Hard sledging for SME’s

 

Latest official insolvency statistics from The Insolvency Service for Quarter 4, 2013 show that both company and personal insolvencies were down in 2013 with 7% fewer company liquidations and 4.6% fewer personal insolvencies. Corporate liquidations are at the lowest level since Q1 2008 and Company Voluntary Arrangements are at the lowest since Q4 2008.

Despite this encouraging development obtaining additional funding remains al a major concern especially for SME’s.

With the marked reluctance of the Banks to lend, it becomes imperative that all businesses focus on their areas of exposure – rigorous policing of the Debtors book must be a priority and Stocks must be kept at a minimum.

More companies will try and improve their cash-flow by dragging their feet with payments and trying to put more of the burden of carrying stock onto their suppliers.

Those that adopt a passive approach to these issues will find themselves increasingly vulnerable and heading down a slippery slope.

 

The workshop of the world

For a few decades in the 19th century British manufactured goods dominated world trade.

Most mass manufactured items were produced more efficiently and competitively in Britain than elsewhere.

At the height of its imperial prowess Britain also had the commercial, financial and political power to edge out rivals at home and abroad.

In some industries, most notably textiles, massive changes took place in technology and in the organisation of production causing dramatic productivity growth. This in turn brought a steep decline in prices

For other sectors more modest organisational improvements coupled with greater specialisation and the employment of cheap labour brought similar, though less dramatic, results.

An unprecedented range and variety of products thus came within the grasp of a new mass market both within Britain and overseas.

Fast forward just over 100 years and all of the above factors can be applied to the Chinese economy.

But just as with Britain after an unparalleled boom there is a period of pausing.

New export orders are contracting, suggesting external demand for China's exporters remains weak.

The true picture is that not only is China's export sector slowing down, but its manufacturing sector is also slowing down. That means the trade surplus is almost gone.

This week Beijing reported the biggest slowdown in investment for more than a decade and the slowest retail sales expansion for nine years resulting in a general revision by analysts in first quarter growth to 7.2%

After a decade of spectacular growth the Dragon is now pausing to catch its breath.

 

More black holes than outer space

Following the precedent set by RBS earlier this year the Co-op Bank have announced plans to raise £400 million though a new share issue following the discovery of additional costs related to past misconduct and poor documentation.

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

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.

The recent fessing up by RBS and the Co-op Bank 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.

Turnover vanity, Profit sanity, Cash-flow reality

 

More than ever, all businesses operating in today’s climate need to constantly scrutinise 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.

 

 

Supermarket price wars – winners and losers

 

Following the announcement by the supermarket group Morrison’s of a £1 billion pounds worth of price cuts over the next 3 years there has been much media speculation as to the reaction from both its customers and its competitors.

Tesco has commented that it will respond with a vigorous pricing strategy which will result in abandoning its operating profit margin of 5.2% it is expected that Sainsbury will follow suit on pricing although it had a lower margin of around 3.25%.

With the big four supermarket groups controlling around 75% of the UK consumers will be anticipating considerable savings in their weekly shop.

But these price reductions will not merely be achieved by the supermarkets trimming their margins. The savings will have to be made on all elements of the supply chain.

Food manufacturers are in an unenviable position; the buying pattern for many continues to be “just in time” reflecting the need to keep inventories as low as possible.

However without the safeguard of a “buffer stock” they are now more than ever exposed to any spike in demand which sees them forced to having to “pay up” in order to secure the raw materials to keep their facilities in production.

At the same time suppliers will continue to face the problems of operating in the current economic background with buyers seeking to delay payment, renegotiate contracts etc.

 

The overhead monster is a greedy animal

 The UK offers a very attractive market for companies wishing to export their products.

Counter party risk is identifiable and can be successfully managed.

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

There is no doubt that to commission and run a UK operation can prove a costly commitment.

The lists of outgoings such as rent, communications, staffing costs are daunting, particularly in a start up situation where income streams are lagging far behind these costs.

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

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

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

 

Shark infested waters – don’t fall overboard

 

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

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

Emails containing 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.

In smaller organisations fraud can be carried out in a variety of forms, over invoicing, theft of stock, supplier’s kickbacks, fictitious expenses etc.

Larger organisations by definition provide scope for fraud on a more substantial basis.

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.

The importance of morale

 In order to achieve success all organisations must have effective leadership. It is the quality of this leadership which determines the morale of the company.

 

Management has the responsibility 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.

 

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

 

Letting your employees express their feelings, needs and concerns will make them feel appreciated. The most efficient companies are those where the workforce feel an integral part of the set-up and not merely there to make up the numbers.

 

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. Show appreciation of a job well done, admiration will boost your employees morale.

It is important to recognise a job “well done” and that employees know that their contribution has value.

 

Create a positive working environment – if an employee doesn’t feel comfortable or motivated by their surroundings, morale will plummet. It’s important that you create an environment that employees will want to work in and will thrive in.

 

Building 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.

In reality people benefit far more from a good mentor than from any course or training exercise.

 

Cash flow the lifeblood of business

 

Credit control has never been more vital than in today’s environment.

It must be a priority that all businesses ensure that their customers are settling invoices on time.

With slim operating margins the norm, very few companies can afford the spectre of significant bad debts.

The following are some procedures which companies can employ to increase the efficiency of credit control.

Set credit limits for each customer and review these regularly

Be concise in trading terms for example it is better to specify 30 days from date of invoice rather than 30 days from end of month.

Issue monthly statements detailing invoices paid and those outstanding.

Score your customers and set a collection policy accordingly.

Do not let overdue payments go unchallenged.

Evaluate aged debtors on a weekly basis.

Prioritise collections and press for settlement of the highest values first.

Have a plan of action if payment is not forthcoming within a set date.

Evaluate the efficiency of the Credit Control function, the best measure is Days Sales Outstanding (D.S.O).

DSO is important because the speed at which a company collects cash is important to its efficiency and overall profitability. The faster a company collects cash, the faster it can reinvest that cash to make more sales.

A relatively low DSO indicates that a company collects its receivables quickly, and a high DSO indicates the opposite.

Here is an example:

Total receivables - £4,600,000

Total Credit Sales - £9,000,000

Number of days in period 90

(4,600,000/ 9,000,000) x 90 = 46 days

In this example it takes 46 days (on the average) to collect the receivables.

The industry standard is for DSO to be no more than 10-15 days longer than the company’s standard terms of sale. So, if the standard terms are net 30 then   the target for DSO is approx. 45 days or less.

 

Further problems for the banks

Major Banks in the US and UK are now facing charges that they conspired to rig the London interbank lending rate (LIBOR).

The process came under scrutiny in June 2012 when Barclays announced that it had submitted false information to keep the rate low.

The list of banks allegedly involved in these latest charges range from the US giants Bank of America and JP Morgan and in the UK includes Barclays and RBS.

Together with Switzerland’s UBS and Rabobank of the Netherlands these four banks have already paid US$ 3.6 billion to settle US and European regulators charges of rigging.

As more evidence of bad practice emerge from the banking industry it reinforces the comments made by the UK Parliamentary Standards Committee on Banking Standards who stated - "too many bankers, especially at the most senior levels, have operated in an environment with insufficient personal responsibility.

"Senior executives were aware that they would not be punished for what they could not see and promptly donned the blindfolds.

"Where they could not claim ignorance, they fell back on the claim that everyone was party to a decision, so that no individual could be held squarely to blame - the Murder on the Orient Express defence."

It is fair to say that had the focus been on the needs of customers and shareholders as opposed to the size and division of the bonus pot, we would not have witnessed the various calamities which befell the Banking system with all the attendant fall out.

It is not unusual for senior management to be detached from the business they purport to run.

From my own personal experience I have worked in trading environments where totally unrealistic profit targets have been passed from Board level to trading departments. No cognisance having been given to the disproportionate risks which need to be taken to achieve these targets.

One factor common to all of the issues is that the most spectacular financial disasters have always followed a period of ostensibly highly successful trading.

 

Failing companies – some tell tale signs

When companies fail the usual reaction is one of surprise.

However very few companies fail overnight and in the majority of instances there are numerous warning signals of a company’s demise.

When dealing with any company always rate their efficiency levels. If your dealings leave you with the impression that the company is muddled in its thinking or lethargic in its dealings then these are early indicators that the company is languishing.

If the staff shows a marked lack of commitment this is also an indication of a demotivated workforce who clearly sees the writing on the wall.

A company who is failing in its obligations to either suppliers or customers will lose business to competitors. A declining market share can rapidly become a slippery path.

Companies that ignore changing market trends and technical innovations are doomed to fail. Companies need to be responsive to market developments and changing patterns.

Be alive to high levels of staff turnover, a continuous exodus of staff is a sure indicator that all is not well and normally a precursor of a more substantial problem surfacing.

Difficult times can forge strong alliances

All too often the focus on the current economic background accentuates 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 customer.

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.

Avoid becoming an unsecured creditor

From a supplier’s perspective the most important part of any transaction is to ensure prompt and satisfactory receipt of funds for goods or services provided.

When a company oversteps the mark by abusing agreed payment terms they are in fact using the seller’s tolerance as means of providing an unsecured overdraft.

Put simply would you exchange a promise from your buyer for prompt settlement conditional on your company providing the upfront funds enabling them to do so?

In reality by continuing to supply a persistent late paying account this is exactly what is happening.

It is a question of commercial judgment.

In these present trading conditions business is hard won but if the transaction carries a disproportionate risk then it isn’t worthwhile.

The time and effort spent chasing a recalcitrant account could be better spent elsewhere.

Every man for himself?

There is a growing trend from companies to press their suppliers into accepting lengthened payment terms.

Such terms can only be served by larger organisation with adequate cash reserves.

For the small to medium supplier it further ratchets up the pressure at a time when for the most part 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 on which the customer/supplier relationship is sustained.

 

Efficient stock control

 

Efficient stock control can limit the effects of problems in the supply chain whilst at the same time reduce the amount of capital which is being tied up with excessive stock.

Many companies have adopted the “just in time” ordering policy and as a result have little or no buffer stock.

Whilst this does translate to a reduction in working capital and lower storage costs there are potential problems such as the inability to deal with an unexpected spike in demand.

This policy also means that the purchasing company has little control and is therefore reliant on the efficiency of its suppliers.

The other side of the coin is to maintain a relatively high level of stock holding which ensures that the company never runs out of material and may afford some economies of scale by bulk buying.

As with all things it comes down to a judgement call.

The best measure is 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.

 

The measure of trust

 

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

The ultimate demonstration of trust and good faith is when a supplier delivers goods to a customer on credit terms.

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

With the current pressures it is easy to understand the temptation of  delaying payment, thereby “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.

It is a very short sighted business tactic.

 

False sense of security

 

To maintain your company’s well-being, 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 this unfortunately provides no guarantee as to future performance.

Be alert to tell-tale signs such as erratic ordering patterns, persistent delays in payments, failure to return calls or respond to emails etc.

Very few businesses fail overnight and there are usually enough warning signals which should enable a supplier to implement actions to reduce its risk.

Operating in today’s business climate 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.

Telling you what you want to hear

One recurring theme from the analysis of losses made in the financial sector is that the management were totally unaware of the risks which their institutions were running.

To be effective, risk management and risk controls rely on the people operating them.

As has been well documented all too often corporate culture is often dominated by fear and greed and these together make for a toxic combination.

When strategies fail and trading positions spiral out of control these two elements come very much to the fore.

Fear can often lead to individuals embarking on an even more reckless course of action in the misguided belief that it will all come right – the age old gambler’s doubling up mentality.

At the same time recklessness is often driven by greed; the larger the risk the greater the reward should it prove to be a successful course of action.

Against this background it is incumbent on the management to ask the uncomfortable questions and not merely rely on the assurance that all is well and going to plan.

It is always worth remembering that if something looks too good to be true it invariably is.

 

 

Getting your fingers burnt

With the plethora of companies coming to the market much focus is being placed on EBITDA – earnings before interest taxes dividends and amortisation.

EBITDA has increasingly become the key metric to show the "intrinsic operational performance" of the business, i.e., the performance when all costs that do not occur in the normal course of business (e.g., restructuring costs, ramp-up costs, consulting fees for special projects, special legal fees) are ignored. While this is helpful in general, it is often misused by declaring too many cost items as "one-offs" and thus boosting profitability.

Many of the companies have as yet only traded at a loss and 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.

 

RBS – still a long and winding road

The latest figures published by the RBS Group make for sobering reading.

The bank's pre-tax loss for 2013 was £8.2bn, compared with £5.2bn in 2012. In 2008 RBS posted the worst loss in UK corporate history of £24 billion.

The average share price paid by the government in 2008 was 500p with the current price languishing around 320p.

According to the head of RBS he estimates it will take a further three to five years for the bank to recover.

The strategy would now appear to focus on a "back to basics" approach.

This will see the group offering simpler retail products, cutting the length of time it takes to set up a current account, and rewarding the loyalty of existing customers, rather than offering "sweeteners" to new customers.

In a nutshell RBS are attempting to reposition themselves to offer a service based business where the customer feels valued.

However, there is still the hangover of the bonus culture which many would argue was one of the major factors which necessitated the UK Government stepping in and saving the Bank in 2008.

Despite the increased loss, RBS set aside £576m for staff bonuses in 2013, a drop of 15% on 2012. Of that sum, £237m went to investment bankers.

So whilst the management claim that they have identified a strategy to take the Group forward and in doing so offer some comfort to its shareholders (primarily the UK tax payer) it is still open to the charge of rewarding failure.

When China wakes up, the world will shake

 

The above quotation which is attributed to Napoleon during his exile at St Helena is almost 200 years old. It was an extremely prescient view and certainly resonates today.

 

During the last decade we all saw the results of the dynamic Chinese export programme as goods poured into the US and EU markets.

 

In tandem with its export led growth we have witnessed a marked step up in acquisition of assets by China following the recent economic problems particularly in the US.

 

However there is another factor emerging as China steps up its demand for raw materials particularly agri commodities.

 

The burgeoning Chinese middle class will continue to demand products which traditionally consumed in the Western world.

A case in point is the increased purchasing by China of Almonds. A “Young at Heart” campaign in China focussed on the idea of “perpetually feeling good” fuelling demand and resulting in price hikes for this premium nut product.

 

As dietary patterns in China become more westernised this will lead to upward price pressure in all sectors of the food industry.

 

This demand will only continue to grow and it will surely become a case for Western consumers of “wake up and smell the Coffee” – whilst you can.