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.

In the words of Machiavelli “Whoever wishes to foresee the future must consult the past; for human events ever resemble those of preceding times. This arises from the fact that they are produced by men who ever have been, and ever shall be, animated by the same passions, and thus the necessarily have the same results.”

Ignore the warning signs at your own peril

 

The hackneyed response from recalcitrant Debtors used to be that “the cheque is in the post”. This generally bought some time as generally 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, we are all operating in difficult times and it is vital to keep full control of receivables.

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.

Battling for the customer

 

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

The Group has reported further losses in its last quarter totalling US$ 126 million compared to US$7 million in the corresponding period last year. The costly shift towards digital content and consumer electronics businesses were cited as the main reason behind this loss.

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

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

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

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

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

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

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

 

Squeezing till the pips squeak

 

Against the current economic backdrop companies are constantly looking for ways to boost their bottom line.

Particularly over the past year we have seen companies trying to extend their payment terms by all manner of means – some fair, some foul.

In addition to this many are looking into the question of obtaining “rebates” from their suppliers. Suppliers will be asked for a 0.75% rebate if their sales grow by 10%.

Earlier reports have suggested said the rebate would rise to 5.25% if sales grew by more than 50%.

Amongst suppliers there is always a battle to secure sales but there also has to been a commercial realism.

If by securing so-called “prestige” business the overall operating margin carries a disproportionate return then it becomes a question of commercial realism.

In such situations it may well be argued that such business is best left to others.

 

Ahead of the silly season

 

As we approach the summer holiday season it would appear to be an appropriate time to tackle potential problem areas with some effective housekeeping.

One of the first areas for scrutiny is the level of inventory which you are holding.

Make sure you are achieving the best level of stock turn and that you are not carrying any obsolete stock.

Rather than be faced with a “fire sale” it may well be prudent to lighten up now with some innovative marketing strategies.

How is your company’s cash position?

Despite their rhetoric the banks are still reluctant providers of additional finance and this is particularly true in the case of SME’s.

Therefore it is an absolute priority to maintain positive cash-flow and this can only be achieved by keeping debtors well managed and under control.

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

Make stock turnover work for you

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.

 

Keep a watchful eye of 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. air transport companies 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.

A rewarding exercise

 

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.

 

Fraud a clear and present danger

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.

A growing threat comes in the form of cyber-crime.

Some 82 per cent of Britain’s 4.9million small and medium-sized businesses believe they are not a potential target of cyber-attacks from fraudsters because they are too small or don’t have anything worth stealing, according to a study by Kaspersky Lab.

However Federation of Small Business found 41 per cent of small firms - in a sample of 1,105 - were hit by cybercrime in 2013.

One in ten were the victim of online fraud and one in five affected by a computer virus.

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.

 

 

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.

Small businesses in the UK are owed billions of pounds in late payments, but new research has shown that a third are reluctant to chase slow-paying customers because they are worried about upsetting them or feel embarrassed.

Four in five, SME’s say they avoid chasing debtors because they find the process 'uncomfortable', while the remaining 20% are afraid of antagonising customers.

This is a dangerous approach resulting in more than a third of UK SMEs reportedly writing off thousands of pounds of bad debt every year.

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.

Despite the vital importance of maintaining a healthy cash flow three quarters of SME’s do not have a person or a procedure in place for chasing bad debt and a vast majority have no established escalation process for late payments. This is a recipe for disaster.  

 

Adding value

 

Essentially there are two courses of action when attempting to boost the bottom line, cut operating costs and generate additional revenue.

The first action that many organisations take is to reduce staffing numbers, seeing this as a quick fix.

It is a tool by which management perceive they can demonstrate that they are getting to grips with the problem.

However, there is a danger that in line with reduced personnel there is an accompanying decline in operating standards. In such circumstances customers often choose to vote with their feet.

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

In many instances companies would be advised to make customer service their USP but this requires the commitment of a dedicated work force not one that is pre-occupied with the spectre of further redundancies.

 

Boosting sales performance

 

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

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

Upselling is a cost effective way to boost bottom line returns.

Essentially, upselling involves adding related products and/or services to your sales portfolio and making it convenient and necessary for customer to buy them. Crucially when upselling the customer has to be persuaded of the benefit.

Give your customers the inside track.

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

Differentiate your customers.

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

Repeat business is the life blood of any sales force.

Loyalty cuts both ways and becomes meaningless if all customers are treated as “someone off the street”.

 

A summer of stress

 

The European Central Bank continues its project of “stress testing” the financial health of Europe’s banks.

This exercise involves collating data provided by 6,000 auditors and central bankers from across the continent.

Problem loans buried since the financial crisis of 7 years ago are at long last being excavated.

Results of the analysis are expected to be announced in October but at this stage some estimates suggest that 30% of Europe’s banks could fail their “stress test” and be forced to scramble for support capital

Last week the market had a taste of the potential fall-out when Portugal’s Banco Espirito Santo suspended trading in its shares’ following concerns about accounting irregularities in its parent company. This news sent shares in London, Paris and Frankfurt lower.

Elsewhere the spectre of defaults by countries such as Hungary and Romania still plague the market.

The ongoing stress test comes as a timely reminder that 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. Many times however, the best business is that which is left to competitors.

It may well be that turnover suffers when stricter controls are in place over such elements as payment terms and credit limits.

The reward for such fiscal discipline is obvious.

Avoiding defaults by customers still remains the surest way to protect the company’s bottom line.

 

The value of the human touch

Companies have traditionally thought of customer service as a cost centre, which made it a ripe target for cuts during the downturn. That has contributed to increasing frustration among consumers who have suffered with poor service in recent years.

Many organisations are opting for a digitally based service as opposed to the more traditional methods i.e. Barclays bank decision to replace cashiers with greeters armed with an ipad.

Although many operations are completed electronically in this virtual world we should never forget that essentially commerce is about people trading together.


The reality is that goods need to be moved from point of production to point of consumption and obviously the diverse elements which make up this chain cannot be achieved solely via a computer terminal.


It makes sound economic sense to foster and maintain good customer relationships as it has been determined that it costs up to five times as much to win a new customer as it does to retain one.


There is an old adage “value your customer,” this dictate has never been more important than in these uncertain and challenging times.

 

It’s within our power

External factors over which little control can be exerted will continually 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 today’s business environment 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.

How much revenue is lost arising from an existing or potential new customer not wishing to endure the frustrations of automated answering and merely hanging up?

How much “repeat business” is lost owing to the failure to meet agreed delivery schedules?

With such experiences customers are left feeling that their business is not valued. It is 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 focus their energies on customer service will see their business reaping the benefits

 

Morale is the lynchpin of efficiency

 

There is no doubt 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. All employees 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.

Don’t say you weren’t warned

 

Monitoring counter party risk is the key to maintaining a healthy business.

In the majority of failing companies the distress signals were plainly 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 “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”.  For many of these organisations 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.

Starved of cash

 

Latest figures show that bank lending to small and medium enterprises fell by another £152 million net of repayments in May whereas advances to non financial firms in general increased by £3.4 billion.

This further underscores that although Banks are willing to lend more the situation for SME’s remains difficult.

The Bank of England recently commented that lending to “small businesses remains constrained with little change in banks risk attitude”.

Having suffered the consequences of their previous reckless attitude to lending the Banks remain nervous about the prospects for the UK economy.

After the spectacular failure of their previous policies there was always likely to be an excessive over reaction on the part of lenders.

The tragedy for many small businesses is that they are being strung along whilst Banks prevaricate about increasing facilities and in the meantime much damage ensues.

Now more than ever any application for funding must be accompanied with a stand-up strategy together with evidence of strict control over all elements such as cash-flow, debtors and stock turn/ inventories.

In this current climate, the Banks will look to any shortcomings and or operating deficiencies as justification to turn down increased funding and or to reduce or even call in previous agreed facilities.

 

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.

Latest figures show that China's manufacturing activity grew at its fastest pace for six months in June, suggesting that recent stimulus moves have started to have an impact.

China's economy expanded at an annual rate of 7.4% in the January to March period, from a year ago, down from 7.7% growth in the final quarter of last year.

There has been a marked step up in acquisition of assets 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.

As dietary patterns change 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 in the Western world of “wake up and smell the Coffee” – whilst you can.

 

Commercial post mortem a forlorn exercise

 

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 into play but for many companies it is at that stage too late in the day.

Holding a tiger by the tail

 

Without doubt 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 dilemma. 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 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.

 

Turnover vanity, profit sanity, cash-flow reality

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

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

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

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

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

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

 

Symbiotic relationships offer path to growth

 

When evaluating the respective role of the supplier/consumer the focus often accentuates the adversarial nature of the relationship i.e. who is getting the better of the deal?

However one of the benefits that can be derived from the current business climate is the value that can be gained by the customer/supplier in having a mutual understanding of each other roles and obligations.

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 delaying payments in order to seek 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 benefit from a renewed confidence in each other and a better based business for the long term.