The inherent dangers of diversification

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

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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 management in respect of their performance.

Then the areas of diversification have to be closely considered, 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 vulnerable balance sheet.

 

Tesco still beleaguered

 

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

 

Whilst the investigation undertaken by the Serious Fraud Office will take a considerable time to complete some shareholders have already decided to instigate legal proceedings over the £263 million overstatement of profits which led to significant shareholder losses. Not least of which 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.

 

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.

 

 

Shining a light

One of the conclusions arising from the foreign-exchange rigging scandal was that the regulators such as the Financial Conduct Authority were blind to institutional wrong doing.



This was not the case of an isolated “rogue trader” but was corruption on an industrial scale as witnessed by RBS who in addition to having paid fines to the regulatory body are now investigating up to 50 members of the staff for their part in the market rate rigging between 2008 and 2013.



The integrity and reliability of any organisation’s reporting structure are vital to its long term survival. All too often risk controls are lax or can even be ignored in the pursuit of profits.
 

It can also prove a false comfort to rely on the findings of the auditors.



As we have seen some of the financial instruments employed by the banks were so complex that even their own architects could not fully understand the full implications.



Even with the most rigorous reporting procedures any company is still heavily reliant on the calibre of the people operating the business and recording each and every transaction diligently.



A prudent exercise for any organisation is to regularly assess and test the systems in place for monitoring risk both transactional and counter party to judge that they are fit for purpose. At long last both the banks and the regulatory authorities are waking up to this.

 

As the holiday season approaches

In recent times there has been the tendency for the Christmas holiday season to stretch out over a number of weeks and therefore with a few weeks to Christmas it would seem an appropriate time to consider the implications for business.

Without doubt of biggest concern to businesses will be the impact on cash-flow. Many companies are operating very close to the edge and any delays in payment could have serious consequences.

In some instances invoices which fall due for payment after the 19^th December could well not be settled until the 5th January – giving an at worse scenario of 3 weeks delayed payment.

It would therefore seem prudent to look at your last half December receivables and make a realistic forecast of just how much cash will “come in”.

Similarly with “just in time” inventory it would be sensible to ensure that sufficient stock will be on hand for the early days of January when there are likely to be disruptions to the supply chain.

Trying to get things done in the UK during the latter half of December has proven to be a challenging task so it would be best to ensure you take appropriate action now and are positioned accordingly.

 

Tough going for SME’s

 

Latest research illustrates that in the UK 50% of start up companies fail to last beyond 5 years. The biggest obstacle that these companies fail to negotiate is the vexed question of securing adequate funding.

When approaching lenders it is vital that the business plan is realistic and clearly defined.

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 outstanding receivables must be a priority and inventory 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.

Nurturing the company’s assets

For any company to succeed it is necessary to have a motivated work force. However in today’s environment there is a discernible sense of demoralisation amongst many workers.



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 receive encouragement if they are expected to give of their best.
 

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. Instead of engaging with their staff they opt to manage by diktat.



This mentality is counterproductive. Staff 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.

 

Where’s the money gone

One of the biggest drains on a company’s financial well being is the high cost of carrying stocks .



In these competitive times it is staggering that so many companies be they large or small fail to keep a control of their inventories.



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



There are various costs attached to carrying stock and as such it is an area of the company’s exposure which needs constant monitoring to ensure the acceptable rate of stock turn is being achieved and that stock losses are kept to a minimum.
 

The same level of focus should also be applied to debtors to ensure the effective management of cash flow.



Now might be considered as timely to conduct a pre-emptive review of your operating systems for stocks and debtors rather than wait for the post mortem results.

A true view of the company’s affairs – or smoke and mirrors?

 

Following the fallout from major losses suffered by various financial institutions the role of auditors is coming under scrutiny as never before. Hitherto they had remained largely unscathed for their part in the recent train wrecks.

The Association of Chartered Certified Accountants (ACCA) has acknowledged that the accountancy profession will continue to lose credibility if it fails to convince its stakeholders and the public of its value.

There are many instances of conflict of interest such as taking on consultancy work for clients and becoming too cosy with management teams.

It is all too easy for companies to bully the young staffers sent in to do the grunt work. Not wishing to rock the boat, there is a reliance of the company being audited for “valuations” and this can result in a totally inaccurate picture being presented.

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

As was recently demonstrated by Tesco “booking profits” not yet realised such activities either through deviousness or sheer incompetence will ultimately have disastrous consequences.

Know when to be bold, know when 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.

It is obviously difficult to contemplate turning away business especially from a customer of long standing. Similarly the attraction of securing “prestige business” can be very seductive.

However an objective assessment may well lead to the conclusion that at times the best course of action is to leave these opportunities to others.

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

However, the reward for such fiscal discipline is obvious. Avoiding defaults by customers not only protects the company’s bottom line whilst allowing focus to be placed on more profitable activities.

 

It’s pointless to shoot the messenger

 

One recurring theme from 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 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.

Risk/reward – the Ying and Yang of commerce

Every business transaction contains an element of risk, but the crucial factor is how adequate are the mechanics and systems that are in place to manage these risks?

In recent years we have witnessed just how costly the laissez faire attitude to risk was in many institutions be they large corporations or smaller SME’s.

In the never ending quest for larger profits many of the saner principles of business were jettisoned.

An analysis of the most spectacular flame outs all have one common denominator – the architects of these calamities went hurtling over the cliff like lemmings.

There has never been a more relevant time to examine all areas of exposure.

For example a forensic 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 3^rdParty appointed to do it for you.

 

The value in leaving some deals for your competitors

 

In the coming weeks, much media focus will be given to the projected burst of retail sales in the pre Christmas/ post New Year period.

With tightening household budgets it should have come as no surprise to retailers that consumers will be hard to attract and some more innovative marketing in the last weeks of 2014 will pay dividends. As it is Kamikaze discounting makes little commercial sense and the results of this policy are likely to be more spilt blood in the High Street.

Aside from the retail sector all companies 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, there are times when subsequent events show that on occasion 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 hard to recoup.

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 at poor service in recent years


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


The reality of the real world 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 “know your customer,” this dictate has never been more relevant.

 

Customers – love ‘em or lose ‘em

 

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

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

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 all contracts are performed efficiently and within due time and that any complaints are handled promptly and with courtesy will go a long way to building and maintaining long lasting relationships.


We have all encountered the difficult customer with whom it would be easier not to deal. However, it is always worth remembering that there are many who would willingly take this “problem” and revenue off of your hands.

 

Today's mantra - keep trimming costs

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

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

Manufacturers of electronics and mobile phones are now shipping cargo by sea because competition was eating into their profit margins meaning they needed to cut delivery costs.

Take the example of mobile phones each 20 foot container can hold 13,000 smart phones with a transportation cost from China to Europe of 7 pence per unit and a transit time of approximately 25 days.

Traffic will continue to moving onto the water because moving goods by air is very energy-intensive and the high cost of jet fuel makes 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 have an uncertain future.

 

Short sighted tactics

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.

 

Effective management

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.

 

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.

 

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 are 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.

 

Time for forward planning

In recent times there has been the tendency for the festive season to stretch out over a number of weeks and therefore with just over 7 weeks to Christmas it would seem an appropriate time to consider the implications for business.

Without doubt of biggest concern to SME’s will be the impact on cash-flow. Many companies are operating very close to the edge and any delays in payment could have serious consequences.

In some instances invoices which fall due for payment after Friday December 19^th could well not be settled until the week beginning the 5^th January – resulting in a scenario of 3 weeks delayed payment.

It would therefore seem prudent to look at your last half December receivables and make a realistic forecast of just how much cash will “come in”.

Similarly with “just in time” inventory it would be sensible to ensure that sufficient stock will be on hand for the early days of January when there will be inevitable disruptions to the supply chain. Already there are reports of shortfall in available haulage capacity for December.

Trying to get things done in the UK during the latter half of December will undoubtedly prove to be a challenging task so it would be best to ensure you are positioned accordingly.