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LadyEllen -> RE: so Brits - what to spend your tenner on? (11/26/2008 8:21:17 AM)
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quote:
ORIGINAL: RealityLicks
For general consumption -
Hmmm, what to spend a tenner on..? That's the wrong question. I think the VAT cut is a sound idea. If you had a warehouse full of 1000 sofas that you wanted to retail over Christmas and were looking at having to discount heavily just to shift them, you'd be grateful that the Gov had opted to share some of the burden. Suddenly, you don't need to let staff go just to balance the books and those staff can go out and spend with others, too. The retail sector is receiving invaluable help via this move.
Really? The difference between survival and bankruptcy is 2.5% for these firms? The same firms that offer "two for one, half price, interest free credit over five years and nothing to pay for 12 months" are that close to going under? (clue; theyre making a killing on the goods - bought from India and China for next to nothing - which is why they can offer all that).
They (and retailers of all sorts) are already offering huge discounts from regular retail price - 2.5% is nothing compared to the discounts already given of 20, 30, 40% and more. 2.5% is unlikely to induce a buying frenzy of any sort if the discounts offered already have not.
Cashflow is where its at to survive this storm; assuming these firms have no purchase VAT - and they will be paying VAT on all they import, theyre getting a 2.5% reduction in their VAT payment which is very little help at all in terms of maintaining a positive cashflow.
Assuming you have purchase and sales VAT then the benefit depends on what your profit margin is. The higher your profit margin, the better your saving as a company on VAT. But we already know that profit margins are lower, because of all the discounts being offered.
If one had a 50% profit margin, then this benefits one's cashflow by £12-50 per £1000-00 worth of purchases / £1500-00 worth of sales (net VAT). One would be paying £75-00 to the exchequer in VAT instead of £87-50 on such a transaction. Lets say our turnover is £1 million per VAT quarter at such a profit margin; our VAT liability is now £75,000-00 rather than £87,500-00 - a saving in salary terms of £4167-00 per month, £500-00 of which is employers NI payments - a net roughly equivalent to 3 warehouse workers' wages; the three we already dismissed because sales have fallen off.
But if we're not making such a margin the arithmetic makes for far more dismal reading. And if we're offering extended no interest credit terms we're truly up the creek even before this VAT change - we still have to meet our quarterly VAT obligation at whatever rate, and with reduced sales we have no incoming cashflow with which to do that.
And then there's that bugbear that we invited in through our policy of exporting our manufacturing; foreign exchange rates. Given we're importing our retail wares in anything but Sterling, (and generally its USD thats used - against which Sterling has fallen markedly), any reduction in price we've given already by our own discounting and certainly any reduction in price we can offer by way of the 2.5% drop in VAT can be wiped out in an instant by the currency traders - and our profit margin (if we still have one after all our discounting) falls too - so reducing the benefit to us in cashflow terms of the 2.5% VAT reduction.
This is not invaluable help for anyone in short.
E
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