Whether it’s packets getting smaller or ingredients changing, that’s been ongoing throughout the slow growth period.
“The exchange rate movement, a bit like the VAT change several years ago, is a one-off movement that has a one-off impact on inflation that’s coming through in the next 12 months. The challenge then is to what extent that will drive an increase in pricing, which will lead to high wage inflation.
“The extent it will go through to wage inflation will vary. But certainly businesses are starting to see more pressure on hiring the right people.
“Access to people and talent is going to be the next biggest impact that businesses will have,” suggests Phil.
Already some hi-tech businesses and Cambridge University have warned of a brain drain as EU residents hesitate over relocating to the UK amid uncertainty over their future residency.
But the issue is affecting workers at all skill levels, explains Phil, thanks in part to the weaker pound.
“We are seeing a reduction in manual workers coming to work on farms and factories as they can earn more now in Germany.
“When they are transferring money back to Poland or other parts of Europe, the money works out more than it would in the UK,” says Phil.
What would he advise business leaders to do during the prolonged period of Brexit negotiations?
“People need to be looking at their whole supply chain – where they are sourcing from but also where they are selling to. There will be a period of change with trade agreements coming into place. But you can look at new or different markets and how you access them.”
In a world of increasing automation, perhaps a reduction in the availability of cheap, manual labour will drive innovation.
“There is already a lot of automation in lots of businesses. But it’s difficult to replace some jobs. In the food sector, with picking and placing, it’s difficult or very expensive to automate, and in a sector where returns are very low, making the investment is very difficult. It’s a vicious circle,” he says.
The issue highlights the challenges for businesses trying to make step changes with a legacy to protect.
“We operate CEO Room – a forum where we work with board members on the strategy for their businesses. We look at visioning and what their sector will look like in 10 or 15 years’ time. We look at how you prepare for that and ask what do you need to do in your business today, tomorrow and in the next five years.
“It can be about dispelling and challenging current thinking and asking what could that sector look like.
“You can look at some of the very fast-growing businesses that have caused disruptive change in a sector, like Uber,” says Phil, referring to the app-driven minicab company.
“That’s from someone not having the burden of a 500-taxi firm, coming in from a completely different angle and bringing in new technology and different thinking to a sector. Given what Uber has done and what online and apps are doing, what could your business look like in future?”
Good ideas, of course, don’t guarantee success.
“What you get in Cambridge are huge amounts of very good ideas and people that don’t necessarily have the experience of commercialising them,” says Phil. “How do you put a wrapper of experienced people around them so they have credibility?”
His advice for start-ups is to ensure the capital structure is right.
“With early-stage businesses, we might see people putting a lot of debt in or too much of their own personal funding, which won’t get them where they need.
“You can look at equity funding. That will vary – it may be early stage seed funding, it may the likes of Cambridge Innovation Capital putting funds in to grow it, or it may be friends and family.
“Other businesses may have a combination of debt and equity.”
But he acknowledges: “Access to funding is an issue in this region, particularly for early-stage businesses – not just in technology but for other businesses as well.”
“Some have found the level of interest for investment in tech businesses has been a lot stronger on the US West coast and valuations have been stronger as well.”
What else is putting a brake on business growth here?
“Infrastructure is one people talk about a lot – the A14, the rail network. But I think there’s a lot of technology out there and coming out that will take some steam out of that. We can use infrastructure as too much of an excuse.
“During school holidays, how much easier is it to drive on the A14? So rather than saying it needs to be 20 per cent bigger, perhaps the question we should asking is how can we use technology to take 20 per cent of the traffic away.
“We also need to look at cultures within businesses. Flexible working is something we all talk about but culturally adopting it has been challenging for some businesses.
“How we recruit and retain the best people is the really big challenge. It’s a common theme – particularly here where there is virtually zero unemployment. It’s about innovative remuneration structures, employee engagement and training and skills.”
Get those things right, and you’ll take a big stride forward on the road to growth.