Early warning indicators

 

Very often the best indicators are the least sophisticated. The UK retail sector remains in a very fragile state – the clearest evidence of this can be seen as you walk down any High Street.

The number of shoppers on UK High Streets fell last month, according to the British Retail Consortium (BRC).

Its latest monthly footfall monitor said shopper numbers declined 1.2% in December, compared with a year earlier.

The BRC data comes after official figures revealed that UK retail sales fell last month.

The Office for National Statistics said that sales in December were 0.1% lower than November, but clothing and food sales particularly struggled.

The BRC said that the decline for the month as a whole came despite a rise of 7.5% in shopper numbers in the immediate week before Christmas.

Helen Dickinson, director general of the BRC, said: "Weak spending power is keeping people away and compounding long-standing difficulties in many of our town centres.

"This month's retail failures confirm the challenges are far from over."

The rising number and popularity of charity shops tell underscore that many families are struggling. Consumers struggle with debt and job insecurity.

As the knock on effect percolate back down the chain many businesses will suffer. External factors by definition are difficult to handle but at the same time in-house disciplines can at least provide some insulation.

Cash-flow will remain difficult to manage so as always strict governance of Debtor and inventory control will provide some measure of comfort.

 

Be on your guard

As the economic realities continue to bite all businesses and organisations must remain alert to the potential for fraud. Companies blamed insider fraud perpetrated by either management or employees for 80% of fraud-related financial losses last year.

 

Entrepreneurial owners of SME’s are a prime target for fraud as overseeing finances doesn’t always come naturally to them. If a founder is focusing mainly on the product or service being sold, and only minimally on administration, it leaves a business vulnerable to fraud.

 

A recent report By KPMG has identified areas where companies are potentially exposed these include back-office fraud, procurement fraud and essentially plain old-fashioned con tricks.

Counterfeit fraud in 2012 was three times higher than the five-year average, at £22.9m; Ponzi schemes worth £72m came to court last year - three times higher than the level in 2011; and the value of fraud committed by employees almost doubled to £25.1m over the last 12 months.

It is vital to have systems in place to monitor all the company’s finances in a clear and concise format. After all it is never comfortable experience to find that someone has their hands on your wallet.

This problem will not go away so vigilance is the order of the day.

 

 

 

 

Spot the fault line

 

The overriding lesson from the calamities in the global financial mess was that the monitoring systems were inherently flawed. 

Exotic trading products and programmes were created which like the Frankenstein monster quickly became uncontrollable. Risks were taken on an unprecedented scale and those supposedly monitoring risk were “asleep at the wheel”. 

Recklessness was encouraged and became the default position. There were no checks and balances – it became for the participants in the so-called casino bankers a safe bet. 

What’s the worst that could happen following a spectacular flame out? Maybe you lost your job and had to move to another bank or institution. Get it “right” and the rewards were sky high. 

Whenever there is a bonus culture unless the supervisory systems are rigorous there will be potential for abuse.

Apart from the self-inflicted wounds the general public fell foul of the culture. One whistleblower at Barclays was quoted as saying   “It's a very high-pressure environment. The way we are paid means there is a lot of emphasis on getting people to invest more of their savings in the stock market than they should.' He added  “Some of the things we sell — such as structured products — are rubbish.”

A little like bolting the stable door after the horse has bolted the FSA has now decided it is time for a clampdown on bank, building society+ insurance company staff being paid commission on sales. 

This follows years of obvious laissez faire when for example it was quite normal for people to borrow based on self-certification of earnings, a recipe for disaster if ever there was one. 

Whether through greed or stupidity there will always be people willing to take potentially catastrophic chances. What is required is that the senior management spend less time forecasting their own bonus and more time scrutinising the bottom line and understanding how results are achieved. Until this balance is in place disasters in the financial system will continue to occur.

 

 

Choppy waters ahead

Choppy waters ahead

The UK economy shrank by 0.3% in the last three months of 2012, further fuelling fears that the economy could re-enter recession.

The economy had grown by 0.9% in the previous quarter, boosted by the London 2012 Olympic Games.

For the whole year, growth was flat.

As the UK government wrestles with its debt burdens the only certainty is there is no silver bullet.


The all pervading sense of nervousness will continue to impact on all business sectors. The days of easy access to finance are long gone.

 

Companies need to focus on their exposure at every level ranging from inventory levels, rate of stock turn and the integrity of the debtor’s book.


Operating in this current climate of austerity will provide the ultimate challenge for those managing companies, be it an SME or a large multi-national corporation.

 

Lessons from history

 

Rarely in life either privately or in a commercial environment do we come across an entirely unique or new situation.

The current situation facing the world markets and business has parallels with previous financial crises such as the 18th century South Sea Bubble, the Victorian Banking crisis of Overend & Gurney, the Great Depression which followed the 1929 Wall St Crash, and the Dot Com Crash. In all of these episodes the common denominators were reckless pursuit of profit whilst fundamentals were ignored, the so called “get rich quick” school of business.

Following each of these debacles there was a collective reigning in and return to the principles of sound business.

However memories are short and it is not long before the blurring starts again and risky practices again become more and more the norm.

Complacency has resulted in the demise of numerous organisations.
As George Santayana commented “those who cannot remember the past are condemned to repeat it”.

 

Revving up the bottom line

When attempting to boost the bottom line there are 2 obvious courses of action, cut operating costs and generate additional revenue.

Many organisations opt to reduce Staffing numbers as a quick fix but there is a danger that in line with reduced personnel there is an accompanying decline in operating standards. In such circumstances customers often choose to vote with their feet.

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.

In many instances companies would be advised to make customer service their USP but this requires the commitment of a dedicated work force not one that is pre-occupied with the spectre of further redundancies.

 

Consumer confidence – the litmus test

One of the tests of the English legal system is “what would the man on the Clapham omnibus think?”

Basically this is the reaction to any problem or situation that could be expected from a reasonably educated and intelligent but non-specialist person.

In the current economic climate many companies would do well to ask “what does the man standing in the queue at the Clapham Supermarket checkout think?”

The problem is that many people running businesses (or for that matter senior politicians) are too removed from the realities of life to effectively understand the economic difficulties faced by the ordinary consumer.

It is a very easy exercise but a few minutes spent in the supermarket or on a garage forecourt will give a true insight into the problems and frustrations currently felt by the ordinary consumer.

Until such times as the man in the street starts to regain some confidence there is little chance of economic recovery gaining momentum and the failure rate particularly evident in the UK High Street will continue to accelerate.

 

 

There are times to hold and times 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.

Obviously turnover may well suffer when stricter controls are in place over such elements as payment terms and credit limits.

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

 

Everyman for himself

 

There is a growing pressure on Suppliers to accept extended payment terms if they wish to retain the business.

Companies who previously had accepted 30 day payment terms are now requesting periods of up to 90 days.

Such terms can only be served by larger organisations with adequate cash reserves. For the small to medium supplier it further ratchets up the pressure as Banks are unwilling to increase their credit lines.

It has been general commercial practise for companies to try to stretch the length of their payment terms by all manner of means both fair and foul.

However as profit margins are further squeezed by increased operating costs the importance of maintaining cash flow is vital.

Business is hard-won in the current climate, but above all there has to be a commercial raison d’être for any transaction.

Mutual reciprocity has to be the basis for the Customer/Supplier relationship for it to remain worthwhile.

 

Today’s mantra – focus on cutting costs

 

With operating margins being continually squeezed it is imperative that costs are rigorously controlled.

 

Every sector is seeing the impact e.g. FedEx the world's second largest package delivery company have seen their customers moving business from air to slower and less expensive routes.

 

Manufacturers of electronics and mobile phones are now shipping cargo by sea because competition was eating into their profit margins meaning they needed to cut delivery costs.

 

Traffic will continue to moving onto the water because moving goods by air is very energy-intensive and the high cost of jet fuel was making air freight too pricey.

 

Facing marked resistance from consumers to price increases and a greater level of competition, those companies who are unable to control costs face an uncertain future.

 

Commercial post mortem – could we have done better?

 

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.

 

 

Keeping the tills ringing

During the past week we have seen Retailers posting the results of their Christmas trading. The first High St casualty has been the photographic group Jessop’s who ceased trading last week and others such as the beleaguered HMV chain who went in administration yesterday, remain firmly under the spot light.  

 

Much talk in recent times has focussed on the demise of the traditional British High St. with 30 shops a day closing down. There is a tendency to feel that all would be well if instead of the plethora of Charity shops, Discount Retailers and Pay Day Loan outlets they were to be replaced by Butchers, Bakers & Candlestick Makers.

In reality there is no going back to this perceived “Golden Age”. The new buzz word in retailing is "multichannel", loosely defined as a strategy that involves selling through stores, websites, mobile phones, catalogues, social networking sites, et cetera. Basically it is an all encompassing process designed to maximise sales revenues.

Not all business models can embrace this system but there has rarely been a time when the old adage of “work smarter” has been more relevant. As more and more obstacles are thrown up to threaten operating margins everyone in any commercial organisation must ensure that they are operating at optimum efficiency.

 

Whilst many Retailers continue to pin their hopes on “multi channelling”, they are not the only sector who will having to radically re-think strategy in the coming months.

 

The Dragon breathes fire again

Since 1978, China's economy has doubled every eight years. Today, the average Chinese person has some ten times the purchasing power they had just a quarter century ago.  

China was the engine room powering the Global boom of the early 21^st century, but towards the middle of 2012 there were concerns that the economy was labouring.

However, China has reported better-than-expected trade data, adding to optimism that growth in the world's second-largest economy may be rebounding.

Exports, a key driver of expansion, rose 14.1% in December from a year earlier. Most analysts had forecast a figure closer to 4%.

Imports also rose, climbing 6% and indicating stronger domestic demand.

This is particularly welcome news for many of Asia's biggest and emerging economies who have become increasingly reliant on China as a trading partner.

 

 

 

 

Action this day!

Daily we are seeing clear cut evidence that the first quarter of 2013 will be a difficult time for business as Consumers further reign in their spending. Without doubt now is the time to tackle potential problem areas with some effective housekeeping.

One of the first areas for scrutiny is the level of inventory which you are carrying. Make sure you are achieving the best level of Stock Turn and that you are not carrying any obsolete Stock.

Rather than face a “fire sale” it may well be prudent to lighten up now with some innovative marketing strategies.

How is your Company’s cash position? With the ominous backdrop surrounding financial institutions and Governments alike, don’t expect the Banks to readily provide additional finance- it is an absolute priority to maintain positive cash-flow and this can only be achieved by keeping Debtors under control.

Undoubtedly, the commercial casualty rate will climb in the early weeks of 2013 – now is the time to do everything you can to ensure that your Company doesn’t become part of these statistics.

 

Keeping all the plates spinning

Managing a business in today’s environment is a complex affair – it has been likened to playing 3 D Chess.

Particularly for the owners of SME’s it has never been harder to keep track of the various elements which are buffeting the business.

Now might be an appropriate time to run a check over those areas of the business most likely to cause problems in the coming months.

It is a self evident truth that many a crisis could have been averted by timely intervention. This is where an independent appraisal can identify areas of potential concern but more importantly the ways and means by which to address them.

The question that needs to be answered initially is – how much longer can I keep all those plates spinning?

Caution is the watchword

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

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

However, there are times when subsequent events show that on occasion the best business decision was to leave it to your competitors.

When stricter controls are in place over such elements as payment terms and credit limits the result is likely to be a reduction in turnover.

The upside of such fiscal discipline carries its own rewards. Avoiding defaults by customers is the surest way to protect the company’s bottom line at a time when profits are hard won and losses easy to establish.

Digging deep to survive

The retail sector is particularly challenged at the moment as domestic spending is reined in. Facing continual squeezing of operating margin the quest is for innovative ways to drive sales.

 
The new buzz phrase in retailing is "multi-channel", loosely defined as a strategy that involves selling through stores, websites, mobile phones, catalogues, social networking sites, et cetera. Basically it is an all encompassing process designed to maximise sales revenues.

Not all business models can embrace this system but there has rarely been a time when the old adage of “work smarter” has been more relevant. As more and more obstacles are thrown up to threaten operating margins everyone in any commercial organisation must ensure that they are operating at optimum efficiency.

Retailers are pinning their hopes on “multi channelling” – but they are not the only sector having to radically re-think strategy in these austere times.

 

Avoiding banana skins

When reviewing operating systems and strategic plans, it is surprising that even in these difficult economic times many companies continue to adopt a laissez faire approach to their financial controls.

These companies fail to recognise the need for strict discipline in respect of Stock turn and control but what is even more disturbing in the reaction to the Debtors book.

As more and more Customers seek actively to delay payment to Suppliers this element of business policing is even more critical.

When a Customer exceeds the agreed payment terms, they are in reality using the Supplier as an alternate (unsecured overdraft). I have seen this situation spiral out of control so that in a worst case scenario the Supplier is forced to keep “supporting” the errant Customer for fear of realising a bad debt. Think of the parallel to the Greek debt situation and the constant payment restructuring – it is a slippery path.

Take a long hard look at your accounts receivable – are you happy to see 30 days drift into 60 and beyond? Have you considered the damage that is being done to your company’s financial position?

Ask yourself “who is picking our pocket?”

It may well be that you conclude that an overall appraisal of your business is overdue - this is where I can help.

Why not get in touch with me at gordon.blackburn1@btinternet.com and I’ll help you get back in control.

 

Food price inflation it’s going to get uglier

Since 2007 the increase in food prices in the UK has been in excess of 30%.

Currently UK Food price inflation in running at 3 - 3.5% but looks set to rise to 5%. 

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

The bank warned countries importing grains will be particularly vulnerable. 

During June to July 2012, 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 were badly damaged. Here in the UK the effects of the wettest year on record will filter through in the coming months. 

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

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

Food manufacturers 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.

 

Diversification – not always the silver bullet

Without doubt one of the most difficult challenges a business faces is diversification. Very often a company is faced with the dilemma of diminishing revenue returns and a tired business model which is either irrelevant or obsolete.

Diversification is seen as the solution to this dilemma. However, the mechanism for achieving this objective can be particularly difficult.
The first step is examining why the current business model is not working. This requires an honest appraisal from the Management in respect of their own performance. Then the areas of diversification have to be closely considered, very often people plunge into businesses in which they have little knowledge or experience and the results pretty quickly show up these deficiencies.

Thirdly one should always respect geography it may be very tempting to consider that there are opportunities just waiting to be picked up but to underestimate the advantage of local knowledge and conditions can again prove costly.

In essence diversification can provide the answer to a company’s need for increased revenue but without a clearly defined strategy it can equally provide another drain on an already embattled balance sheet.

The integrity of Financial Reporting

Towards the end of 2012 more reports surfaced in respect of companies who had been camouflaging their poor performance with some suspect off-balance sheet shenanigans.

This is not an isolated event, think of the recent problems with losses incurred by various Banks. However it highlights 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.

In trading environments it is not uncommon that totally unrealistic profit targets 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.