MBA Geek

As was widely anticipated, it seems like the UK Interest Rates have remained fixed at 0.5%, the historic low they had dropped to in March this year. This is good news for people on tracker mortgages as it means their mortgages are still costing them very little. However, there’s a concern for home owners that new mortgages at those rates are impossible to find and people are getting locked into higher rate mortgages. Does this translate into more profit for banks, who’s borrowing rate from the Bank of England has dropped?

It’s food for thought, especially if you’re in the market for a new mortgage; but don’t forget the knock on effect on other industries. At the end of the day, borrowing is what drives other businesses, whether you sell peanuts or diamond heart jewelry, whether you’re into services or hard liquor. Banks need to remain viable to provide this service to the economy, so producing a good margin of profit is imperative for them. But the question is, who decides what a reasonable margin of profit is? Should it be regulated by the government? Or should the free market decide?

So many questions!

I was reading a post on Link4Business called Accounts Demystified that talks about how important it is for business owners to get their head around their company’s accounts and what they mean. Here’s how the problem is described:

Accounting is viewed by most non accountants as a complicated and highly technical matter, and this is a view that is encouraged by the accountancy profession. But the truth is that it is based on a very simple principal which once understood allows business owners and managers to understand the financial state of their business without the need of a costly accountant.

He goes on to recommend a book that could help if you’re in the process of trying to understand your accounts; and the way the book is described sounds like it could be useful to anyone running their own business, especially as it was written by someone who isn’t accountant. So next time you’re looking for something to read, wait for a nice evening, pull our a couple of patio chairs and teach yourself some accounts.

So, the official word is out, the UK is in recession for the first time since 1991. The technical definition of recession is when the economy shrinks for 2 successive quarters, and that’s just what happened. Last quarter the economy deflated by 0.6% and in the last 3 months, the economy slowed by another 1.5%. Considering that happened over Christmas, which is supposed to be one of the busiest shopping periods of the year. Granted, the rest of the economy slows down but you don’t normally expect to see these sort of figures.

The pound is also losing value compared to other currencies around the world, which has the effect of making it harder for people to spend money abroad. For example, a tub of Ephedrasil hardcore costs $79 which today is around £58. Some time ago, this used to cost £45 just a few weeks ago. It’s not all bad news though; exporters get more for their products, assuming that they can make the sales they are after. And people being paid in dollars get more bang for their buck, figuratively speaking.

How has the recession affected you?

It’s interesting to note how many academic subjects end up being used in practical applications without most people being aware of what they’re actually doing. For example, you can look at subjects like mechanical engineering for example; where people who drive cars have no idea what’s going on beneath the bonnet.

Another similar subject, is finance, particularly in the world of insurance. Insurance is really all about managing some sort of risk. The formal disciple, called risk management, has evolved into a practice where organisations recognise and measure the level of risk they are exposing themselves to, and put in place plans for avoiding, mitigating or absorbing that risk. But this also effects each and every one of us in a simple form. I’m thinking about taking out a car or bike insurance policy. What this does is pass on the risk of some unforeseen event from yourself to the insurance company who has the financial backing to be able to deal with that sort of eventuality. The insurance company collects premiums from people who want to be covered and uses these to foot any claims that may arise. Premiums are calculated by measuring the risk that your policy covers, which is really a function of the likelihood and the financial cost of one of a set of events happening.

It’s quite fascinating to see the different flavours of insurance available to people. I was looking through the FAQ page on the Autonet Insurance website just to get an idea of what is available. They claim to be the country’s largest independently owned insurance brokers and have a huge selection of different insurance policies on offer (including quad-bikes which is cool). Must bookmark them for future reference.

I was reading about a financial instrument we have available here in the UK called an IVA (Individual Voluntary Arrangement) which is a formal and legally binding agreement between someone in debt and his creditors. It’s not quite a free ride through because although the terms of may vary, creditors will expect that their prospects of recovering money will be at least as good as in bankruptcy. Creditors also don’t lose their right to bankrupt you if you don’t fulfil your part of the agreement.

In order for the IVA to be binding, a minimum of 75% of creditors must agree to the IVA proposals. Creditors can suggest changes, however you must agree these in order for them to be implemented. The proposals usually call for the party in debt to make monthly payments and a dividend is paid out to creditors in full and final settlement of their debts.

The reason why creditors usually go for this sort of arrangement is because they expect a larger repayment than they would otherwise get if the debtor were made bankrupt. This is enough incentive for them to accept the IVA.

If you need to go down this route, it is always advisable to get a professional to guide you through the process. There are a number of organisations who will help you to avoid bankruptcy and get back on your feet. If you want to learn more about IVAs, check out the FAQ page on ClearDebt’s website.

I came across a really interesting article in FT talking about offshore jurisdictions and the pressure they are under because of the worsoning economic climate. I must say it is of personal interest as I’m based in the Isle of Man, but it’s also interesting to see how major economies around the world have started trying to look at their finances and trying to plug leaks. The article calls the UK’s threats towards the Isle of Man as ..

a sign of the growing hostility to the tiny states and islands around the world that harbour an estimated $6,000bn (£3,895bn, €4,725bn) of offshore assets. After months of financial crisis and banking scandals that rocked Liechtenstein and Switzerland, the world’s most powerful countries have lost patience.

An interesting part of the article is a reference to Delaware, a US state with much less transparency than most offshore jurisdictions:

Delaware company agents advertise the state as allowing even greater secrecy than offshore tax havens. “The Delaware LLC provides the anonymity that most international jurisdictions do not offer,” claims one agent website quoted by the task force.

So, for example, if a company selling Wilmington NC real estate was incorporated in Delaware, it has huge tax reporting flexibility without having to go offshore.

If you find this interesting you can read the complete article: Harbours of Resentment