Top 10 trading tips

Partnership iStock 000006695073XSmall 146x219Avoiding 'corporate drag', ensuring 'cash is king'.....Azhar Ghose provides his top ten trading tips for local authorities.

Very often local authority trading companies or subsidiaries are launched with great fanfare and high hopes. They are equipped with an incredible amount of resources and finance that most business start-ups could only dream of. Yet despite all of these advantages, achieving success for these companies and keeping them afloat can still remain elusive.

Success for a trading enterprise is usually measured by the extent of its profits or losses. I have worked with local authority companies that have made unexpected losses and that have had to go cap in hand back to the local authority (LA) for more cash. In another case a company had no map to find its way and no working engine to drive it forward.

I set out my top ten tips to establish a successful public body trading entity.

1. Beware the politically driven trading entity

If the political ideology emanating from the ruling members is so strong that it starts to mould the officer’s findings and the business case then this is a disaster waiting to happen. The proposal will shift away from what is realistically achievable to a political fantasy.

2. Get the right people with the right skills

Two opposing views found in a local authority are that the private sector is the panacea for the public sector or the assumption that existing local authority staff can just as successfully operate in a commercial environment. Both views fail to appreciate that the trading entities are a hybrid of the public and private sector. To be successful they require people with the combined knowledge of these sectors so that they can hit the ground running and waste no time in exploiting opportunities. Time lost learning in business translates into a loss making venture.

Individuals recruited with only private sector experience have a steep learning curve to understand their new political masters and processes not to mention the overlap of public law. Similarly, commercially naïve local authority officers inevitably make mistakes and unwittingly give away costly advantages to rivals.

Do engage individuals who can demonstrate mastery of the two sectors. This can be attained by providing the necessary business training to existing staff or recruiting individuals with the desired skill set or better still finding staff who have had previous ‘hands on’ experience of running their own business.

3. Use the business plan as a working tool

A local authority will prepare a business case and plan for its trading enterprise for approval in order to satisfy a statutory obligation. Once approved the plan will be promptly discarded until the next time it needs to be approved.

The business plan needs to be fluid as it is a working tool that requires continuous review and revision to support the progress of the business. For example 3SFire Ltd was established for a business opportunity that never materialised in its first year of trading and it quickly racked up losses. The swift revision to its plan ensured its recovery by generating income from other previously unforeseen sources.

4. Think new business start-up and be frugal with your expenses in spite of the local authority bank of resources

The enterprise has to pay all its own costs and work very hard to generate sufficient income to cover these costs.

Ensure the enterprise is only resourced to incur minimum expenditure at the outset. For example do you need a full time employee where a part-time role may suffice?

If the company operates in the same way as the local authority without question it could financially cripple the business. Obvious examples of this include more people attendng a meeting than are necessary.

5. ‘Cash is king’

The enterprise needs to also identify sources of income that will generate quick cash returns to meet its day-to-day expenses. This will be critical to avoid sinking into an unmanageable level of debt whilst it secures longer term contracts and revenue.

6. Avoid the ‘corporate drag’ of the authority

If the local authority services are not geared up to supply the necessary services in a responsive way to its trading arm to meet its customers’ needs this could have serious consequences for the business model. The enterprise should therefore be free to source the services from other reliable sources.

7. Challenge the governance arrangements

There is a tendency for the companies to be top heavy at the initial stages particularly at the board level which merely serves to create additional costs, delays and work for the company.

Can the appointment of all the directors be justified? For example if it secures members support where these companies are viewed suspiciously or that the company can benefit from a specific expertise then it may be reasonable to do so.

Consider alternative participation with the company such as by setting up an advisory group for the directors to achieve the same outcomes but with less formality.

8. Establish good relations with the shareholder

The local authority may be one shareholder but within this body there will be many critical and sceptical voices whose support and cooperation will be essential. This will be particularly crucial when the business is loss making and needs the support to get over a difficult period.

It is also important to align the objectives of both the authority and its enterprise as this will be the lubricant between the two to avoid friction.

Good communication and opportunities to liaise with the members should be established such as regular updates, meetings and presentations.

9. Raise awareness and understanding of the trading entity by training authority staff and members

The trading entity will need support from the local authority staff such as finance or insurance especially in the early stages. Quite often inertia or the ‘corporate drag’ effect can result from the staff's insecurities about the brave new world in which they find themselves in. They may be ignorant of the new structures, processes and their respective supporting roles in this new commercial environment.

10. Establish good governance and compliance

As the trading entity is a hybrid of the public and private sector it will be operating subject to a more complex legal framework than can be expected for other private companies. For example in addition to company law it will also be subject to the Freedom of Information Act and local government considerations.

In order to ensure that the enterprise can also successfully navigate these issues it should have to hand the services of a specialist legal advisor and/ or company secretary.

Azhar Ghose ACIS is a freelance Solicitor and Chartered Secretary working in both the public and private sector and is a Director of AG Law Consultancy Ltd. Azhar can be contacted This email address is being protected from spambots. You need JavaScript enabled to view it., on 07531 918341 or via Linkedin.

This article first appeared in the Local Authority Companies and Partnerships (LACAP) bulletin for November 2014. LACAP is published online by LexisNexis. For more information go to Hann Books.