Gilding the lily

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.

 

There have been graphic examples of this recently, the gross mismanagement and ineptitude at the Co-op Bank and the manner in which Tescos was being run. 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.

 

Symbiotic relationships offer the 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.

 

The Greek crisis is a perfect metaphor for our times.

 

A customer develops a pattern of late payments but far from being called to order the supplier fearful of alienating the customer allows this to become the norm.

When the inevitable tipping point is reached there is no alternative to continue to support the errant buyer or risk realise a loss.

As it is with the Greek situation and the realisation that concessions will have to be offered by the international community in order to keep the plates spinning rather that witness the typical Greek folk custom of plate smashing.

 

Accompanying this need to reach out to the fledgling Greek government there is a growing perception that the problem is just being kicked down the road.

However as the international banking community continues to ponder the consequences of another serious blow to its capital structure the UK banking community will not be immune. At the very least there will be a renewed focus on exposure and this will impact on their willingness to lend.

Now more than ever businesses must demonstrate that they have full control over all aspects of their operations. Reporting procedures must be strictly observed and any potential problem areas or customers brought quickly into line. As it becomes harder to borrow, positive cash-flow is critical.

 

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.”

 

The importance of morale

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

 

Management has the responsibility to lay down a set of ideas and objectives that are articulated, understood and supported by the workforce. Good people do not like working for organisations whose values are muddled.

 

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

 

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

 

The workforce is the company’s most precious asset. Accordingly the ability to judge people and value their contribution is an essential prerequisite for any manager. Show appreciation of a job well done, admiration will boost your employees morale.

 

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

 

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

 

Building a talented team requires working with people who may be better at their job than you are at yours, and to guide and motivate them.

 

People will always derive more benefit from a good mentor than from any course or training exercise.

 

A false sense of well being

 

Until such times that they are directly faced with a problem it is the nature of most companies to assume that all is well with their systems and operating procedures.

 

These are the companies that are most likely to be blindsided.

 

Constant monitoring of counter party risk is the order of the day combined with disciplined inventory control.

A customer’s previous reliability can provide a false sense of comfort. Past performance is unfortunately not a failsafe guarantee for the future. Be alive to tell-tale signs such as unusual ordering patterns, delays in payments etc.

 

In truth very few businesses fail overnight and there are usually enough warning signals which should enable a vigilant supplier to reduce its risk.

Current market conditions will continue to test but undoubtedly there will also be opportunities for those placed to take advantage of less efficiently organised companies.

 

By far the biggest danger to the financial wellbeing of any organisation is complacency.

 

Holding a tiger by the tail

Many companies find themselves 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 diversification is one of the most difficult challenges facing any business, and the mechanism for achieving this objective can be particularly difficult to implement.

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, many times 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.

 

Setting the course

 

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

The first action that many organisations take is to reduce staffing numbers, seeing this as a quick fix. This has been the first action taken by the supermarkets and retail chains as they face competition from online suppliers.

 

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.

For the sales director there is only 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.

 

 

Speak softly and carry a big stick

 

Funding issues continue to impact on businesses with more and more customers actively employing various tactics to delay payment to suppliers.

 

Credit control and the monitoring of payments is an increasingly important element for every business.

 

By exceeding the agreed payment terms a customer is using the supplier as an alternate (unsecured overdraft).

 

This situation if left unchecked can spiral out of control. As the situation deteriorates the supplier can find themselves in the invidious position whereby they are forced to keep “trading” with the errant customer for fear of realising a bad debt.

 

Think of the parallel to the Euro zone bail out situations – it is a slippery path.

 

Slack policing of accounts receivable will have serious consequences. At best tardy payments damage cash-flow and at worst can often be the precursor of a company failing with the end result of a total write off.

 

An examination of most debtor’s lists will undoubtedly provide examples of aged invoices where 30 day terms have drifted into 60 and beyond.

 

Consider the damage that is being done to your company’s financial position and ask the question “why is this being allowed to happen?”.

 

A timely 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 produce 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.

 

 

Where’s the family silver?

It is incomprehensible that so many companies be they large or small fail to keep an adequate control of their stock holdings.

 

Similarly companies neglect to rigorously police their receivables.

 

Whilst management consistently focus and push for increased sales performance in their pursuit of turnover/ market share, the question of housekeeping is often put on the back burner or it would appear totally neglected.

 

It is a truism that no business deal is complete until the invoiced funds are in the seller’s bank account.

 

This begs the question: how comfortable are you with your stock and debtors controls?

 

A worthwhile exercise would be to review operating systems now rather than adopt the “let’s hope for the best” style of management.

 

Avoid becoming an unsecured creditor

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

 

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

 

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

 

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

 

It is a question of commercial judgment.

 

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

 

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

 

Good service it’s easily doable

 

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 look for alternative suppliers.

 

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

 

 

Cash-flow the lifeblood of business

 

Efficient credit control is a vital component for any successful company.

 

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.  

 

 

 

Clicks versus bricks the battle for market share

 

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

 

In the UK the impact of Amazon’s business model on leading High St retailers has been devastating. Groups such as Comet has disappeared and HMV have gone into administration.

 

Amazon now has just under 25% share of the UK entertainment industry. Forbes recently listed Amazon at number 33 in the world’s most valuable brands.

 

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

 

This 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 personalisation software.

 

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

 

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.

 

 

Risk versus reward – the ying and yang of commerce

 

Every business transaction contains an element of risk, yet at the same time 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 measures 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 pressing need to examine all areas of exposure.

 

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 .

 

Stock control policy and procedure

 

For manufacturing companies a crucial element of running a successful business is the manner in which they control their stock holdings.

 

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.