The REAL reason so many small energy suppliers have failed - it was inevitable.

[Deleted User]

@[Deleted User] Agreed. The suppliers are abusing the situation, and taking advantage of it. The customer is always on the back foot, and chasing credit balances from one company to another, and never actually receiving it. The suppliers are, and always have been, using the customer as a source of free working capital, and essentially throwing their weight around, based on figures that are quite often only estimates. And we have fallen for it. 

wakeupalarm

MWT said:

wakeupalarm said:

Customers credit balances should never have been allowed to be used as working capital for these energy firms.  It should have been ringfenced and protected.  If they wanted funding for their activities, they should have put there own money in, or taken out loans to finance it, just like any other business has to.  This is a failure of regulation.

The error is in not stamping down on the creativity that was employed by some, there is nothing intrinsically wrong in having people pay in advance for something that needs to be bought in advance (at least in part) and that the customer is already consuming...

If it was being used to buy energy in advance, then the companies would have covered customers predicted usage for a year before the price increases.  But it wasn't been used to buy energy in advance, it was being used to finance working capital of the energy companies as well as directors unrelated family businesses and questionable consultancy work.

MWT

wakeupalarm said:

If it was being used to buy energy in advance, then the companies would have covered customers predicted usage for a year before the price increases.

That would only work the customers were paying for their energy a year in advance as well, which isn't the case of course...

wakeupalarm said:

But it wasn't been used to buy energy in advance, it was being used to finance working capital of the energy companies as well as directors unrelated family businesses and questionable consultancy work.

With respect you are picking on one bad example, and assuming the rest were doing the same...

... and of course the payments 'finance working capital' that is the very definition of what working capital is, current assets minus current liabilities...

ihatetrump

@MWT

The error is in not stamping down on the creativity that was employed by some, there is nothing intrinsically wrong in having people pay in advance for something that needs to be bought in advance (at least in part) and that the customer is already consuming...

You are correct - but only as part of an overall sound business practice - airlines and hotels and hotels do it all the time - but at least the customer sees something that is tangible (a plane to fly in or a hotel to stay in).

However, using that customer cash (which should be ring fenced) not to buy future energy supply but to line the Directors/Shareholders pockets? that's more than being 'creative' or  'simple economics' as Jake Brown is famously quoted as saying - it's a get rich quick scheme - still being peddled by Andrew Dyball at Dyball Associates - responsible for the creation of so many Energy Companies that are now failing - same MO with all of them. Note that Jake Brown & his Dad still remain Directors of Dyball to this day.

ihatetrump

... and of course the payments 'finance working capital' that is the very definition of what working capital is, current assets minus current liabilities...

And when it's a negative it's not really working capital: (last filed accounts)

[Deleted User]

To be fair, who actually looks at the accounts when they are choosing an energy supplier? I would expect someone higher up the food chain to be doing that, for instance when they are issuing licences to companies, and assessing business plans etc. 

Furthermore, accounts can show whatever you want them to show, if you have a clever accountant, and need to be looked at in the context of its relationships with other companies or individuals. Just because you are making a loss now doesn’t you will always make a loss, or vice versa.

Also ideally accounts should be subject to official audit unless, of course, the company is too small. However, the audit industry hasn’t exactly covered itself in glory in recent times. Even large audit groups have suffered large fines for incompetence and poor oversight, and being too close to their clients. 

BobT36

ihatetrump said:

@MWT

However, using that customer cash (which should be ring fenced) not to buy future energy supply but to line the Directors/Shareholders pockets? that's more than being 'creative' or  'simple economics' as Jake Brown is famously quoted as saying - it's a get rich quick scheme - still being peddled by Andrew Dyball at Dyball Associates - responsible for the creation of so many Energy Companies that are now failing - same MO with all of them. Note that Jake Brown & his Dad still remain Directors of Dyball to this day.

Yup and the most irritating thing of all is that this is allowed to happen in an industry that is an essential. it's not like you can just "take your money elsewhere" or "go without". You're forced to make these ****** rich, by lending them YOUR hard earned money so they can live in those massive multi-million detached houses that the Avro bosses do. 

ihatetrump

In my OP I said the following:

1. Even in the good years, many (not all) of these businesses failed to make a profit - why should they? they attracted new customers with energy prices that were too good for many of us (including me) to pass up on - often selling at their own cost (check out AVRO again - almost 100% cost of sales). It didn't matter that their revenues weren't enough to cover their costs, they could always use customer advance payments to fund their growing yet unprofitable businesses - especially with so many new customers joining and adding to their cash pile - more fresh blood to the feeding frenzy.

Here's the evidence:



I defy anyone to show me a viable business model (without any shareholder investment or bank funding) that sells the goods/products/services it buys at a 99.92% cost of sales. Yes we all know about Google and Amazon who sustained incredible early year losses - all funded by their shareholders who are now reaping the rewards.

The Directors of AVRO will have known a very long time ago that they were in trouble - who wouldn't when you're sustaining a £28M loss and know you don't have any funding other than the goodwill of your customers (who were none the wiser)? It really beggars belief that OFGEM didn't have the gumption to pick this up when the accounts were eventually filed in 2020.

The writing was really on the wall on the 28th June this year - 2 days before AVRO were obligated to file their 2020 accounts - so what did they do?:



They changed their year end by 1 day - which (stupidly) under Company Law gives them an extra 3 months to file their accounts.

The Auditors MUST have known by then that things weren't right - they must have done their work by then - they failed to blow the whistle and AVRO continued to trade for another 3 months before finally calling it quits on 22nd September
. 

Hopefully the Administrators will have picked up on all of this and the Directors will be held to account with personal liability - then as @BobT36 so eloquently puts it - lose their multi-million  pound houses!

Streaky_Bacon

The OP does not understand what Share Capital is. It is not the money that is put into the company by the shareholders.

It is the money that is raised by selling stock.

It is perfectly common practice for a limited company to issue £100 of stock to its shareholders.

This is so Bob and Carol can start a company and each get £50 of stock, in other words 50% of the business each.

£100 is common because it is easy to work out the percentages.

This is just how the company ownership is accounted for. It has absolutely nothing to do with how much money Bob and Carol, or anybody else actually puts into the common.

MWT

Streaky_Bacon said:

This is just how the company ownership is accounted for. It has absolutely nothing to do with how much money Bob and Carol, or anybody else actually puts into the common.

Although that is certainly true, the administrators have confirmed that no additional working capital of any kind was obtained by the company beyond the amounts received from customer payments, so the essence of the comment remains accurate.