Playing the game or subliminal warning?

In the past when suppliers followed up on overdue payments the traditional reply from recalcitrant debtors was “the cheque is in the post”.

This tactic generally bought some breathing space 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.

However, irrespective of any other consideration it is vital to keep full control of receivables.

At the very least delays in payment will impact on the bottom line; in the worst case scenario neglecting to strictly monitor a failing company could result in a total write off.

Early warning signals

Very few companies implode like a supernova.

The distress signals are visible for some time before the flame out.

Any analysis of a company’s published accounts or even monthly management accounts are by definition “out of date”.

It is vitally important that all counter parties are monitored closely and in “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.

 

Master of your own destiny

Every organisation has a potentially winning weapon in their armoury namely the opportunity to offer excellent customer service.

In these difficult times everyone expects ultimate value for their cash be it the corporate customer or the man in the street.

It is a paradox that as trading conditions 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 telephone answering through 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.

 

Sometimes it’s best to say no

In business as in poker there are times when discretion is the better part of valour.

Put simply, some of the best business deals are those you turn away.

All organisations operating in today’s climate need to rigorously monitor their commercial exposure.

Against the current competitive background it is obviously difficult to contemplate turning away business especially from a customer of long standing.

However an objective assessment may well lead to the conclusion that in this instance the business would be left to others.

Stricter controls over such elements as payment terms and credit limits will lead to reduced turnover.

However there is a reward for such fiscal discipline. Avoiding defaults by customers not only protects the company’s bottom line but allows focus to be placed on more profitable activities.

 

Caveat emptor

The accusations of suspect accounting at the British technology firm Autonomy before its 2011 acquisition by Hewlett-Packard have taken a fresh turn.

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

A fresh cache of emails and other documents have emerged some of which point to the need for “radical action” to stop falling sales a year before the takeover.

Deloitte who audited Autonomy’s accounts said “it accepted decisions of management” to recognise hardware sales in its accounts as “sales and marketing”.

Hewlett-Packard says that this was a mechanism of covering up hardware sales and that Autonomy booked revenues before they were received and used a number of acquisitions to inflate the company’s value before the turnover.

Currently the FBI and the Serious Fraud Office continue to trawl through some 75,000 emails. Meanwhile the US$ 5 billion battle continues. begging the question that during the due diligence process how many Auditors examined the validity of the reported accounts?

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

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

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

 

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

 

Identifying the fault line

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

 

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.

Apart from the self-inflicted wounds the general public also paid the price for this flawed culture.

 

One whistle-blower at Barclays was quoted as saying “It's a very high-pressure environment. The way we are paid means there is a lot of emphasis on getting people to invest more of their savings in the stock market than they should.' He added “Some of the things we sell —such as structured products — are rubbish.”

A little like bolting the stable door after the horse has bolted the regulatory authorities have now decided it is time for a closer scrutiny on bank, building society an insurance company staff being paid commission on sales.

 

This follows years of obvious laissez faire when for example it was quite normal for people to borrow based on self-certification of earnings, a recipe for disaster if ever there was one.

 

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

 

Boosting your company’s sales figures

The only way to grow your business is by increasing sales and revenue.

The following are some suggestions for achieving improved sales growth:

Concentrate efforts on broadening the customer base. If you are not adding customers then your business will stagnate.

Increase sales turnover by persuading buyers to purchase more. It will also benefit sales by increasing the frequency of transactions per customer.

Be alive to market trends and spikes in demand which will allow for an increase in the sales price.

Always concentrate your efforts on serving your premium customers i.e. those who are loyal and regular buyers.

There is no benefit to be gained from dealing with customers who show no loyalty and abuse payment terms.

Time spent on these accounts could be more profitably utilised in dealing with worthwhile accounts.

Essentially the more ideal customers the better your business.

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Finding the philosopher’s stone

 

When trying to improve bottom line returns there are two obvious strategies; cut operating costs whilst increasing revenue. From a Financial Director’s perspective it is the Holy Grail.

The Sales Director only has one shot in his/her armoury namely increase sales. Sales targets can always be raised but a sense of commercial realism also needs to be applied.

If you are marketing a totally unique product or service the task is easier but for the most part there are many companies offering a similar range of products in a broadly similar price range.

As such for most companies it is about getting back to the basics – ensuring orders are processed efficiently and in a timely fashion. Following up on customer satisfaction, in short providing what in old fashioned terms was called “service”.

This is where a difficult balancing act comes into play, in cutting costs the net result is very often a reduced / demoralised workforce.

If those involved in the support work aren’t performing then results inevitably suffer. It is a question of striking the correct balance.

 

Where’s the family silver?

 

It is incomprehensible that so many companies be they large or small fail to keep an adequate control of their inventories. Similarly companies neglect to rigorously police their receivables.

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

It is a truism that no business deal is complete until the invoiced funds are in the seller’s bank account.

This begs the question: how comfortable are you with your stock and debtors controls?

A worthwhile exercise would be to review operating systems now rather than adopt the “let’s hope for the best” style of management.

Keeping it up close and personal

With the unstoppable rise of e-commerce come challenges. Perhaps the biggest danger is the lack of personal contact between a company and its customers.

Obviously this is not an issue for an online retailers selling products over the net and being paid via a Debit Card or Pay Pal etc.

However, there is an increasing tendency for B2B sales to be concluded by email or even SMS.

The personal element has been lost and so has the identity and customer relationship.

The surest way to avoid problems is by knowing your customer and understanding their business.

It is not possible to develop and maintain an ongoing business relationship and mutual understanding based upon a key pad and email ordering system.

Customer satisfaction the art of the achievable

 

The old adage the customer is always right has come in for a fair amount of criticism recently and there are many times when plainly the customer is in the wrong.

Notwithstanding it is of paramount importance to the sustained growth of any business that the customer is kept onside.

One sector that has drawn much negative comment recently is banking.

The key requirement that any customer wants is to feel that their business is valued and appreciated.

In business securing the deal is only the start of the process and the repeat order very often stands or falls with the after sales service (or lack thereof).

Simple but effective measures such as ensuring all contracts are performed efficiently and within due time and that any complaints are handled promptly and with courtesy will go a long way to building and maintaining long lasting relationships.

We have all encountered the difficult customer with whom it would be easier not to deal.

However, in these competitive times there are many who would willingly take this “problem” and revenue off of your hands.

 

Keeping your eye on the ball

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.

 

Time well spent

As business practices change and external factors come into play a regular review of the company’s business plan will ensure that the company stays ahead of the game.

The review if done correctly should result a realistic, objective and clinical appraisal of the business.

Following an analysis of the business plan it should be easier to communicate objectives and strategies to those funding the operation and also to the company’s employees.

The review will serve as a reference point when determining the effects of alternative courses of action on business operations.

A clear assessment of current working practices should highlight areas where the company may require outside assistance.

At the same time an analysis of the current inventory levels and receivables will provide the answer to the future growth and capital requirements of the business.

 

Keeping ahead of the game

 
Running a business in today’s environment is a complex affair – it has been likened to 3 D 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 not only 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 – are we positioned securely?

 

Taking the long view or emperor’s new clothes?

 

In the US Twitter the micro blogging site has reported losses of £395 million in 2013 compared to losses of £49 million in 2012.

It has been estimated that 68 percent of last year’s IPOs were also losing money.

In the UK there is a similar example, Ocado the on-line grocery delivery service saw sales up by 17% with losses to December £12.5 million compared to £600,000 year before. Correspondingly the share price in past year rose from 102p to 522.p.

 

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.

The New World Order

One of the staples of the Hollywood B movie was the Mad Scientist working away in his laboratory desperately trying to engineer a monster or come up with a powerful formula which would lead to world domination. Inevitably all these grandiose plans ended in failure and the world carried on as before.


Fast forward to today’s world and the threat originates from a different source, best described as the Mad Banker. Working away not in laboratories but behind banks of computer screens these would be Masters of the Universe were also trying to control the world through their own form of financial engineering.

By developing trading instruments and programmes of ever increasing complexity they created monsters which just like Dr Frankenstein they could not control.


The results of these spectacularly flawed experiments are now clearly visible. Last week the boss of RBS advised shareholders that problems are still emerging from the financial crisis leading to further write off in the coming months.


The greatest irony of all is that despite all the evidence of their incompetence and sheer recklessness any business seeking additional funding to expand their business finds that they are in thrall to the very architects of the disaster – the Bankers.

 

Diversification – not always the golden path

 

One of the most difficult challenges a business faces is diversification.

Very 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 problem. However, the mechanism for achieving this objective can be particularly difficult.

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, very 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.

Today’s watchword – focus on cutting costs

 

With operating margins being continually squeezed it is imperative that costs are rigorously controlled. 

 

Every business sector is seeing the impact of spiralling costs  e.g. FedEx the world's second largest package Delivery Company have seen their customers moving business from air to slower and less expensive routes. 

 

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.

 

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

 

Facing marked resistance from consumers to price increases and a greater level of competition, those companies who are unable to control costs face an uphill struggle to maintain their position in today’s market place.

 

Lessons from history

  

Rarely in life either privately or in a commercial environment do we come across a unique or totally new situation.

History provides us with many examples of financial crises 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, 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.

We may well be witnessing the start of a new “bubble” in the UK housing market where house prices on average have risen by 6.3% in the past year the biggest annual increase since the start of the financial crisis in November 2007.

As George Santayana commented “those who cannot remember the past are condemned to repeat it”.

 

Making the best use of your cash flow means scrutinising stock turnover.

 

Stock turnover ratio equals cost of goods sold during a specific time frame, divided by the average stock holding during the period.

The result of this ratio gives the "number of days that on average money is tied up in stocks". The longer this is, obviously the worse this is for the business as the money is not available to be used elsewhere. .

An stock turnover ratio of 20 means that the average amount of stock holding during the year has been renewed, or turned over, 20 times over the course of the year.

Dividing the number of days in the period under consideration by the turnover ratio tells you how many days it takes, on average, for the warehouse to empty and then be refilled. The number of days in a year, 365, divided by 20 is 18.25. So the entire stock is fully sold and replenished every 18.5 days, on average.

As a general rule, the higher the stock turnover ratio, the more efficient and profitable the firm. A high ratio means that the firm is holding a low level of average inventory in relation to sales.

Carrying stock ties up money. This money is either borrowed and carries an interest charge, or represents funds that could otherwise be better used in servicing other elements of the business.

There are additional costs in holding stocks such as storage and the risk of getting spoiled, breaking, being stolen, or simply going out of style.

Wherever possible companies need to reduce stock holdings and there are various means by which to achieve this aim:

Liquidate slow-moving or obsolete stocks.

Introduce more efficient production techniques to reduce stock holdings.

Rationalise the product range weeding out the under performers and thereby reduce stock carried.

Negotiate sale or return with suppliers in order to avoid being stuck with unwanted product.