The value of a pre-emptive strike

The current economic inputs point to the fact that the coming months will continue to produce difficult challenges for all.

As domestic budgets are ever more squeezed this will impact on businesses across the board.

This is an appropriate time to conduct a top to tail analysis of your business.

Undoubtedly there are areas which would benefit from some radical adjustments/ change of direction. The consequence is not acting now could have very negative effects in the next few months.

Now is the opportunity to prepare for difficult times rather than adopting an ostrich "head in the sand" attitude.

When trying to explain a disastrous strategy to your shareholders or bankers there is little merit in falling back on the old standard “it seemed a good idea at the time”.  

The cost of denial

As a result of ignoring obvious problems the management and shareholders of troubled organisations subsequently end up asking “why did that go wrong?”

It is simple, a large number of companies fail to address problem issues early enough to avoid an 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, the preferred option in many instances is to engage in a totally pointless exercise such as a rebranding exercise or the launch of another product range destined to fail for the above reasons.

At the time it seems a rather painless way to deal with problem issues but for the most part it only buys a limited reprieve before the harsh realities come into play.

 

More evidence of smoke and mirrors

RBS have announced that they may face full-year losses of up to £8bn, after the bank said it needed another £3.1bn for claims relating to the financial crisis.

The boss of RBS stated "the scale of the bad decisions during that period means that some problems are still just emerging."

This is straight out of the manual under the heading “nothing to do with me guv”.

There have been repeated assurances that the banks were putting their houses in order but there is a growing feeling that many of the problems have been swept under the carpet rather than acknowledged and dealt with.

This announcement from RBS adds credence to this view.

 

It is hard to believe that we have seen the end of issues with the banks when we consider their recent history of financial mismanagement and sheer scale of incompetence.

 

 

There is no doubt that the internal controls of these institutions appear seriously deficient but there is a question mark concerning the obvious lack of professionalism on behalf of the independent auditors.

 

 

Time to bite the bullet

 

Every business transaction contains an element of risk, yet often the mechanisms for managing risk are flawed.

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

In the never ending quest for larger profits many of the disciplined measures of business were neglected or abandoned.

An analysis of recent business failures all have one common denominator – the architects of these calamities went hurtling over the cliff like lemmings.

There has never been a more pressing need to examine all areas of exposure.

A thorough analysis of the current Debtors Book might make for uncomfortable reading but like most unpleasant tasks it should not be ducked.

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

 

Nurturing the company’s assets

 

When dealing with companies over the past months it is noticeable that there is an increasing sense of demoralisation amongst many sectors of the work force.

The causes for this are readily identifiable, many people are struggling with their own domestic finances whilst at the same time the need for increased levels of performance and efficiencies at work have rarely been as intense.


It is the responsibility of management to ensure that during these times staff members are encouraged to give of their best.


Unfortunately too many managers are remote from the day to day activities of their staff and appear to have the attitude that the people who report to them are lucky to have a job.


This mentality is counterproductive. Staff need motivating and incentives do not necessarily have to come solely in the form of financial rewards.


Some of the best run and therefore by definition most successful commercial entities are those where the workforce is engaged and feels part and parcel of the organisation rather than merely there to make up the numbers.

 

Fraud the enemy within

One of the lessons of the recent economic downturn was the need for all businesses and organisations to 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.

 

In smaller organisations fraud can take many forms e.g. invoice scams, to suppliers providing kickbacks for inflated purchases, theft of stock, fictitious expenses etc.

 

For larger organisations the potential for various fraud activities exists but the numbers involved are far greater.

 

It is vital that all organisations have systems in place to monitor all of the company’s finances and commitments in a clear and concise format.

 

Simple but effective systems of checks and balances can go a long way to limiting if not removing the risks.

 

It is all but impossible to ensure that any organisation is “fraud proof” but by establishing robust and efficient systems some measures of comfort can be introduced.

 

After all it is never comfortable experience to discover that someone else is holding your wallet.

Putting on the squeeze

It has become the norm for large companies to unilaterally change previously agreed payment terms. Towards the end of 2013 Marks and Spencer advised its suppliers of a shift in payment from 60 days to 75 days as it attempted to dress up its figures.

The issue is that the majority of supply chain contracts are one-sided arrangements. Large buyers can vary terms and for the most part the burden for this is borne by small independent suppliers who have little muscle and therefore can be bullied into acceptance.

Faced with supporting “extended” payment terms suppliers generally discover the chance to obtain funding from their banks is usually limited. They are left with having to seek other ways of improving cash-flow such as factoring but this adds costs and erodes profit margins.

There is a potential fall out for buyers looking to squeeze their suppliers.

Diminishing returns can result in suppliers concluding that the game isn’t worth the candle or those that decide to accept the new terms may well find it to be uneconomic in the long term and cease to trade.

Stretching payment terms may well provide short term benefits for buyers but the longer term implications could turn out to be very damaging in terms of continuity of supply and reputation in the market place. 

Europe’s strong man takes a breather

In the last quarter of 2013 Germany saw little or no economic growth. A combination of Eurozone’s woes and a general slowdown in global growth impacted on business confidence and investment in Germany.

 

One bright spot was that German exports continued to hold up, thanks in large part to the competitive price edge afforded to them by a weaker euro.

Latest figures show that Germany's economy grew by a weaker-than-expected 0.4% in 2013 according to the first official estimates.

However, most economists expect the economy to bounce back in 2014 with growth of up to 2% compared to the Government’s forecast of 1.7%.

Improving economic conditions in the rest of the Eurozone and the US - both big export markets - should help Germany to grow and outperform the rest of the Eurozone for several years to come.

Germany's economy has remained a strong point of the Eurozone, and was credited with helping to haul the single currency bloc out of recession last year.

 

Houston we have a problem

 

When the crew of Apollo 13 contacted Mission Control in April 1970 there was no ambiguity. Following an explosion the crew faced a potential catastrophic situation which they quickly identified and a successful course of action was implemented.

Contrast this to the on-going situation within the banking community. Despite re-assurances that they were putting their houses in order there is a growing feeling that many of the problems have been swept under the carpet rather than acknowledged and dealt with.

It is hard to believe that we have seen the end of issues with the banks when we consider their recent history of financial mismanagement and sheer incompetence on a level that beggar’s belief.

 

Not only would the internal controls of these institutions appear seriously deficient but there is a question mark concerning the obvious lack of professionalism on behalf of the independent auditors.

 

It has become a quetion of whose accounts can you trust?

Warning signals

 

Very few companies explode like a super-nova the warning signs are usually visible for some time ahead.

The following is a basic check list which should help to determine whether the problems are of a temporary nature or have more serious implications for the future of the company:

The most important element in any business is maintaining a healthy cash flow. It is imperative that a strict control is maintained on all outstanding invoiced amounts.

The value of an efficient credit control system cannot be over emphasised.

Do not focus on generating sales with little margin in the belief that over time things will improve. Being the “cheapest supplier” will not provide an automatic route to more satisfactory profits in the long term. It is often better to keep your powder dry.

If you are constantly in danger of breaching your credit arrangements with the banks or suppliers this is a clear indication that the company is not trading satisfactorily.

As conditions deteriorate more and more time is spent focussing on the problems and not enough on to how to position the business for the future.

Particularly for owners of SME’s it is not easy to take the necessary remedial actions and very often this is where an outsider can be of assistance in repositioning the business before it is too late.

You can’t always rely on your sat-nav

 

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.

 

In addition to sales and marketing services we also have experience in carrying out project feasibility studies, debt collection and dispute resolution in respect of product quality issues.

 

If you are looking to enter the UK market or have a requirement for any of the above services then email me at gordon.blackburn1@btinternet.com to arrange an initial discussion.

Now Chinese banks come under closer scrutiny

We have become accustomed to the growing trend in companies to camouflage poor performance with deliberate misreporting and suspect off-balance sheet shenanigans.

 

The Chinese authorities have taken cognisance of this and China's major banks have been asked to publish data on 12 key indicators, including off balance sheet assets.

Chinese banks - especially the big four state-owned lenders - played a key role in keeping the country's growth momentum going in the years following the global financial crisis.

They lent record sums of money in an attempt to sustain China's high growth rate.

There are now fears that some investments have turned out badly and that banks may not be able to recover those loans.

The concern among many is that a rise in loan defaults would not only hurt the country's banking sector, but also have a big impact on its overall growth.

While the reports of bad loans at China's banks account for less 1% of total lending, some analysts are sceptical and feel that banks were either rolling over such loans or even restructuring them to try and keep the reported figure low. A not unfamiliar banking practice.

 

As evidenced previously 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.

The Chinese authorities have now decided that it is a worthwhile exercise to look under a few stones – just in case.

 

 

Acceptable commercial practice or subliminal warning?

  

The traditional response from recalcitrant debtors was “the cheque is in the post”. This generally bought some time as suppliers met this response with a weary resignation.

 

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

 

Basically the name of the game remains the same, buy some time - achieve a payment extension thereby 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.

 

Irrespective of any other considerations it remains crucial to keep full control of receivables.

 

At the very least delays in payment will impact on the bottom line.

However the worst scenario is that neglecting to strictly monitor a failing company could result in a total write off.

 

 

Turnover vanity, profit sanity, cash-flow reality

 

More than ever, 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 as business conditions remain difficult we are witnessing a growing trend for companies to squeeze suppliers in various ways. This can take the form of a decision to arbitrarily extend payment terms, decide not to take up previously agreed deliveries or introduce respective price discounts.

 

From a suppliers perspective this erosion of operating margin means that in some instances 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.

 

Making customer 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.

 

Forging effective partnerships

 

All too often the focus on the current economic background has accentuated the negative. However one of the benefits emerging from the current business climate is the value that can be placed on a mutually beneficial customer/ supplier relationship.

 

As increasing numbers of business operate on a just in time inventory basis it is vital that a good understanding exists between supplier and consumer.

 

In as much as a supplier will be prepared to go the extra mile to ensure that his buyer receives his goods on time and in good order so it behoves a buyer to ensure that he pays as required and is not abusing the goodwill of his supplier by “pinching” some extra period of credit.

 

If both parties work together in a professional and commercial manner then it will strengthen the relationship and both will emerge from the current difficult situation with a renewed confidence in each other and a better based business for the long term.

 

Commercial post mortem – what have we learnt?

All too often in the course of commercial post mortems, the Management and Shareholders of troubled organisations end up asking “how did that go wrong?” 

 

It is an incontrovertible fact that many companies fail to address problem issues early enough to avoid an oncoming crisis. When in reality the causes of the problems were all too readily visible. 

The signs of a troubled business are all too apparent – these include lack of controls, lack of strategic vision, a demotivated workforce and obsolete or valueless stocks etc

 

Instead of grasping these nettles, often the preferred option is to engage in a variety of exercises ranging from ill judged acquisitions (think RBS/ABN), totally pointless projects such as rebranding or the launch of another product range destined to fail for the above reasons.

 

Inevitably the harsh realities come to the fore but by then for many companies it is to late in the day.

 

Trust –the defining business requisite

 

As trading conditions remain tough more than ever the question of trust is of paramount importance.

 

Operating margins are being squeezed and people are looking for ways to protect their bottom lines.

 

As we saw last year with the meat contamination in “Beef products” there will always be those who disregard regulations or flout the law in the belief that they will get away with it.

 

Consumers should have absolute confidence in what they are buying. The responsibility for that lies with the retailers, who need to be absolutely sure that what they're selling is what they think it is.

 

It boils down to the integrity of the supplier, no matter how many factory audits are conducted or how many QA questionnaires are completed it is essentially an issue of trust and reliability.

 

The same can be said of the buyer, if goods are delivered on a credit basis this should mean that the supplier has every right to expect that the agreed settlement terms are adhered to.

A good relationship / reputation takes time and effort to build and sustain, once damaged it is hard sometimes impossible to restore.

 

A question of balance

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.


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.

 

Pick your shots

Much media focus has been given to the burst of retail sales in the pre Christmas/ post New Year period. However, when an objective analysis is made the results will show that although retailers moved stock their operating margins were unacceptably low.

With tightening household budgets it should have come as no surprise to retailers that consumers would be hard to attract and some more innovative marketing in the last quarter of 2013 would have paid dividends. As it is Kamikaze discounting makes little commercial sense and the results of this policy is likely to be more casualties in the High Street in the coming weeks

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.