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 really comfortable with allowing 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?”

 

 

Financial crises are like buses in that they come along frequently

 
The ongoing fallout from the latest financial crisis has parallels with previous financial upheavals 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”.

Zeroing in on your target

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.

 

Spot the fault line

 

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

Last week in what is largely viewed as a symbolic process Fabrice Tourre the former Goldman Sachs Banker went on civil trial in New York  on charges of defrauding investors .

There is no dispute that, in exchange for a $15m fee to Goldman, Mr Tourre helped Paulson & Co, a hedge fund, create a complex security named Abacus out of mortgage-backed bonds in order for the fund to profit from an anticipated collapse in the housing market. For Paulson it was a spectacular success; for those on the other side of the trade, not so much

 An email written by Tourre has become a metaphor for the whole financial mess which engulfed global markets and institutions. In January 2007 as the subprime meltdown was beginning Tourre wrote “The whole building is about to collapse anytime now. Only potential survivor, the fabulous Fab...standing in the middle of all these complex, highly levered, exotic trades he created without necessarily understanding all the implications of those monstrosities!!!” 

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. 

Whether through greed or stupidity there will always be people willing to take potentially catastrophic chances.

The danger of pushing it too far

 

The most important component in any business relationship is the question of trust.

 

The ultimate demonstration of trust and good faith is when a Supplier delivers goods to a Customer on Credit terms.

 

It therefore is incumbent on the Buyer that they acknowledge this act of trust and observe the agreed payment terms.

 

With the current pressures it is easy to understand the temptation of “pinching” a few days extra credit but this type of behaviour soon begins to pall. Once a Supplier feels that their Buyer is taking undue advantage the relationship is damaged sometimes irreparably.

 

For any relationship to be sustained there has to be mutual benefit. When a Buyer gains a reputation for persistently crossing the line the merit in maintaining the account is called into question.

 

 

Make service your USP

 

We are operating in times when everyone expects ultimate value for their cash be it the corporate customer or the man in the street.

 

It is a paradox that as times become tougher and business harder to win the level of service offered by many Suppliers is falling very short of acceptable standards.

 

From the frustrations of automated answering (devised surely to test anyone’s patience to the ultimate degree) to the failure to meet agreed delivery schedules Customers are left feeling that their business is not valued.

 

Little wonder that they choose to vote with their feet. Customer service is not a difficult act to pull off – in reality all that is required is to give the Customer the feeling that their business is important and they are valued not just “one of a number” or even worse a nuisance.

 

Those businesses that master the art of Customer service will emerge from this current difficult period all the stronger.

 

Whenever it rains the banks want their umbrellas back

 

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.

 

Lending from the UK Government Enterprise Finance Guarantee scheme has dropped to record £66 million low in the first quarter of 2013. The EFG scheme was introduced in 2009 to assist SMEs to obtain loans.

 

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

 

Prior to the credit crunch it was not uncommon for companies to use loans or overdrafts to settle VAT and tax bills but these companies are finding it hard to do so in the present climate.

 

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.

 

Action this day

When a problem comes home to roost it prompts a round of head scratching
and the standard response “why did that go wrong?”

 

The answer is all too often glaringly obvious and boils down to companies failing to address problem issues early enough to avoid the oncoming crisis.

 

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 totally pointless exercise such as a rebranding campaign or the launch of another product range destined to fail for the above reasons.

 

The operating style of many doomed companies can be likened to Nero’s pastime of fiddling whilst Rome burns.

 

Time to gain control

It is incomprehensible that even in these difficult economic times many companies continue to adopt a relaxed approach towards their financial controls.

 

These companies fail to recognise the need for strict discipline in areas 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).

 

This is a situation that can easily 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 EU restructuring of sovereign debt Ireland, Greece, Portugal to name a few, 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?

 

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 re-establish control.

 

The hidden cost of cheap food

In a market where prices are squeezed to the absolute and in order to protect margins suspect practices and questionable ethics will inevitably come to the fore.

 

Recently the CEO of the Iceland Frozen Food chain cited the purchasing policies of local councils blaming them for driving down food quality with cheap food contracts for schools and hospitals.

 

Independent butchers (an endangered species in themselves) are trying to make capital by citing their credentials as reliable suppliers who have complete traceability of their product.

 

However the collapse in the number of independent retailers in face of the competition from the all powerful supermarkets means that this is likely to be a last hurrah rather than a return to the golden age of the British High Street.

 

In the UK overall household spending has failed to increase over the past 12 months.

 

This illustrates that higher inflation (currently 2.9%) and slow wage growth are squeezing household incomes and that is being felt in the UK's shops.

 

The current economic reality will continue to underpin the demand for cheap food but in satisfying this demand as was evidenced in the recent horse meat scandal there will be accompanying risks.

 

Chill wind blowing from the East- German exporters catch cold

Speaking in Washington, Lou Jiwei China's finance minister has hinted that the country’s economic growth may fall below 7% in 2013, but said that even this may not be the "bottom line".

That figure is below Beijing's official 7.5% target, and below most economists' forecasts for the country.

Mr Lou's comments highlight how rapidly the country is slowing down, as Beijing seeks to rein in a construction boom.

He also caused some confusion by implying that 7% was now the government's target, even though the target was set at 7.5% in March.

The government is particularly concerned about "wealth management products" (WMPs) - high-yielding investments sold to citizens with spare cash.

WMPs have been increasingly churned out by the banks - particularly the smaller banks.

The authorities fear that they are being used as a sneaky way to raise extra money to pour into the property market and other speculative activities.

However, WMPs also play a vital role in financing small privately-owned businesses, including China's dynamic small-scale exporters.

The German car industry is already feeling the impact of weaker export demand from China with Opel closing one of its factories next year. In China there are already reports of cash starved motor dealers refusing to deliver cars to car lots without upfront cash payments.

Any additional stuttering from the engine key to global recovery would have damaging impact on US and EU economies.

 

 

To the heart of the matter

 

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 (as we see all too regularly) 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, 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.

If the squeeze on household incomes continues, Britain could be left in a fragile position, with even moderate additional increases in interest rates leading to a major surge in families with dangerous debt levels - especially among worse-off households.

Since 2007 the number of households spending at least 50% of their income on repayments has dropped by 270,000 to 600,000 because of falling interest rates.

But a rise in interest rates in the next four years could see Britain return to higher levels of household debt than before the financial crisis, which was sparked by US homeowners being unable to service their mortgage debt.

Until such times as the man in the street starts to regain some confidence there is little chance of economic recovery having a sustained momentum.

 

 

Playing the long game

 

The impact of the French Revolution? - “too early to say.”This was the response from Zhou Enlai  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.

 

Chinese companies are 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.

At the same time China has continued to extend its influence in Africa. In the latest development  China has agreed to give Nigeria a $1.1bn (£700m) low-interest loan to build much-needed infrastructure.

The money will help build roads, airport terminals in four cities, and a light-rail line for Nigeria's capital.

China will continue to invest heavily in Africa at it relies on it for oil and other natural resources.

The integrity of financial reporting

 

There is a growing trend in companies to camouflage poor performance with deliberate misreporting and suspect off-balance sheet shenanigans.

 

This practice is increasing, think of the recent problems with losses incurred by various Banks. It underscores the need for senior management to 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. This was graphically illustrated by the recent testimonies of senior bankers to the House of Commons Select Committee looking into banking failures.

 

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 the 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.

 

Reading the runes

 

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.

 

Everyman for himself

 

There is a growing trend from companies switching all their Suppliers to lengthened payment terms.

 

Such terms can only be served by larger organisation 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.

 

For some time companies have sought to stretch the length of their payment terms by all manner of means both fair and foul.

 

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.

 

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 – can I keep all those plates spinning?

Funding issues - are you prepared?

 
Despite assurances from the major Banks, we are still witnessing a reduction of loans to companies in the face of tightening liquidity – 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 financial crisis but that will not prevent them from playing hard ball with anyone trying to seek support in the current climate.

 

Tapping the barometer

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

The rising number and popularity of charity shops tell underscore that many families are struggling.

The recent furore over the so called pay day loan companies (charging interest rates in excess of 4000%) further illustrates just how near the edge many families are.

At the same time the latest results from Marks and Spencer the favourite chain for the over 40’s reported Pre-tax profits by 14 per cent to £564.3m over the year to 30 March, which was its worst performance since 2005.

Data suggests there are as many as 160,000 so called “zombie businesses”  being kept from going under by means of low interest rates and patient tax authorities.

As the knock on effects 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 level of insulation.

Cash-flow will be very difficult to manage over the coming months so as always strict governance of debtor and inventory control will provide some measure of comfort.

 

 

The overhead monster takes some feeding

 

The UK offers a very attractive market for companies wishing to export their products. Counter party risk is identifiable and can be successfully managed.

 

However one barrier may be the perception of high operating costs.

 

There is no doubt that to commission and run a UK operation can prove a costly commitment. The lists of outgoings such as rent, communications, staffing costs are daunting, particularly in a start up situation where income streams are lagging far behind these costs.

This is where we can assist you, as an established independent company, we have experience of representing overseas organisations in marketing product into the UK.

In addition to opening up new markets for your products and services we can also police the all important areas of logistics and payment of your invoices.

 

An introduction to our activities can be seen on our web site www.glbconsulting.co.uk or alternatively why not contact me at gordon.blackburn1@btinternet.com to arrange a meeting to discuss how we assist you in entering the UK market.