Keep an eye out for early 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.

 

Masters of the long game

 

The impact of the French Revolution? - “too early to say.”This was the response from Zhou Enlai to questions in the early 1970s about the popular revolt in France almost two centuries earlier – buttress China’s reputation as a far-thinking, patient civilization.

The former premier’s answer has become a frequently deployed cliché, used as evidence of the sage Chinese ability to think long-term – in contrast to impatient westerners.

Fast forward to today and the ability of the Chinese to play the long-game has never been in more evidence.

In a single decade from 2001 up to 2010 Chinese trade with the rest of the world increased from£325 billion to £1.9 trillion.

Since 2005 China has invested £320 billion across the globe with 75% of this in developing countries.

There is an insatiable demand for raw materials to fuel the economic growth in China and commodities such as Oil, Minerals, Precious Metals and Fuel are the prizes for these investments.

The ongoing crisis in Western economies has provided ample opportunity for China to assert its economic strength and China has now usurped the US as the largest foreign investor in Germany.

Chinese companies are investing in such diverse areas as the French Wine industry or making acquisitions in the US/European Food Industry and this will undoubtedly continue as China accelerates its move into Western markets.

China says it wants to back major UK infrastructure projects and has recently signed £14bn in trade deals.

The projects the state-owned China Development Bank (CDB) wants to invest in include High Speed 2 and the next generation of nuclear power stations.

A major deal between BP and China National Offshore Oil Corporation is worth about $20bn (£11.8bn).

At the same time China has continued to extend its influence in Africa. In the latest development China has agreed to give Nigeria a $1.1bn (£700m) low-interest loan to build much-needed infrastructure.

The money will help build roads, airport terminals in four cities, and a light-rail line for Nigeria's capital.

China will continue to invest heavily in Africa at it relies on it for oil and other natural resources.

 

To the heart of the matter

One of the tests of the English legal system is “what would the man on the Clapham omnibus think?”

This is the reaction to any problem or situation that could be expected from a reasonably educated and intelligent but non-specialist person.

In the current economic climate many companies would do well to ask “what does the man standing in the queue at the Clapham Supermarket checkout think?”

The problem is (as we see all too regularly) many people running businesses (or for that matter senior politicians) are too removed from the realities of life to effectively understand the economic difficulties faced by the ordinary consumer.

It is a very easy exercise, a few minutes spent in the supermarket or on a garage forecourt will give a true insight into the problems and frustrations currently felt by the ordinary consumer.

Talk of interest rises in the UK is gathering momentum but there is a real and present danger that even modest increases in interest rates could result in a major surge in families with dangerous debt levels - especially among worse-off households.

Since 2007 the number of households spending at least 50% of their income on repayments has dropped by 270,000 to 600,000 because of falling interest rates.

But rises in interest rates over the next four years could see Britain return to higher levels of household debt than before the financial crisis, which was sparked by US homeowners being unable to service their mortgage debt.

 

What's in a name?

 

Following the financial crisis of 2008 there was much talk of a collective reigning in and return to the principles of sound business.

However memories are short and it is never long before the blurring starts again and risky practices again become more and more the norm.

There is now a concerted move afoot to rehabilitate the image of leverage. This was the mechanism which more than any other precipitated the disaster in the financial system.

Companies no longer speak of leveraged deals but are now taking on “sponsor finance”.

This re-branding has in-built danger as witnessed previously, complacency has resulted in the demise of numerous organisations.

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

Gilding the lily

There is no doubt that in the current economic environment some companies are camouflaging their poor performance with some suspect off-balance sheet shenanigans other dubious activities.

Directors of many companies simply do not have the understanding of the mechanics or the day to day activities of the business which they purport to run.

The classic example of this being the gross mismanagement and ineptitude at the Co-op Bank. This lack of commercial expertise has been especially true in the case of non-executive directors.

In trading environments it is not uncommon that 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.

Some of the most spectacular financial flame outs have followed a period of ostensibly highly successful trading.

 In their desire to recognise these “profits” no thought were given as to how they were being made. In such times it would be well to take note of the old adage that is something looks to be too good it usually is!

If a company is bucking the trend in these difficult times it may well be that they are implementing a winning formula.

However history tells us that it is prudent to implement some rigorous analysis in order to avoid any unpleasant surprises.

If you keep them happy, you keep them loyal

 

External factors over which little control can be exerted continue to buffet all business sectors.

However, every organisation does have 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 answering with the intensely irritating muzak accompaniment, 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 companies that focus on customer service will build an increasingly stronger business.

 

Low cost access to the UK market

 

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 operating costs such as rent, communications, staffing are daunting, particularly in a start up situation where income streams are lagging far behind these up front out goings.

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.

“Showrooming” an increasing problem for retailers

 

With the rise of online shopping retail chains do not need as many stores as they did in the past, a trend that looks set to accelerate this year.

Customers are becoming ever more savvy in looking for value for money, employment is tight and also we've seen a massive growth in the supermarkets in terms of non-food retail.

Now further adding to the problems of the “bricks and mortar retailers” is the rise of “showrooming.”

Essentially this is customers going into a shop to browse but in reality an exercise to check out goods and then search on line for a more competitive deal.

The growth of online shopping is a juggernaut now accounting for 12% of retail sales - and forecast to be at least 30% by 2020.

Those retailers who fail to exploit all areas of multi channel marketing whilst finding themselves saddled with the burgeoning costs of maintaining retail outlets will continue to suffer.

Biting the hand that feeds you

One of the oldest sayings in commerce was “the customer is always right”.

However in truth 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.

The key requirement that any customer wants is to feel that his/her 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 that all transactions / 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.

Every business will have its fair share of 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.

 

Taking it too far

 

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 “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.

Consistently delaying payment is a short sighted policy which can often lead to the loss of a valuable supply source.

Modern alchemy – turning stock into cash

 

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.

 

A question of trust

 

 

As the various pressures increase on businesses the integrity of financial reporting has never been more crucial.

 

With companies and individuals desperate to achieve profit targets the potential for abuse may prove to be too much of a temptation
.
It is important that systems are in place to prevent misreporting and in worse case scenarios fraud and these systems should be reviewed and rigorously checked.

The fallout from numerous banking scandals illustrate how vulnerable institutions are if their personnel choose or are allowed to camouflage the extent of their exposure to unanticipated market movements.

Fraud is not confined to any one business sector. Despite the increased presence of computer modelling to monitor risk there is always the “human element” which has to be considered.

 

Nobody has devised a fail-safe system which affords 100% comfort but in many instances a closer objective scrutiny would have given sufficient warning to have averted a train wreck.

Effective 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.

Time to sharpen up

 

Every business transaction contains an element of risk, yet at the same time how satisfactory are the mechanics for managing risk?

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 abandoned.

Analyses 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; price risk, credit risk and liquidity risk.

It is imperative that appropriate credit checks are made on potential customers before sales are made.

Another element of risk is non-performance by suppliers so again it is vital that key suppliers are credit scored and suppliers risk is spread.

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.

Beef up your credit control

 

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 DSOindicates 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.

There are times to hold and times to fold

 

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 have constant and rigorous focus on 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.

Obviously turnover may well suffer when stricter controls are in place over such elements as payment terms and credit limits.

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

 

It’s always worth asking the difficult question

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 the corporate culture is 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 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.