The era of the mega-ships

 

The world’s largest cargo carrier the MSC’s “Oscar” is now in full service. It has the capacity to carry 19,224 standard 20 foot containers. Thirty years ago no vessel was able to carry more than 5000.

Manufacturers of electronics and mobile phones are shipping cargo by sea because competition was eroding their profit margins focussing their attention on cutting delivery costs.

 

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.

 

Currently there are over 6000 container vessels operating with a significant number engaged in the East to West trade routes.

 

China’s economic success remains export driven as illustrated by the cost of shipping a container. Inward from China to Europe costs around US$1500 with the reverse journey only commanding a rate of around US$700.

 

As evidenced by the Japanese shipping company MOL commissioning 6 vessels capable of carrying 20,000 standard containers traffic will continue to moving onto the water.

 

The alternative moving goods by air is very energy-intensive and the high cost of jet fuel makes air freight too expensive.

 

 

A regular review of the company’s business plan is a necessary discipline

 

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.

 

An analysis of the current inventory levels and receivables will provide the answer to the future growth and capital requirements of the business.

 

Achieving better 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”.

 

 

Beefing up credit control

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 DSO indicates 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.

Before the alarm bells ring

 

Complacency has resulted in the demise of many companies who were supposedly being well managed. However there are usually some tell-tale indicators that a crisis is looming.

 

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.

 

Sound management principles

 

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.

Asleep at the wheel

 

Recent events have underscored 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.

 

HSBC executives have been accused by MPs of incompetence for saying they were unaware of tax evasion activities in their Swiss private bank. Chris Meares, the ex-head of HSBC's private banking division, said he didn't know what staff "were up to".

 

This is not a new phenomenon for example I have worked in trading environments where 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 disasters 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! It is a truism that recessions catch what the auditors miss

 

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.

 

A Harvard study in 2012 found that companies that cut down on workforce costs actually become less profitable.

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.

 

Maximise cash utilisation with efficient stock turnover

 

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.

 

All that glitters

 

The electrical appliance retailler AO has just completed its first year as a listed company. At the time of its stock market debut the company was worth £1.2 billion.

 

A year later underlying earnings of £16.5 million compared to predictions of £18.6 to £21 million saw the share price fall to 192 pence half the value of the float euphoria.

 

It is obvious that any company about to float must by definition be bullish about its prospects. There is a growing trend of companies coming to the market whose history suggests that there is no basis for concluding that they will ever make money.

 

That’s the stock in trade for a company about to float whilst losing money. If it were making a profit before its IPO, it would be harder to make bullish forecasts about how much profit the company will generate in the future.

 

Ironically for a company losing money, the sky’s the limit when it comes to predicting how bright its future revenues will be.

 

In tandem with the ability to forecast a spectacularly profitable future is the functioning of one of the market’s most basic laws: momentum. In other words powered by its own performance a stock that is gaining value up will continue to appreciate in value just because it is going up.

 

More specifically, when there is no real positive cash flows on which to value a stock, its price will rise because investors who do not own the shares will want to climb aboard the bandwagon rather than miss out.

 

This wave of “new buying” can help to drive up the shares further, which will attract a new investment creating a dangerous bubble.

 

It would probably be a more prudent strategy to avoid the money-losing IPOs and invest in companies who are making a profit before they try and float their shares. 

 

However forecasting the price of stocks remains an inexact science and unfortunately for the investor there is as yet no failsafe basis on which to explain why stocks go up and down.

 

The real price of cheap food

In a market where prices are squeezed to the absolute and in order to protect margins suspect practices and questionable ethics will inevitably come to the fore.

 

The current economic reality will continue to underpin the demand for cheap food but in satisfying this demand there is a price to pay.

 

The combined effect of the recession, the growth in online retailing and the increased market share of discounters such as LIDL and ALDI has shaken the likes of Tesco, Sainsbury and Morrison’s. For supermarkets focussing on market share food prices must be kept down, at all costs.

 

But in the case of farming it is such a long cycle and there is little account taken of retrospective costs for the producer.

 

The latest casualty is the UK dairy industry. Global milk prices have fallen 50% in the past year to an 8 year low. The NFU said in December that the number of UK dairy farmers had dipped below 10,000 for the first time - a 50% fall since 2001.This reflects the worsening conditions for producers some of whom are currently faced with accepting a price of 22 pence per litre of milk versus a production cost of 28 pence.

Looking back 25 years ago, British people spent about 22% of their disposable income on food .In 2015 the spend is roughly between 4 and 8%, so food has actually become cheaper.

 

The reality is that the 'bog-offs' - the buy-one-get-one-free deals are not actually sponsored by supermarkets. They are paid for by the producer who has to agree to them under tight terms and conditions. It has recently been reported that LIDL has introduced payment terms of 120 days for its UK suppliers.

 

With margins of the big supermarkets falling from 5% to nearer 3% producers will be expected to absorb more of the pain.

 

 

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.

 

Keeping ahead of the game

 

Managing a business is a complex affair – it has been likened to playing 3 D chess.



Particularly for the owners of SME’s it has never been harder to keep track of the various elements which are buffeting the business.



Now might be an appropriate time to run a check over those areas of the business most likely to cause problems in the coming months.

 

Is the company’s business model relevant and fit for purpose? Is stock turn satisfactory? Is the debtors book giving any cause for concern?



It is a self evident truth that many a crisis could have been averted by timely intervention.

 

This is where an independent appraisal can identify areas of potential concern but more importantly the ways and means by which to address them.



The question that needs to be answered initially is – are we positioned securely?

Caution is the watchword

 

All businesses operating in today’s climate need to have constant and rigorous focus on their commercial exposure.


Operating in 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.

 

There is little merit in vying for “prestige” business if it does not allow for an acceptable commercial return.

 
At the same time 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.

 

Finding the philosopher’s stone

 

In trying to improve profitability, there are 2 obvious strategies, cut operating costs whilst increasing revenue.

 

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 and 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.

 

Avoid damaging supplier relationships

 

The most important component in any business relationship is the question of trust.  

 

The ultimate demonstration of trust and good faith is when a supplier delivers goods to a customer on credit terms.

  

It therefore is incumbent on the buyer that they acknowledge this act of trust and observe the agreed payment terms. 

 

With the current pressures it is easy to understand the temptation of “pinching” a few days extra credit but this type of behaviour soon begins to  pall.

 

Once a supplier feels that their buyer is taking undue advantage the relationship is damaged sometimes irreparably.  

 

For any relationship to be sustained there has to be mutual benefit.

 

When a buyer gains a reputation for persistently crossing the line the merit in maintaining the account is called into question.