Do you want to jump start your business?

Pressures on the business sector continue to mount and this is especially true for those running SME’s.

The latest instruction from the Bank of England that banks must increase their own capital reserves will once again add to the pressures of those businesses trying to fund their own expansion.

The need to achieve operating efficiencies has never been more acute. This is a time when a fresh appraisal of your business could return significant dividends.

As an independent business consultant I am confident that I can assist you to ride out these difficult times and build a strong base from which to expand.

Why not drop me an email at gordon.blackburn1@btinternet.com or alternatively check out my video link which will give an insight into my experience:

http://www.youtube.com/watch?v=qvIHWrB5BWI

 

Model driven Risk analysis - not a guaranteed fail safe

The recent Senate Committee hearing into losses at J.P.Morgan concluded that the Bank ignored risk and misled investors. The bank lost $6.2bn (£4.1bn) in what was dubbed the London Whale trades.

Ina Drew, a former JP Morgan bank executive, whose department suffered multi-billion-dollar losses, has said she was not to blame for them.

Drew, who was chief investment officer, said the bank's risk models were flawed and that some London-based staff hid information from her.

Bruno Iksil, the trader at the heart of the incident, was dubbed the London Whale because the positions taken were big enough to move markets.

Ms Drew said that she believed her oversight of the department was "reasonable and diligent". She said she had no knowledge that some trades were inflated or "not reported in good faith".

The Senate subcommittee issued a report which said that JP Morgan had ignored risks, misled investors and fought with financial regulators.

"We found a trading operation that piled on risk, ignored limits on risk-taking, hid losses, dodged oversight and misinformed the public," said Carl Levin, the subcommittee's chairman.

This is yet another example of the reckless and short-termism so prevalent throughout  the Banking system.

Notwithstanding the most sophisticated computer modelling of risk analysis and reporting procedures the only real fail safe in a trading environment is the integrity of the traders and the competence of those to whom they report.

All too often the reality of the situation is obscured by the attraction of the “profits” being generated.

Few people ever want to challenge a situation where they benefit from turning a blind eye.

Until and unless there is a seismic change in “culture” and operating practices then we will continue to see other banks and corporations following in the wake of Barings, RBS, J.P.Morgan, UBS et al.

 

 

Unserviceable debt – who carries the can?

“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 Eurozone debt problem.

Last year the “Greek problems” took centre stage whereas over the past week or so Cyprus has been the focus. Eurozone finance ministers have now agreed a 10bn-euro bailout deal for Cyprus to prevent its banking system collapsing and keep the country in the Eurozone.

In the interim the problems in Southern European States such as Italy and Spain have still to be resolved.

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 continues to be an uncertain time but one undisputable outcome of the above will be the hard ball attitude of the Banks towards companies seeking funding.

Now more than ever it will be necessary to demonstrate effective control over all areas of cost and exposure as the banks will undoubtedly remain reluctant lenders.

 

Time for a reality check

In the UK food industry the effects of the horsemeat scandal are dramatic. Over the past two months total ready meal sales were down 5% year-on-year, frozen food sales dropped 13% and there was a fall of 3% in chilled ready meal value sales. The reaction of consumers to this issue is not surprising.

However the latest report from the Chartered Institute of Purchase and Supply states that almost half of supply chain managers “do not have a means of monitoring their entire supply chain”.

Even more damaging is their comment that “how few chief executives and boards take supply chain issues seriously”.

One of today’s buzzwords is “traceability” – it is incumbent on companies to monitor all aspects of their supplier’s performance and failure to do so can have far reaching and damaging consequences.

The days of a “cosy” relationship between Buyer and Supplier, the archetypal nod and a wink have long since passed.

These scares and alarms are part and parcel of today’s trading environments and there is no excuse for being unprepared.

 

 

Caveat emptor

The Serious Fraud Office and US department of justice have opened investigations into the accusations of suspect accounting at the British technology firm Automony before its 2011 acquisition by Hewlett-Packard.

In a regulatory filing with the US Securities and Exchange Commission (SEC), HP said it had been told that investigations were under way by the US and UK authorities on 21 November and 6 February respectively.

Ironically, the SFO is itself an Autonomy user – in order to work through voice calls and emails for relevant information.

HP announced last November that it was writing down the value of Autonomy by $8.8bn (£5.9bn), having bought it for more than $10bn in summer 2011.

Meg Whitman, the chief executive who took over as the acquisition was being completed, blamed a "wilful effort" to inflate the company's figures, and that they "severely impacted HP management's ability to fairly value Autonomy at the time of the deal".

The numbers are truly eye watering and begs the question that during the due diligence process how many Auditors examined the validity of the reported accounts?

This is not an isolated event, think of the Japanese camera giant Olympus, the company admitted to hiding losses on securities investments for decades.

To conduct this $1.7 billion fraud Olympus executives secretly liquidated hundreds of millions of dollars of Olympus investments,then lied to auditors by certifying that the investments still existed.

Ultimately the validity of a company’s accounts reflects the integrity of the company which is being audited.

If the company’s results are misrepresented through fraud, deviousness or sheer incompetence then the fall-out will be disastrous.

 

 

Squeezing till the pips squeak

Against the current economic backdrop companies are constantly looking for ways to boost their bottom line.

Particularly over the past year we have seen companies trying to extend their payment terms by all manner of means – some fair,some foul.

In addition to this many are looking into the question of obtaining “rebates” from their suppliers.

John Lewis has announced that they will be introducing a rebate scheme with effect from next year. Suppliers would be asked for a 0.75% rebate if their sales grew by 10%.

Earlier reports have suggested said the rebate would rise to 5.25% if sales grew by more than 50%.

Amongst suppliers there is always a battle to secure sales but there also has to been a commercial realism.

If by securing so-called “prestige” business the overall operating margin carries a disproportionate return then it becomes a question of commercial realism.

In such situations it may well be argued that such business is best left to others.

 

Hard sledging for SME’s

During March UK insolvency figures show that 2112 companies went into liquidation. SME’s are finding it particularly hard to survive against the current economic backdrop.

Funding as always is the main problem and the rejection of applications for bank loans makes for stark reading – in the North East 46% were turned down, West Midlands 47% and in the South West 41%.

With the marked reluctance of the Banks to lend, it becomes imperative that all businesses focus on their areas of exposure – rigorous policing of the Debtors book must be a priority and Stocks must be kept at a minimum.

More companies will try and improve their cash-flow by dragging their feet with payments and trying to put more of the burden of carrying stock onto their suppliers.

Those that adopt a passive approach to these issues will find themselves increasingly vulnerable and heading down a slippery slope.

 

Spotting those early warning signals

 

 

Very few companies implode like a supernova. The distress signals are visible for some time before the flame out.

Any analysis of a company’s published accounts or even monthly management accounts are by definition “out of date”.

It is vitally important that all counter parties are monitored closely and “real time”.

In the case of customers look out for unusual ordering patterns, repeated delays in payments – these are early indicators of more serious problems ahead.

For any organisation facing mounting problems it is obvious that the solutions will of necessity be painful. However, radical and decisive surgery is often the only way to ensure a patient’s survival.

Many companies adopt the Mr Micawber attitude that “something will turn up”. In the overwhelming majority of such cases the only people likely to turn up are the administrators/liquidators.

Be it merely inertia or fear of addressing the issue, the outcome will remain the same.

 

Euro woes

It is evident that while the threat of a Eurozone break-up may have subsided, a long term solution to the debt crisis is yet to be found.

The problems in Eurozone have not gone away. Essentially people are either choosing to ignore them or are seeing what they want to see.

Currently unemployment continues to rise in countries such as Greece and Spain, a delayed solution may see the crisis escalate, a move which is likely to hurt investor morale.

Gross domestic product in the Euro zone shrank 0.6 percent in the October-December quarter from the previous three months, Eurostat, the statistical agency of the EU reported from Luxembourg. The figure, the same as the initial estimate made Feb. 14, confirmed the gloom surrounding the region’s economic prospects.

All of the major Euro area economies shrank in the fourth quarter, with Germany contracting 0.6 percent, France 0.3 percent, Spain 0.8 percent and Italy 0.9 percent.

Household spending fell 0.4 percent from the third quarter, while investment fell 1.1 percent and exports fell 0.9 percent.

For all of 2012, GDP in the Euro zone shrank 0.9 percent from 2011.The Eurozone is clearly the main weak link in the global economy.

Countries such as Greece and the Republic of Ireland that have been bailed out by international lenders continue to see their economies shrink. Meanwhile larger economies such as Spain have imposed spending cuts in an attempt to avoid having to ask for a bailout.The current situation in Cyprus serves to highlight the problem.

 

The austerity measures in many countries - mostly in southern Europe - have combined tax rises with cuts in salaries, pensions, benefits and social services.

Apart from the social cost the spectre of unemployment represents a major threat to economic recovery within the EU together with all the global implications it brings.

 

 

In these difficult times the “hard nose” approach has merit

 As funding issues continue to bite more and more Customers are actively employing various tactics to delay payment to Suppliers. Credit control and the monitoring of payments is an increasingly critical element for every business.

 

When a Customer exceeds the agreed payment terms, they are in reality using the Supplier as an alternate (unsecured overdraft). 

This situation if left unchecked can spiral out of control. In a worst case scenario the Supplier is in reality forced to keep “trading” with the errant Customer for fear of realising a bad debt. It is a slippery path.

Slack policing of accounts receivable will have serious consequences. At best tardy payments damage cash-flow and at worst can often be the precursor of a company failing with the end result of a total write off. 

Take a long hard look at your accounts receivable – are you comfortable with 30 day terms drifting into 60 and beyond? 

Consider the damage that is being done to your company’s financial position and then ask yourself “who is taking advantage of us?”

 

A question of trust

As the various pressures increase on businesses the integrity of financial reporting has never been more crucial.

 

With companies and individuals desperate to achieve profit targets the potential for abuse may prove to be too much of a temptation.

It is important that systems are in place to prevent misreporting and in worse case scenarios fraud and these systems should be reviewed and rigorously checked.

The fall out from recent LIBOR fixing scandal illustrate how vulnerable institutions are if their personnel choose or are allowed to camouflage the extent of their exposure to unanticipated market movements. 

Fraud is not confined to any one business sector.Despite the increased presence of computer modelling to monitor risk there is always the “human element” which has to be considered.

Nobody has devised a fail-safe system which affords 100% comfort but in many instances a closer objective scrutiny would have given sufficient warning to have averted a train wreck.

 

The damage being done by short-termism

 Former Institute of Directors boss Sir George Cox has produced a report citing that the pressure to deliver quick results to the potential detriment of the longer-term development of a company had "become an entrenched feature of the UK business environment".

He said almost three-fifths of the senior business leaders he had consulted believed short-term thinking was a major or a significant impediment to economic growth.

Sir George said: "Short-termism curtails ambition, inhibits long-term thinking and provides a disincentive to invest in research, new capabilities, products, training, recruitment and skills."

There is no doubt that the main reason which precipitated the financial meltdown was the slavish following of short terms goals which hitherto had been labelled “get rich quick” schemes but have been shown to be the very opposite.

The problem facing the business community now is as companies struggle with funding issues and the spectre of more corporate failures it becomes increasingly difficult to focus on long term objectives as opposed to satisfying the immediate requirements of the shareholders.

 

The value of the human touch

 

Companies have traditionally thought of customer service as a cost centre, which made it a ripe target for cuts during the downturn. That has contributed to increasing frustration among consumers at poor service in recent years

Although many operations are completed electronically in this virtual world we should never forget that essentially commerce is about people trading together.


The reality of the real world is that goods need to be moved from point of production to point of consumption and obviously the diverse elements which make up this chain cannot be achieved solely via a computer terminal.


It makes sound economic sense to foster and maintain good customer relationships as it has been determined that it costs up to five times as much to win a new customer as it does to retain one.


There is an old adage “know your customer,” this dictate has never been more important than in these uncertain and challenging times.

 

Bankers only lend a man an umbrella when it is a fine day

Despite previous rhetoric it is now apparent that some banks are still trying to increase their reserves, rather than lend more money out.

New figures from the banks themselves confirm that lending to businesses is continuing to fall. The British Bankers Association (BBA), which represents all the main banks, said lending to four million small and medium-sized businesses fell by £382m in the last quarter of 2012.

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 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.

 

Where's the money gone?

Particularly in these difficult times, it is staggering that so many companies be they large or small fail to keep a control of their inventories.

Whilst Management consistently push for increased sales performance, the question of housekeeping is often put on the back burner or it would appear totally neglected.

This laissez faire attitude is in evidence across the board.

The latest report from the Ministry of Defence on its inventory controls makes for sobering reading. With over 710 million items in its stores (ranging from missiles to uniforms) the inventory is worth £40.3 billion.

The Public Accounts Committee has now identified £6.6 billion was over ordered or unused.  The MOD is now faced with disposing of some £3.4 billion of supplies on its disposal website (a military version of eBay).

The scale of this ineptitude beggars belief.

As far back as 2008-9, auditors had raised concerns about inventory accounts and warehouse systems and checks had been improved, but they had found that the inventory recorded did not match the stock count at 29% of locations.

This begs the question: how comfortable are you with your Stock and Debtors controls?

It might be timely to conduct a pre-emptive review of your operating systems now rather than wait for the post mortem results.

 

High Noon for the High Street

The acceleration in store closures this year followed a grim 2012, when a net 1,779 closed. That represents a 10-fold increase from the 174 in 2011 and reflected casualties including Game Group, JJB Sports, Blacks Leisure and Clinton Cards. Although many of the companies were salvaged in one form or another, hundreds of stores closed.

With the rise of online shopping the chains did not need as many stores as they did in the past, a trend that looks set to accelerate this year.

People have got less money in their pockets, employment is tighter and also we've seen a massive growth in the supermarkets in terms of non-food retail.

The dominant factor has been the growth of inline shopping. The internet now accounts for 12% of retail sales - and is forecasted to be at least 30% by 2020.

Those retailers who fail to exploit all areas of multi channel marketing whilst finding themselves saddled with the burgeoning costs of maintaining retail outlets will continue to suffer and produce more casualties in the sector in the coming months.

The pain in Spain it’s the Banks who are to blame

Spain's troubled Bankia - formed of the merger of seven floundering savings banks - has reported a record loss.

The bank, which received aid of 18bn Euros, made a loss of 19.2bn Euros (£17bn, $25.2bn) for 2012 and put aside provisions of 26.8bn Euros.

Last year, Bankia and its parent firm, BFA, asked for EU funds to help rebuild its capital.

Spain's bank rescue fund said Bankia itself had a negative value, although its parent had some worth.

Bankia was born out of the merger of seven savings banks that were highly exposed to Spain's property sector, which crashed five years ago.

The Bankia-BFA group as a whole made losses after tax of 21.2bn Euros in 2012.

Bankia's seven component banks were severely damaged by their loans to property developers and home buyers during the country's property bubble that ended in the late 2000s.

The above train wreck graphically underscores the need for strict controls of all financial reporting and a robust monitoring of valuations of assets.

As evidenced by this fall-out in Spain unrealistic valuations either through deviousness or sheer incompetence will ultimately bring disastrous consequences.

 

The impact of the French Revolution? - “too early to say.”

Thus did Zhou Enlai – in responding to questions in the early 1970s about the popular revolt in France almost two centuries earlier – buttress China’s reputation as a far-thinking, patient civilization.

The former premier’s answer has become a frequently deployed cliché, used as evidence of the sage Chinese ability to think long-term – in contrast to impatient westerners.

Fast forward to today and the ability of the Chinese to play the long-game has never been in more evidence.

In a single decade from 2001 up to 2010 Chinese trade with the rest of the world increased from £325 billion to £1.9 trillion.

Since 2005 China has invested £320 billion across the globe with 75% of this in developing countries.

There is an insatiable demand for raw materials to fuel the economic growth in China and commodities such as Oil, Minerals, Precious Metals and Fuel are the prizes for these investments.

The ongoing crisis in Western economies has provided ample opportunity for China to assert its economic strength and China has now usurped the US as the largest foreign investor in Germany.

We are already seeing Chinese companies investing in such diverse areas as the French Wine industry or making acquisitions in the US/European Food Industry and this will undoubtedly continue as China accelerates its move into Western markets.  

A true and fair view of the state of the company’s affairs?

 

During the recent failures in the global financial system one group of participants have remained largely unscathed for their part in the train wreck, the Auditors.

Now Britain's four biggest accountancy firms have been heavily criticised by the Competition Commission.

The regulator has accused PWC, Ernst & Young, Deloitte and KPMG of being too dominant and not always meeting a shareholder's needs.

The four accountancy firms act as auditors for 90% of the UK's stock-market listed big companies.

They have also been criticised in the past for not doing enough to warn of the financial crisis.

Critics say accountants failed to scrutinise the banks' balance sheets properly, missing the warning signals that led to government bailouts.

The concern is that the relationship between auditors and company management becomes too comfortable with a "tendency for auditors to focus on satisfying management rather than shareholders' needs".

Essentially there are many instances of conflict of interest such as taking on consultancy work for Clients and becoming too cosy with management teams.

It is all too easy for companies to bully the young staffers sent in to do the grunt work .For example what chance has a newly appointed auditor walking around a factory warehouse to adequate value stock?

In reality they have to rely on the company for “valuations” and this can result in a totally inaccurate picture being presented.

The validity of a company’s accounts reflects the integrity of the company which is being audited. As was graphically demonstrated with the banking crisis in Spain an unrealistic valuation of the property portfolio either through deviousness or sheer incompetence will ultimately have disastrous consequences.

Rarely will a company or individual be able to hide losses indefinitely as witnessed by the likes of Maxwell, Madoff, and Stanford.

 

 

Negotiating hairpin bends

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.

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 t
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.