Don’t get trapped in quicksand

 

Despite many warnings and scares many companies are still failing to adopt a robust 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 is the reaction to the debtors’ book.

 

As more and more customers seek actively to delay payment 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).

If left unchecked this situation can 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 recent Eurozone debts (Eire/Greece etc.) – it is a slippery path.

 

Without a vigilant approach it will not be unusual for payment terms of 30 days drifting into 60 and beyond. The implications for your company’s financial position is all too obvious.

Failure to spot a crisis – FSA for short

The ongoing fall-out arising from the departure of the Chairman of the Co-op Bank continues. Flowers was the £132,000-a-year chairman of the 'ethical' Co-op Bank from 2010 until May this year when he stepped down as the bank's financial woes became apparent. The bank lost £700 million in the first six months of this year.

The failure of the regulatory authorities specifically the FSA (the UK’s Financial Services Authority) again highlights the fact that they really did not understand the complexities of the business which they were in the position to regulate.

Furthermore the FSA's seemingly lackadaisical approach to his appointment was - many would say - compounded, by the fact that it allowed Co-op Bank for months on Flowers' watch to negotiate another huge deal. This would have resulted in the bank trebling in size by buying more than 600 branches from Lloyds (a deal from which Co-op ultimately withdrew, when it belatedly recognised it was beyond its management capabilities).

Following the closure of the FSA, on 1^st April the Prudential Regulation Authority (PRA) became responsible for the prudential regulation and supervision of banks, building societies, credit unions and major investment firms.

In promoting safety and soundness the PRA focuses on the harm that firms can cause to the stability of the UK financial system. A stable financial system is one in which firms continue to provide critical financial services – a precondition for a health and successful economy. Hopefully it will be more efficient than its predecessors.

The situation at the Co-op Bank is an outstanding example of a business out of control. At the same time it begs the question how many businesses are similarly basket cases yet by smoke and mirrors are able to befuddle and confuse both their shareholders and bankers.

For example as the owner of an SME are you really confident in the integrity of the figures presented to you by your finance department? Or as the shareholders of RBS are you merely content to receive good news without challenging the how and whys of these results being achieved?

It all boils down to the age old fact that if something looks too good to be true it usually is.

Developing and sustaining relationships

 

Business practises have changed markedly 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 maxim has never been more relevant than in these uncertain and challenging times.

 

Banking practices – not in my name

The latest revelation to further damage the credibility of the banking system comes with the report that RBS (which is 82% owned by the tax payer) have according to a report submitted to the Business Secretary “forced vibrant businesses into financial trouble only to profit from their distress by squeezing them for exorbitant fees and charges and ultimately seizing their assets to swell their own vast property empire”. It is a damming indictment.

Following on from the financial chaos precipitated by the banks own negligence and poor management it has become increasingly difficult for businesses particularly SME’s to gain or in some cases maintain funding from the banks.

As the banking community sought to repair their damaged balance sheets they have resorted to any means both fair and foul to generate income.

This latest example follows on the heels of other misdemeanours such as PPI miselling, rigging of LIBOR and currency rates.

Contrast the actions of the banks with those of merchants and suppliers whose business is supplying goods to customers on credit terms.

Unlike the banks these companies rely on a simple mechanism of payment, an invoice.

Goods are delivered and are due for payment on a specified date it is the ultimate statement of trust and as such should not be abused.

 

Still on life support

With talk of the timing of increase in interest rates the Bank of England are ever mindful of the spectre of the so called “zombie” businesses.

 

Latest reports suggest that there are as many as 432,000 companies in the position of generating only enough cash with which they can service their loans and continue to trade.

 

This figure equates to roughly 1 in 7 companies, a rise of 16% from 3 years ago. It is estimated by solvency experts that up to 4000 could fail following a modest 0.5% rise in interest rates.

 

In reality there are many businesses stagnating - being kept alive by the forbearance of banks, rather than being shut down as they would have been during previous recessions.

This has prevented the “natural shake-out” which normally accompanies recession.

Until such times as the UK economy presents itself with a more robust backdrop it is unlikely that the Bank of England would take the risk of lifting rates.

 

Shark infested waters - don't fall overboard

 

In the present economic climate all businesses and organisations must remain alert to the potential for fraud.

Tens of millions of UK email users could be targeted in 'mass spamming event' designed to harvest their financial details the UK National Crime Agency has warned.

Small and medium businesses are particular targets of messages that appear to be emails from banks, the NCA said recently.

Emails contain attachments that look like details of suspicious transactions are actually malicious software that encrypts user's computer allowing fraudsters to harvest sensitive information and access bank accounts.

 

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.

 

It is essential 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 is holding your wallet.

 

All businesses be they independent or large corporations are vulnerable.

 

It is an undeniable fact that there will always be people trying a variety of ways to “scam” your organisation; it is a problem that will not go away so vigilance should remain the order of the day.

 

Sound management principles

In order to achieve success all organisations must have effective leadership. It is the responsibility of management to lay down a set of ideas and objectives that are articulated, understood and supported by the workforce .Good people do not like working for organisations whose values are muddled.

Managers have to take difficult and unpleasant decisions. These often need to be made swiftly balanced against conflicting demands. It is not always possible to access cast-iron evidence to support the decision making process. This is one of the tests of strong management.

A clear and defined vision are essential requirements. Managing a large company, and dealing swiftly with a variety of challenges and issues is a complex task.

The desire to succeed which provides the drive and focus on excellence is one of the hallmarks of a good manager.

The workforce is the company’s most precious asset. Accordingly the ability to judge people and value their contribution is an essential prerequisite for any manager.

To build a talented team requires working with people who may be better at their job than you are at yours, and to guide and motivate them. People learn far more about the art of leadership from a good mentor than from any course or training exercise.

The ability to respond quickly will prove invaluable when things go wrong. Surviving a reverse and changing direction is the utmost test of resilience and flexibility.

What if your sat nav malfunctions?

One of the most valuable assets 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

 

Driving your sales

There are some basic tactics which you can employ to increase your sales.

Companies that are increasing their sales turnover usually have an attractive staff incentive programme in place. Make sure you keep track of what type of “carrot” your competitors are offering to their sales force.

Upselling is a cost effective way to boost bottom line returns. Essentially, upselling involves adding related products and/or services to your sales portfolio and making it convenient and necessary for customer to buy them. Crucially when upselling the customer has to be persuaded of the benefit.

Give your customers the inside track. Try to stay ahead of the competition by having up to date brand and market information combined with technical back-up. For example if a new product launch is imminent it is better to keep the customer’s interest “warm” rather than push them into a purchase which they shortly will become dissatisfied with.

Differentiate your customers. There should be a clear and obvious difference between your regular customers and others – a difference that your regular customers perceive as showing that you recognise and appreciate their value.

Repeat business is the life blood of any sales force. Loyalty cuts both ways and becomes meaningless if all customers are treated as “someone off the street”.

 

Battling for the customer - the ongoing battle of clicks v bricks

Amazon is predicted to be 9^th biggest retailer in the world by 2018 but has no stores.

The Group reported sales of US$ 15.7 billion for the quarter ended 30^th June which generated a net loss of US$7 million.

In the UK the impact on leading High St retailers has been devastating. Groups such as Comet has disappeared and HMV have gone into administration. Amazon now has just under 25% share of the UK entertainment industry.

Obviously they are playing the long game and of the keys to their future strategy is the latest buzzword "personalisation".

bbThis is the mechanism of presenting customers with tailored, relevant content as they shop and in doing so increase conversion and generate loyalty

Despite the increased usage of this technology, it is still relatively new to the market but will undoubtedly evolve to become a prime factor in driving the future of ecommerce.

More ecommerce companies are devoting increasing resources to develop personalisation software.

Several leading brands are assigning more internal resource to creating a truly personal customer experience by appointing teams of ‘personalisation experts’.

As with traditional retailers ecommerce companies are now placing greater emphasis on using real insight to make customers feel like valued individuals as they spend time shopping on line.

All of this blurs the traditional lines and retailers face a common problem delivering what the consumer demands efficiently and free of delivery charge at prices which reflect ever squeezed profit margins.

 

 

 

Time for a check up

As we approach the final weeks of 2013 now would appear to be an appropriate 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 holding.

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 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 well managed and under control.

Carrying out these simple but effective measures will ensure that your company enters 2014 in good order.

Mixed messages

There has recently been a concerted effort to “talk up” the economic recovery in the UK.

The housing market has traditionally been used as a barometer and latest reports show that increased demand for homes has led to the ninth consecutive monthly increase in house prices, according to the Halifax.

The mortgage lender said that property prices were up by 0.7% in October compared with the previous month and 6.9% annually.

The retail sector will similarly provide a good indicator as to the health of the economy. The run up to Christmas, October through to December the so called “golden quarter” has always been of prime importance.

Currently wages are flat lining and consumers are facing rising fuel and utility bills.

Any sustained pickup in demand therefore will be credit driven. Memories are short and it is likely that consumers will be more ready to take on additional debt given a sense of comfort from the appreciating prices in the housing market.

 

Risk versus reward – the Ying and Yang of commerce

 
Every business transaction contains an element of risk, yet many companies do not have sufficiently robust systems in place to manage these risks.


In recent years we have witnessed just how costly the laissez faire attitude to risk was in many institutions be they large corporations or smaller SME’s.

In the never ending quest for larger profits many of the saner measures of business were ignored or even jettisoned.

An analysis of the most spectacular flame outs all have one common denominator – the architects of these calamities went hurtling over the cliff like lemmings.

All areas of exposure require constant and consistent monitoring.

A forensic analysis of receivables and inventories might make for uncomfortable reading but like most unpleasant tasks it should not be ducked.

It is always better to take remedial action such as a write down whilst you are in control of your own destiny rather than have a 3^rdParty appointed to do it for you.

 

Management style makeover

In these difficult economic times we are bombarded with negative news. There is no doubt that this is having a significant impact on morale in the workplace and therefore impacting bottom line results.

It is important that managers take on board the effect of these outside inputs on staff and wherever possible reduce the "fear factor".
 

In many instances the default management style relies on pressurising people to attain often unrealistic targets.

Far from improving performance it has the opposite effect.

There are some fairly basic steps that managers can take to ensure that all employees feel that they have a “stake” in the company and by definition their own future this include:

1. Leading by example

2. Proactive mentoring

3. Clear and concise communication

4. Building a positive workplace environment

The above are not difficult to implement but undoubtedly will be well received by a workforce in need of motivation rather than intimidation.

 

No room for sentiment

There is a growing trend for companies to bully their suppliers over the question of payment terms. It is not unusual for buyers who hitherto had paid on the basis of 30 days to now demand switching their suppliers to 90 day 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.

This is not a new phenomenon. 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.

 

Diversification can seriously damage your wealth

Without doubt one of the most difficult challenges a business faces is diversification.

 

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 challenging.

 

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, 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.

 

Half a loaf

With a pre-tax loss of £259 million in 2011, the Premier Group, Britain’s largest food manufacturer had immense problems in servicing its £1.4 billion debt.

The banking syndicate led by the Royal Bank of Scotland and Lloyds Banking Group agreed to an extension of 2.5 years and relaxed covenants on Premier Foods' loans.

Premier managed to defer interest rate payments as well as contributions to the company’s pension deficit. In turn, the food manufacturer paid its lenders £25 million up-front and pledged to sell £330 million in assets.

Losses narrowed to £23.5m in the six months to the end of June 2012 versus a loss of £45.8m for the same period last year.

Chief executive Gavin Darby commented: "We have already completed the actions to deliver the promised £20m of overhead cost savings for 2013 and continue to keep a tight control over costs.

"The restructuring of our bread and milling business is ahead of plan and we are taking the decisions necessary to create a more sustainable platform for this business."

Now the owner of the iconic Hovis brand has said it is looking for a partner to help with its struggling bread business.

The company has spent £28m on restructuring its bread business this year after closing two mills and three bakeries, and losing several contracts.

Having embarked on a rigorous policy of cost saving and disposals the company is anxious to lose the tag of a “zombie business”.

 

Today’s mantra – keep cutting your costs

 

As operating margins continue to be squeezed it is imperative that all costs are rigorously monitored. It is an incontrovertible truth that the overhead monster is getting hungrier by the day.

 

Every commercial sector is seeing the impact. A prime example is the area of transportation. Wherever possible exporters are moving business from air to slower and less expensive forms of transport.

 

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.

 

Exporters of perishable goods such as fruit, vegetables and flowers have little choice and as such face a diminishing return.

 

Non-perishable goods will continue to be shipped on water as the cost of moving by air is very energy-intensive and the high cost of jet fuel makes air freight prohibitive.

 

Facing marked resistance from consumers to price increases and a greater level of competition those companies who are unable to exert a firm control over their costs face a difficult future.

 

Turnover vanity, profit sanity, cash-flow reality

A root cause of the failure of many businesses is the focus on increasing sales whilst at the same time ignoring the true benefits of the profits originating from the increased turnover.

It is far too easy to be lulled into a false sense of the company’s welfare by an increase of sales unless it is accompanied by a proportionate increase in the bottom line.

Strong financial controls are crucial as are customer-facing functions or what used to be deemed as “customer service”.

In many cases the best business strategy for a “start-up” or a SME would be to focus on smaller projects with higher margins rather than chasing volumes and sales with thin returns. So called prestige accounts are also a luxury than many companies could do without.

The focus has to be on increasing growth whilst at the same time controlling and wherever possible reducing overheads.

The reality of a strongly managed cash-flow is that profits are then available to be used to settle accounts with suppliers or other operating (overhead) costs. A lax approach to cash-flow will inevitably see the company running out of funds and unable to fulfil its obligations.  

The biters are being bitten

 

There is a certain irony that the latest victims of the downturn are the UK’s Pay Day Lenders who have been targeted by organised crime gangs. In the first 8 months of 2013 cases of identity fraud against loan companies rose by 90% compared to 2012.

 

As the economic downturn continues to bite all businesses and organisations must remain alert to the potential for fraud.

 

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.

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 rarely comfortable to find that someone is holding your wallet.

 

However all businesses be they independent or large corporations are vulnerable Corporate fraud can take many forms such as invoice kickbacks, sales schemes, bid rigging and the like.

 

It is an undeniable fact that there will always be people trying a variety of ways to “scam” your organisation; it is a problem that will not go away so vigilance is the order of the day.

 

‘Tis the season to be – focussed

In recent times there has been the tendency for the Christmas holiday season to stretch out over a number of weeks and therefore with a few weeks to Christmas it would seem an appropriate time to consider the implications for business.

 

Without doubt of biggest concern to SME’s will be the impact on cash-flow. Many companies are operating very close to the edge and any delays in payment could have serious consequences.

 

In some instances invoices which fall due for payment after the 18^th December could well not be settled until the 3^rd January – giving an at worse scenario of 3 weeks delayed payment.

 

It would therefore seem prudent to look at your last half December receivables and make a realistic forecast of just how much cash will “come in”.

 

Similarly with “just in time” inventory it would be sensible to ensure that sufficient stock will be on hand for the early days of January when there are likely to be disruptions to the supply chain.

 

In recent years trying to get things done in the UK during the latter half of December has proven to be a challenging task so it would be best to ensure you take appropriate action now and are positioned accordingly.