The ongoing pain in Spain – the banks must take the blame

 Spanish bank Santander has said its quarterly profits fell by more than 90% after taking provisions for bad property loans in its local market.

Net income fell to 100m Euros (£81m) in the third quarter from 1.8bn euros in the same period last year, it said.

The bank also commented that UK profit fell 21% to 337m Euros in the three months.

So far this year Santander has set aside 3.5bn Euros for provisions for property losses - a problem facing all Spanish banks.

The Spanish government has found itself in financial difficulty since the 2008 global financial crisis caused a big crash in the country's over-heated property market, and many fear that it will need a full bailout on top of the banking loan that has already been agreed.

Santander said that total problematic property assets amounted to 18.5bn Euros.

The jobless total in Spain has now reached a record 25% and Greece will shortly apply for more funding and assistance on its debt programme against this background the Euro woes look set to continue for some considerable time.

Avoiding the trap

A combination of recent market volatility coupled with latest pronouncements from politicians and economists alike have done little to restore confidence and now more than ever is the time for good housekeeping and firm controls.

Constant monitoring of counter party risk is the order of the day combined with disciplined inventory control.

Just because a customer has always being reliable in the past is unfortunately no guide as to future performance. Look out for tell tale signs such as unusual ordering patterns, delays in payments etc. Very few businesses fail overnight and there are usually enough warning signals which should enable a supplier to reduce its risk

The coming months will continue to test but undoubtedly there will also be opportunities for those placed to take advantage of less efficiently organised companies. Make sure that when the dust eventually settles that your company emerges in a stronger position.

 

Liquidity crisis - still not out of the woods

The governor of the Bank of England has given his starkest warning that banks in what he calls the advanced economies, including British banks, still have too little capital to absorb potential losses on bad loans. And he says that the economy will remain weak till they raise the needed capital.

He commented that the reason banks, including some British banks, have found it difficult and expensive to borrow, and therefore have found it impossible to provide the credit needed by households and businesses, in the right quantities and at the right price, is that they have "insufficient capital".

Sir Mervyn warns that "just as in 2008, there is a deep reluctance to admit the extent of the under-capitalisation of the banking system in many parts of the industrialised world".

Here is his stark and gloomy warning: "I am not sure that advanced economies in general will find it easy to get out of their current predicament without creditors acknowledging further likely losses, a significant writing down of asset values and recapitalisation of their financial systems."

He continues: "Only then will it be possible to return to a more normal provision of vital banking services so crucial to an economic recovery".

As the Banks continue to labour under the weight of their previous errors the knock on effects are percolating down through the economy.

 

With both new and additional funding hard to access – now is the time to take a long hard look at your Company’s financial situation. 

Any approach to your Bankers could be very uncomfortable in the current climate so it is necessary to demonstrate you have full control of your exposure. Make sure that the Debtors book makes for healthy reading and that inventory control and stock turn are being monitored very closely. 

Ironically it is the activities of Banks themselves who have once again precipitated the ongoing crisis but that will not prevent them from playing hard ball with anyone trying to seek support for additional funding in the current climate.

Beyond this place there be dragons

 

A combination of recent market volatility, the continuing spectre of failure in
the Eurozone coupled with latest pronouncements from politicians and economists alike have done little to restore confidence and now more than ever is the time for good housekeeping and firm controls.

Rigorous monitoring of counter party risk is the order of the day combined with disciplined inventory control.

Just because a customer has always being reliable in the past is unfortunately no guarantee as to future performance. Very few businesses fail overnight
and there are usually enough warning signals which should enable a supplier to reduce its risk. Be on the lookout for early warning indicators such as unusual ordering patterns, delays in payments etc.

The coming months will continue to test but undoubtedly there will also be opportunities for those placed to take advantage of less efficiently organised
companies. Make sure that when the dust eventually settles that your company emerges in a stronger position.

 

 

Batten down the hatches

The current financial inputs point to the fact that the recovery in the UK is extremely fragile. As we approach the final two months of the year and the oncoming holiday season it is most likely that we find ourselves in somewhat of a limbo situation.

Without question, the real effects of the cut-backs and general downturn in many people’s incomes will be felt most keenly in the final weeks of  2012.

The recent hike in utility charges will start to bite and a further downturn in consumer confidence appears likely. More and more will the mantra “heating versus eating” be heard.

Running any business against this background will provide challenges and there could not be a more pressing time to address the question of operating costs and the rigorous policing of stocks and Debtors.

If appropriate actions are taken now, Companies should find themselves well positioned to ride out the inevitable storms.

If you’d like to discuss how I can assist you with a plan of action then contact me at gordon.blackburn1@btinternet.com

 

Customer service - the art of the achievable

 

The old adage the Customer is always right has come in for a fair amount of scrutiny recently and there are many times when plainly the Customer is in the wrong.

 

Notwithstanding it is of paramount importance to the sustained growth of any business that the Customer is kept onside.

 

The key requirement that any Customer wants is to feel that his/her business is valued and appreciated.

 

In business securing the deal is only the start of the process and the repeat order very often stands or falls with the after sales service (or lack thereof).

 

Simple but effective measures such as ensuring all contracts are performed efficiently and within due time and that any complaints are handled promptly and with courtesy will go a long way to building and maintaining long lasting relationships.

 

We have all encountered the difficult Customer with whom it would be easier not to deal. However, in these difficult times there are many who would willingly take this “problem” and revenue off of your hands.

 

 

Will the Banks heed the siren call?

 

The "worst may still be ahead" for the banking system, the Bank of England's deputy governor has told a gathering of leading bankers.

Paul Tucker said reserves held by banks were still not calibrated for the "end-of-the-world risks" that remained a possibility

It is a well known fact that history is written by the victors, one of the spoils of war.

I’m not sure however how the current Doomsayers be they high profile members of the international Banking world or senior politicians can justify their pronouncements when the problems we now face were created on “their watch”.

It is the ultimate irony that politicians with the so called “light touch” and institutions such as the Bank of England/ US Fed were all too willing not to look too closely into the ways that the markets and sovereign economies were being structured for fear of rocking the boat.

There is a certain black humour that these very architects of disaster now turn round and pontificate about the dangers that the world faces. These were the same people who were lauding and applauding the likes of Sir Fred Goodwin, (shortly to be sued by former shareholders of RBS). There also were a number of high profile cheer leaders for the Euro who are now conspicuous by their silence on the matter

Now the man in the street is told to prepare for more belt tightening whilst businesses find themselves desperate for funding as Banks are reluctant lenders as they look to repair their damaged balance sheets.

Plus ça change

The Water Stone of the Wise aka the philosopher’s stone.

 When trying to boost the bottom line, there are 2 obvious solutions, (a) Cut operating costs and (b) Increase Revenue. If you’re the FD you’ll probably aim for the double.

 

The Sales Director only has one shot in his/her armoury namely increase sales. Sales targets can always be raised but a sense of commercial realism also needs to be applied.

If you are marketing a totally unique product or service the task is easier but for the most part there are many companies offering a similar range of products in a broadly similar price range. 

As such for most companies it is about getting back to the basics – ensuring orders are processed efficiently and in a timely fashion. Following up on customer satisfaction, in short providing what in old fashioned terms was called “service”.

 

 

 

 

Europe’s strong man starts to falter

 

A group of leading think tanks in Germany have cut growth forecasts for the country and warned of recession.

The economic institutes said Europe's biggest economy would only grow 1% next year instead of the 2% they had been expecting six months ago.

But this assumes that the crisis in the eurozone does not worsen.

They also criticised the European Central Bank's latest initiative to ward off the crisis, saying its debt purchases risked fuelling inflation.

Last month the ECB unveiled plans to buy up the government debts of struggling eurozone members, but only if those governments first signed up to a rescue package, including strict conditions on cutting their overspending and reforming their economies.

Some analysts are concerned that in the longer term there is a great danger that the ECB will continue to purchase bonds and provide excessive monetary policy stimulation even if states deviate from the adjustment programmes, which could drive up prices and lead to an increase in inflation expectations.

The eurozone's woes, coupled with a general slowdown in global growth, is now impacting on business confidence and investment in Germany, despite the fact that German exports had continued to hold up, thanks in large part to the competitive price edge afforded to them by a weaker euro.

Over the forecasting period as a whole the downside risks prevail and there is a great danger that Germany will fall into a recession with unemployment in Germany rising from its current 20-year low of 6.2% to 6.8% next year.

Germany is Europe's biggest single national economy, and until now has been faring far better than almost every other eurozone member.

A German recession could sap business confidence across the eurozone even further, and would hit the other eurozone members more directly if their exports to Germany fell.

Elsewhere, data from the rest of the eurozone continues to paint a grim picture.

Consumer prices inflation in Spain rose to a 16-month high in September of 3.4%. High inflation is particularly unwelcome in a country that is already struggling with shrinking incomes and uncompetitively high wage costs within the eurozone.

It will also make it even harder for the government to cut its overspending from 8.9% of Spanish economic output this year to 4.5% in 2013, as Spanish state pensions are indexed to the inflation rate.

Meanwhile in Greece, the unemployment rate rose above 25% for the first time in July, according to the Greek statistics office.

The record 25.1% was up from 18% a year ago. The unemployment rate in Spain is also 25%.

The poor state of the eurozone, along with the risk of massive automatic government spending cuts in the US early next year, prompted the IMF  to issue yet another warning about the state of the global economy last week.

"Whether you turn to Europe, to the United States of America, to other places as well, there is a level of uncertainty that is hampering decision makers from investing, from creating jobs".

Unserviceable debt – the spectre at the feast

 

“If you owe the bank $100 that's your problem. If you owe the bank $100 million, that's the bank's problem” the famous quotation from JP Getty neatly sums up the dilemma faced by the international community in dealing with the Greek debt problem.

Greece has asked for two more years to meet the spending cuts demanded by its lenders, which include the Eurozone countries through its bailout funds and also the IMF.

The IMF’s Ms Lagarde backed the calls, but Germany have maintained their previous line that on the terms of the 130bn-euro (£105bn; $168bn) bailout - Greece's second since 2010 - Athens must be held to what it agreed.

At stake is whether Greece should receive the next tranche of the bailout, worth 31.5bn euros. Without it it risks running out of money by the end of next month.

In spite of the hard line talk it will be no surprise to see real politik coming into play  and a fresh compromise being offered to the Greeks, in effect kicking the problem further down the road.

The fact is the international community will have to learn to accommodate the spectre of countries failing to grapple effectively with their debt burdens. In turn this will inhibit growth and limit the speed and strength of global economic recovery.

 

It will be an uncertain time but one undisputable outcome of the above will be the hard ball attitude of the Banks towards companies seeking funding. It will become ever more necessary to demonstrate effective control over all areas of cost and exposure as the banks will undoubtedly remain reluctant lenders.

Running out of rope

With the continued funding difficulties experienced by SME’s it will come as no surprise that trust in banks and other financial institutions is falling, according to a survey from the British Chambers of Commerce (BCC).

Half of the 1,560 businesses questioned said they mistrust banks and building societies, while 38% said they trust them less than a year ago.

The BCC survey said 57% of firms felt confident they could secure external finance, while 37% said they were not confident of doing so.

Despite the rhetoric from politicians it is difficult to foresee an environment where Banks and other financial institutions will be more receptive to requests for increased funding/credit lines.

It is the spectre of risk management or more pertinently the lack of management which overhangs the market.

Any approach for funding must be accompanied by a clearly defined strategic plan to take the company forward. At the same time those seeking to access increased lines of credit must demonstrate that they are strictly managing cash flow and have robust risk control procedures already in place. 

Commercial post mortem – could we have saved the patient?

All too often in the course of commercial post mortems, the Management and Shareholders of troubled organisations end up asking “how did that go wrong?”

 

It is an incontrovertible fact that many companies fail to address problem issues early enough to avoid an oncoming crisis. When in reality the causes of the problems were all too readily visible.

 

The signs of a troubled business are all too apparent – these include lack of controls, lack of strategic vision, a demotivated workforce and obsolete or valueless stocks etc

 

Instead of grasping these nettles, often the preferred option is to engage in a variety of exercises ranging from ill judged acquisitions (think RBS/ABN), totally pointless projects such as rebranding or the launch of another product range destined to fail for the above reasons.

 

Inevitably the harsh realities come into play but for many companies it is at that stage too late in the day.

 

Wake up and smell the Coffee – whilst you can

 

The rise of the developing world is really just a return to business as usual.

 

After all, until the 18th Century, India and China were the richest countries on the planet. For 18 of the past 20 centuries China had the largest economy in the world until the 19^thcentury and the industrial revolution.

 

Chinese companies will continue to make international acquisitions such as the purchase by Bright Food of the controlling stake in Weetabix, which owns the breakfast cereal brand as well as Alpen and Ready Brek.

Bright Food acquired a 60% stake in Weetabix in a deal that valued the company at £1.2bn.

 

Meantime as evidenced by the recent purchases of US Corn, China will continue to be a major buyer in the international agri markets in response to demand from its burgeoning middle classes.

 

By 2020 China’s consumers will be spending an annual £ £3,830 billion and their Indian counterparts £2,200 billion contrast this with British consumers who spent £937 billion last year.

A Chinese person born in 20009 will consume 38 times as much over his lifetime compared to one born in 1960.

 

With a population in excess of 1.3 billion (approximately 20% of the world’s population) imagine the implication for Western consumers should an early morning cup of coffee become the beverage of choice!

 

Food price inflation its getting uglier

Since 2007 the increase in food prices in the UK has been in excess of 30%. In September prices rose by 1.7%.

 

On a global basis the recent hikes in price of key grains such as corn, wheat and soybean have been described by the World Bank president as "historic".

 

The bank warned countries importing grains will be particularly vulnerable.

 

From June to July this year, corn and wheat prices each rose by 25% while soybean prices increased by 17%, the World Bank said. Only rice prices decreased - by 4%.

 

In the United States, the most severe, widespread drought in half a century has wreaked havoc on the corn and soybean crops while in Russia, Ukraine and Kazakhstan, wheat crops have been badly damaged.

 

The World Bank said that the use of corn to produce ethanol biofuel - which represents 40% of US corn production - was also a key factor in the sharp rise in the US maize price.

 

Overall, the World Bank's Food Price Index - which tracks the price of internationally traded food commodities - was six percent higher than in July of last year, and one percent over its previous peak, in February 2011.

 

Livestock and milk related products will rise in accordance with the higher costs of grain based feedstuffs.

 

Food manufactures are caught in a vice; the buying pattern for many has been “just in time” reflecting the need to keep inventories as low as possible.

However without the safeguard of a “buffer stock” they are now more than ever exposed to the harsh reality of having to “pay up” in order to secure the raw materials to keep their facilities in production.

 

At the same time they will continue to face the problems of operating in the current economic background with buyers seeking to delay payment, renegotiate contracts etc.

 

 

Navigating through the perfect storm

Viewing the general air of unease they now prevails in the current climate it is hard to remember the halcyon days of easy money (credit) and the all pervading feeling that the party would never stop.

There is no doubt the world and his wife embarked upon a collective spree for which we are now picking up the bill.

With the benefit of hindsight the warning signs were there to see but these were readily ignored. One quotation springs to mind “they that sow the wind, shall reap the whirlwind"

The problem now is that as always there is an over-reaction and just as we never saw the top there is also the certainty that we will not see the bottom.

What is needed is a clear and unemotional assessment of the current climate, whilst few would dispute that difficult times lie ahead we are far from a financial Armageddon.

As always the markets are driven by fear and greed but the importance of sentiment should not be overlooked. Until and unless the Doomsayers gain a sense of perspective it will be hard to imagine business and markets on a sustained stable footing.

 

What’s lurking round the corner?

Events of the past week have shown just how vital it is that Senior Management set clear defined operational and reporting procedures.

In many companies the Directors simply do not have the understanding of the mechanics or the day to day activities of the business which they purport to run.

For example I have worked in trading environments where totally unrealistic profit target have been passed from Board level to trading departments. No cognisance having been given to the disproportionate risks which need to be taken to achieve these targets.

Some of the most spectacular financial flame outs have followed a period of ostensibly highly successful trading. In their desire to recognise these “profits” no thought were given as to how they were being made. In such times it would be well to take note of the old adage that is something looks to be too good it usually is!

If your company is bucking the trend in these difficult times it may well be that you are implementing a winning formula.

However history tells us that it is often a prudent course of action to look under a few stones – just in case.

 

Euro woes continue to mount

Unemployment in the eurozone hit a fresh high of 18.2 million in August,  a record high of 11.4%.

The highest unemployment rate was recorded in Spain, where 25.1% of the workforce is out of a job, and the lowest of 4.5% was recorded in Austria.

Last week, the European Commission warned of the existence of "a real social emergency crisis" due to the fall in household income and growing household poverty.

Youth unemployment remains a particular concern, with the rate among under-25s hitting 22.8% across the eurozone, and 52.9% in Spain.

The commission repeated its call to governments and businesses to act to try to avoid the "disaster" of "a lost generation".

In Greece, the most recent figures recorded in June show that more than 50% of the young workforce has no job.

Apart from the social cost the spectre of unemployment represents a very major threat to economic recovery in the EU with all the global implications that this brings

KYC know your customer

In the US this basically refers to a due diligence process undertaken by Banks and financial institutions to combat fraud, identity theft and general scams.

It is however a mantra that most organisations would do well to adopt.

Rapid advances in technology continue to transform the way we do business. Everyday business tools would have been regarded as flights of fancy not so long ago. With the unstoppable rise of e-commerce come challenges.

One of the biggest dangers is the lack of personal contact between a company and its customers. Obviously this is not an issue for online retailers selling product over the net and being paid via a Debit card or Pay Pal etc.

However the is an increasing trend for B2B ales to be concluded by email and even SMS. With the loss of the personal contact the identity and customer relationship suffers. The surest way to avoid problems is by knowing your customer and understanding their business.

This relationship and mutual understanding cannot be achieved via a key pad and electronic ordering system.

 

Know when to be bold – know when to fold

 

In business as in poker there are times when discretion is the better part of valour.

 

Put simply, some of the best business deals are those you turn away.

 

All organisations operating in today’s climate need to have constant and rigorous focus on their commercial exposure.

Against the current competitive background it is obviously difficult to contemplate turning away business especially from a customer of long standing.

However an objective assessment may well lead to the conclusion that in this instance the business would be left to others.

It may well be that turnover suffers when stricter controls are in place over such elements as payment terms and credit limits.

The reward for such fiscal discipline is obvious. Avoiding defaults by customers not only protects the company’s bottom line whilst allowing focus to be placed on more profitable activities.