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 fallout from the LIBOR fixing scandal illustrates how vulnerable institutions are if their personnel choose or are allowed to camouflage the extent of their exposure to unanticipated market movements.

Now Barclays are being investigated over its foreign-exchange trading covering a several-year period through August 2013 and is co-operating with the relevant authorities in their investigations. The investigations appear to involve multiple market participants in various countries.

This represents another headache for Barclays, having already suffered penalties of £290m for rigging Libor interest-rate benchmarks.

 

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.

 

To date 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 the need for criminal investigations.

 

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. Meantime non-bank lending to small businesses has hit a five-year high, as more enterprises turn to alternative sources of credit such as peer-to-peer lenders and invoice financing.

 

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.

 

Cheques and balances?

In light of recent “Black Holes” banks have been rigorously running “health checks” on their banking systems.

Events have underscored how vital it is that clearly defined operational and reporting procedures are in place.

In many organisations the senior management 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 from my experience in trading environments it has not been uncommon for totally unrealistic profit targets to be 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!

Companies that are bucking the trend in these difficult times may well be implementing a winning formula.

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

 

Taking liberties- or a wakeup call?

 

Historically the standard response from recalcitrant debtors was “the cheque is in the post”. It traditionally bought some time as generally suppliers met this response with a weary resignation. 

Times have moved on and the latest mantra is “its set up for next week’s computer payment run”. 

Basically the name of the game is the same, namely to achieve a payment extension effectively squeezing the supplier’s margin. 

Obviously it is a difficult balancing act between keeping the customer happy and managing your own company’s cash-flow. 

Now more than ever it is vital to keep full control of the debtors book.

 

Whilst delays in payment can damage bottom line, the worst scenario is that neglecting to monitor a failing company could result in a total write off.

Money to burn

 

According to research from the University of Florida, Twitter, which lost $79 million in 2012 and is poised for a bigger 2013 loss, is hardly alone in losing money as it prepares to go public. The University estimates that 68 percent of this year’s IPOs were also losing money.

After all, based on their history, there is no basis for concluding that these unprofitable companies will ever make money.

That’s the stock in trade for a company about to float whilst losing money. If it were making a profit before its IPO, it would be harder to make bullish forecasts about how much profit the company will generate in the future.

Ironically for a company losing money, the sky’s the limit when it comes to predicting how bright its future revenues will be.

In tandem with the ability to forecast a spectacularly profitable future is the functioning of one of the market’s most basic laws: momentum. In other words powered by its own performance a stock that is gaining value up will continue to appreciate in value just because it is going up.

More specifically, when there is no real positive cash flows on which to value a stock, its price will rise because investors who do not own the shares will want to climb aboard the bandwagon rather than miss out.

This wave of “new buying” can help to drive up the shares further, which will attract a new buyers creating a dangerous bubble.

It would probably be a more prudent strategy to avoid the money-losing IPOs and invest in companies who are making a profit before they try and float their shares.

However forecasting the price of stocks remains an inexact science and unfortunately for the investor there is as yet no failsafe basis on which to explain why stocks go up and down.

Swimming against the sea of debt

  

Last week’s Budget deal in the US which Funds US government until 15 January 2014 can be viewed as merely kicking the can down the road.

The US has a total debt pile of almost $17 trillion (£10.6 trillion), which is expected to rise to almost $23 trillion in the next five years.

Japan is not far behind, with current debts totalling $11.5trillion.

Much of this debt has been accumulated over the long term, but the numbers have rocketed in recent years as governments have struggled to cope with the 2008 financial crisis and the subsequent recessions that have ravaged almost all major economies. Banking bailouts, economic stimulus measures and falling tax revenues have all forced governments to borrow more.

For example, in 2007, the UK's debt pile was just 44% of GDP compared with 88% last year. This reflects in part the country's large financial sector relative to its overall economy. The US's debt-to-GDP ratio in 2007 was 64%, the same as France and Germany.

As always after peering over the brink that is a collective sigh of relief but there remains no doubt that the spectre of indebtedness will re-emerge to haunt both markets and governments.

 

Batten down the hatches

 

As we approach the final two months of the year and the oncoming holiday season it is most likely that we find ourselves operating against a difficult background. 

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 2013. 

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 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. 

By taking appropriate actions now, companies should find themselves well positioned to ride out the inevitable storms.

 

The Long March – 21st Century version

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. 

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. As the world's second largest economy, the fastest growing economy in the G20 and with more than a trillion dollars sitting in various sovereign wealth funds, China has a pile of cash to invest. 

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 all prime targets.

China's demand for energy is expected to triple by 2030 so countries with abundant natural resources will continue to attract the most money from China. 

Meantime 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 and the UK’s nuclear fuel programme in addition to making acquisitions in the US/European Food Industry and this will undoubtedly continue as China accelerates its move into Western markets.

Beyond this place there be dragons

A combination of recent market volatility, the budget wrangling in the US Congress have damaged business confidence. 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.

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 of every business.

By exceeding the agreed payment terms customers are in effect using their 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.

Think of the parallels to the Greek debt situation and the Eurozone “bail outs” – 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 to see 30 days drift into 60 and beyond?

 

Consider the damage that is being done to your company’s financial position and respond accordingly.

Commercial post mortem – now the problem is clear

 

The results of commercial post mortems leave the management and shareholders of troubled organisations 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.

In reality the causes of the problems were 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.

 

Multichannel marketing

The retail sector is facing particular challenges at present with the survival of many outlets resting upon the results of their Christmas trading.

Much talk in recent times has focussed on the demise of the traditional British High St. 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 are pinning their hopes on “multi channelling”, they are not the only sector having to radically re-think strategy in these times of austerity.

The inability to adapt to the requirements of the changing market place will inevitably see many companies joining the ranks of corporate failures in the months ahead.

Respect geography or face the consequences

One of the most valuable commodities available to any organisation is local knowledge.

How many times has a venture ended badly owing to a basic failure to understand and deal with local market conditions?

The UK is a mature and sophisticated market and though offering different challenges to operating in a 3rd World destination there are still obstacles in trying to establish a presence.

Operating overheads present a crucial challenge and this is where we can assist you to achieve a cost-effective solution to marketing your products in the UK.

Take a look at our website www.glbconsulting.co.uk

or check out our video link http://youtu.be/ruUtQnlJwVM

 

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 in dealing with unserviceable debt.

 

Last year the “Greek problems” took centre stage. In the interim the problems in Southern European States such as Italy and Spain have still to be resolved.

Austerity has failed to bring public finances and debt under control. Increases in taxation and cuts in government spending have led to sharp contractions in economic activity, reducing government revenues and increasing welfare and support payments as unemployment rates increase. Budget deficits, while smaller, persist and debt levels continue to rise.

 

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.

 

Taking the pitcher to the well once too often

 

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.  

Faced 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.

 

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 who have suffered with 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 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 “value your customer,” this dictate has never been more important than in these uncertain and challenging times.

 

21st Century Leviathan

The recent commissioning of the world’s largest container ship the Maersk's Majestic underscores the competitive nature of international shipping.

 

The vessel is a quarter of a mile long and has the capacity to transport 18,000 20-foot containers.

 

Manufacturers of electronics and mobile phones are shipping cargo by sea because competition was eroding their profit margins focussing their attention on cutting delivery costs.

 

Each 20 foot container can hold 13,000 smart phones with a transportation cost from China to Europe of 7 pence per unit and a transit time of approximately 25 days.

 

Currently there are over 6000 container vessels operating with a significant number engaged in the East to West trade routes.

China’s economic success remains export driven as illustrated by the cost of shipping a container. Inward from China to Europe costs around US$1500 with the reverse journey only commanding a rate of around US$700.

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

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.

 

Some retail chains have recently announced that they will be introducing a rebate scheme with effect from next year. Suppliers will 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.

 

 

Keeping all the plates spinning

Managing a business in today’s environment is a complex affair – it has been likened to 3 dimensional gaming.

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 long can I keep all those plates spinning?