Cash flow the vital element

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.

Call it what you will

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; failing to acknowledge harsh realities 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.”

 

Would your company pass the "stress test"

The European Central Bank has released its findings after “stress testing” the financial health of Europe’s banks

Twenty-four European banks have failed "stress tests" of their finances, the European Banking Authority (EBA) has announced.

The banks now have nine months to shore up their finances or risk being shut down. No UK banks are included.

The review was based on the banks' financial health at the end of 2013.

Ten of them have taken measures to bolster their balance sheets in the meantime. All the remaining 14 banks are in the Eurozone.

The health check was carried out on 123 EU banks by the EBA to determine whether they could withstand another financial crisis.

The list of 14 includes four Italian banks, two Greek banks, two Belgian banks and two Slovenian banks.

The exercise involved 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 were excavated.

The stress test came 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. Business which carries a disproportionate risk/reward ratio is best 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.

 

Keyboard crime the new growth industry

With the ever increasing reliance on computer based transactions all businesses and organisations must be alive to the potential for fraud.

Entrepreneurial owners of SME’s are a prime target for fraud as overseeing finances doesn’t always come naturally to them. If a founder is focusing mainly on the product or service being sold, and only minimally on administration, it leaves a business vulnerable to fraud.

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

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

One area of particular concern is invoice fraud. Fraudsters send in fake emails which contain new payment details. If a company is not vigilant payments are then made and by the time that the mistake has been identified the fraudsters have long since transferred the funds.

In one recent case a Norfolk based manufacturer fell victim to this scam. Believing that the invoice came from a usual supplier they transferred £350,000 to a fraudulent account and were unable to recover this money.

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.

Competition is hard enough without having to face another drain on your company’s resources.

 

Who is auditing the auditors?

The majority of the flak following the failures in the global financial system was largely directed at one sector i.e. the banking industry. One group of participants remained largely unscathed for their part in the train wreck, the auditors.

Now with the admission from Tesco that accounting irregularities were in excess of £263 million for its first half accounts the activities of this sector is again coming under closer scrutiny. Auditors are in a very privileged position and their integrity is paramount.

Last year in the UK subprime lender Cattles has launched a multimillion-pound claim for damages against PwC, alleging “audit negligence” for failing to spot major holes in its accounts in 2006 and 2007.

Cattles said the failure resulted in it piling up £1.6bn in debts and liabilities, bringing the FTSE 250 firm to the brink of collapse and forcing it to suspend shares in 2009.

A spokesman for Cattles said, "After a thorough, independent and objective review of the merits of this claim, it is clear to us that PwC were negligent in their role as auditors. As a consequence, Cattles and its creditors suffered very significant losses."

In the US authorities brought criminal and civil charges against former senior partners at accountancy giants KPMG and Deloitte Touche over alleged insider trading.

However it is not just about negligence or illegal activity, there are many instances of conflict of interest such as taking on consultancy work for clients and becoming too cosy with management teams.

At the lower end of the scale it is all too easy for companies to bully the young staffers sent in to do the grunt work. For example what chance has a newly appointed auditor walking around a factory warehouse to adequate value stock?

In reality they have to rely on the company for “valuations” and this can result in a totally inaccurate picture being presented.

In many instances the senior management of the company being audited and the auditors can end up signing off on a “nod and a wink”.

The validity of a company's accounts reflects both the integrity of the company which is being audited and that of its auditors.

 

Symbiotic relationships a clear way forward

 

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 consumer.

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

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

 

Manage stock to protect the bottom line

For suppliers and manufacturing companies alike the efficient management of stock is a vital element of their business.

In many cases business failures can be traced back to the inability of a company to turn its stock back into cash within an acceptable time frame.

It is worth noting the costs associated with carrying stock:

Holding stock ties up working capital with otherwise could be used for other purposes therefore it has an opportunity cost.

All stock being held incurs storage costs such as rent and other utilities. Insurance especially for high value goods also is an expensive add-on.

If goods are being funded via a Bank overdraft or loan this may well inhibit the company’s ability to finance other activities as Banks are reluctant to extend terms.

There is always the danger that stock can become obsolescent or in the case of perishable products deteriorate and become a write off.

The only way to ensure that a company keeps track of this area of exposure is by constant monitoring of stock levels and focussing on unusual or irregular patterns in the movement of stock.

 

The danger signs are there if you look

There are numerous tell tale signs which point to the fact that a company may be heading into trouble.

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.

 

Cleaning the Augean stables

 

Following the financial crash of 2008 there was a general feeling that those perceived responsible for financial shenanigans should be held to account.

Some years later a tough new law to prevent future financial collapse is about to be introduced. For the first time non-executive directors could face the possibility of criminal charges if finanicial misconduct occurs on their watch.

As the various banking disasters unfolded we heard how ostensibly “mega profits” were being generated and that nobody thought that this seemed too good to be true.

When an individual or group of individuals are labelled “star traders” the culture of these financial institutions is such that it is virtually impossible for anyone to check or challenge them.

There are few prizes for killing the golden goose.

Even more ludicrous is the lack of independent controls which left many of the traders to self-police their own portfolio.

Whether by design or delusion what trader facing enormous losses is willingly going to face up to the reality of the situation?

The preferred course of action is to continue betting more heavily in a forlorn hope to recoup the losses. It is an all too familiar tale.

The regulatory authorities may pursue some of these irresponsible traders in an effort to appease those who think that the bankers “got away with it”.

In due course a few of them may end up going to prison but the vast majority will have nothing to fear.

In reality the really guilty parties are those who were operating at the very highest levels in the banking communities.

Whilst not directly responsible for the specific transactions they oversaw the deeply flawed system. Whether driven by greed for increased profits or fear of not keeping pace with their competitors they presided over the ultimate train crash whilst being rewarded handsomely.

The new tougher legislation may go some way to redressing this imbalance.

Playing it hard ball

Any company who supplies the major supermarkets is left in doubt as to the considerable power and ruthlessness of these organisations. The revelations that Tesco employed a variety of strategies to reduce their purchasing costs are not recent phenomena. Be it payments for prominent display of products, changes to bar codes or retrospective rebates there is no shortage of bullying tactics which are brought to bear.

When Premier Foods tried to renegotiate prices in light of rising commodity prices Tesco responded by delisting products such as Hovis, Mr Kipling and OXO which saw Premier Foods lose £10 million over a 3 month period.

Against the current economic backdrop supermarkets facing increasing competition from the discount retailers 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 revisiting “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.

 

What’s lurking round the corner

Events of the past week have shown just how vital it is that Senior Management set clear defined operational and reporting procedures.

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

For example I have worked in trading environments where totally unrealistic profit target 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 your company is bucking the trend in these times it may well be that you are implementing a winning formula.

However history tells us that it is often a prudent course of action to look under a few stones – just in case.

 

The price of denial

 

How often do we ignore the obvious and subsequently ask ourselves “why did that go wrong?”

A large number of companies fail to address problem issues early enough to avoid an oncoming crisis.

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

Instead of grasping these nettles, often the preferred option is to engage in a totally pointless exercise such as a rebranding campaign or the launch of another product range destined to fail for the above reasons.

The operating style of many doomed companies can be likened to Nero’s pastime of fiddling whilst Rome burns.

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, analysts have now concluded that the Chinese government's target of achieving 7.5% growth this year may be missed.

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

 

Back again the usual suspects fear and greed

After a substantial rally in the Global stock markets we have recently seen some turbulent trading and wild price swings.

Whilst some commentators remain bullish the recent spate of economic news from China and the Eurozone have clearly unsettled some operators.

Now is the time to remain focussed and consider the implications for your business.

Just as was evidenced during the credit crunch crisis in the summer of 2008 there is a question mark over the manner in which the banks will respond to the current inputs.

The problem for the banks is that because of the legacies of their previous mistakes they are effectively stifling their customers businesses as they look to batten down the hatches and strengthen their own balance sheets.

It will remain difficult to gain support from the banks in the coming months therefore it must be the absolute priority to keep a strict rein on your finances – make sure that your Debtors Book is strictly controlled and ensure that Stock turn and inventory levels are well policed.

With their houses still far from in order, the banks will undoubtedly remain conservative in their approach to lending, so the order of the day is work within your current limits and maximise your profits.

 

Europe’s strong man under pressure

 

Global stock markets endured a torrid time last week with stocks falling to levels last seen a year ago.

Once again the Eurozone was the focus of market attention with the German economy facing particular scrutiny.

Germany is Europe's biggest single national economy, and until now has been faring far better than almost every other Eurozone member.

However recent data makes for gloomy reading. Germany saw a 5.8% drop in exports during August the biggest monthly decline in over 5 years. . At the same time the German government cut its own economic growth forecasts to 1.2% for both 2014 and 2015.

These statistics are fuelling concerns that Europe’s biggest economy is heading into recession.

A German recession could sap business confidence across the Eurozone even further, and would hit the other Eurozone members more directly if their exports to Germany fell.

Elsewhere, data from the rest of the Eurozone continues to paint a grim picture.

Whether you turn to Europe, to the United States of America, to other places as well, there is a level of uncertainty that is sapping confidence.

 

The overhead monster is a hungry 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.

international real estate adviser Savills claims the typical combined cost of renting housing accommodation and leasing an office for a team of office executives for 12 months in London has sky-rocketed to almost £74,000 per employee. This figure reportedly sets London apart from other major global cities such as Paris, Tokyo and New York.

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 product 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.

 

Deutschland uber aisles

Whilst the four major supermarket chains Tesco, Sainsbury, Asda and Morrison face declining sales their main threat is coming from the German discounters Aldi and Lidl who are going from strength to strength.

Lidl expect sales this year to grow by 20% to more than £4 billion. Over the next 10 years Lidl plans to double in size with up to 1500 outlets. Meanwhile latest figures from Aldi show that UK sales increased 36% to £5.3 billion last year ldiscounters.eading to a 65% increase in profits.

These two companies have been the beneficiaries of a shift in consumer buying habits following the financial crisis of 2008 and the global recession. People are looking for value for money and these discounters are providing it. The big four UK supermarkets were slow to appreciate the threat and now find themselves very much on the back foot.

Morrison have now launched a loyalty card “Match and More” which takes into account not only its traditional rivals pricing structure but also the German discounters.

At the same time as facing this heightened competition the UK big four supermarkets find themselves under scrutiny in respect of how they are reporting their figures and the treatment of rebates or costs of promoting products which they levy on suppliers.

From a consumers perspective there is a general desire to get back to basics i.e. good quality at the best possible price. More and more people are turning away from the “bargain offerings” of buy one get one free the so called BOGOFF.

Lidl and Aldi have certainly stolen a march on the established grocery chains who will have to respond with some innovative and aggressive marketing as they attempt to recoup market share.

Whilst this will be good news for the consumers there will be pain to be felt and this will certainly be the case for those supplying the supermarket chains. These companies will undoubtedly be pressured to reduce their prices whilst having to accept a lengthening of payment terms.

 

 

 

Beware the siren song

More than ever, all businesses operating in today’s climate need to have constant and rigorous focus to their commercial exposure.

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

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

From a suppliers perspective this erosion of operating margin means that in some instances the best business decision was to leave it to your competitors.

When stricter controls are in place over such elements as payment terms and credit limits the result is likely to be a reduction in turnover.

The upside of such fiscal discipline carries its own rewards. Avoiding defaults by customers is the surest way to protect the company’s bottom line at a time when profits are hard won and losses easy to establish.

It is worthwhile to remember the old mantra - turnover vanity, profit sanity, cash-flow reality.

 

Getting the formula right

Companies trying to improve bottom line returns have recourse to 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.

Tesco still reeling

 

The fallout from the revelation that Tesco had been overstating their profits continues to be immense.

Warren Buffet has announced that he made a “huge mistake” by investing in Tesco shares with estimates that his losses on his Group’s holding in Tesco shares exceeds £500 million.

Other less notable losers will of course included Tesco employees who bought into the company’s share scheme and have seen the value of their investment drop by 50% in the past year.

Further illustration of the hubris of the previous Tesco senior management was the ordering of a £31 million jet for corporate travel. No doubt the new board will be under pressure to dispose of this in the not too distant future.

This self-aggrandisement is an all too familiar story, it was exactly the same type of behaviour we saw from Fred Goodwin when he was at the helm of the RBS Group albeit that the fall-out from his ineptitude came at a far higher cost to the group’s shareholders and the UK taxpayer.

The components of this story are the usual suspects, loose governance, directors preoccupied with their own bonus structure, Auditors not getting to grips with the fundamental issues of the business they are auditing.

Meantime the UK’s top financial regulator (FCA) has launched an investigation into whether Tesco broke rules on adequate financial disclosure and it will

The figures are wrong through incompetence or deliberate falsification it can only be one of these two issues.

In smaller companies it is not unusual for management under pressure to resort to “massaging the figures” whilst unacceptable business practice it does not have the implications that accompany the Tesco situation.

The damage to shareholder confidence and the brand itself is incalculable coming at a time when Tesco is facing rapidly declining sales.

It will be difficult to rebuild trust from either the market of its customers with the overhanging feeling that there may well be more skeletons lurking in the cupboard.

 

Leading by example

 

In order to achieve success all organisations must have effective leadership. It is the responsibility of management 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.

Managers have to take difficult and unpleasant decisions. These often need to be made swiftly balanced against conflicting demands. It is not always possible to access cast-iron evidence to support the decision making process. This is one of the tests of strong management.

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

The desire to succeed which provides the drive and focus on excellence is one of the hallmarks of a good manager.

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.

To build 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. People learn far more about the art of leadership from a good mentor than from any course or training exercise.

The ability to respond quickly will prove invaluable when things go wrong. Surviving a reverse and changing direction is the utmost test of resilience and flexibility.

 

Take heed of tell tale signs

Rarely do 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.

 

Web crime a burgeoning industry

 

Cyber-crime is growing at an alarming rate. In the period January to June internet fraud linked to stolen passwords in the UK soared by 71% to £29.3 million.

Meantime it has been estimated that online fraud hits one in eight UK businesses each year and costs a staggering £20 billion.

Despite storing critical information on mobile devices and computers some 82% of SME’s are unprepared for an IT security breach.

Entrepreneurial owners of SME’s are a prime target for fraud as overseeing finances doesn’t always come naturally to them. If a founder is focusing mainly on the product or service being sold, and only minimally on administration, it leaves a business vulnerable to fraud.

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

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

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

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