Navigating through the perfect storm

Viewing the general air of unease they now prevails in the current climate it is hard to remember the halcyon days of easy money (credit) and the all pervading feeling that the party would never stop.

There is no doubt the world and his wife embarked upon a collective spree for which we are now picking up the bill.

With the benefit of hindsight the warning signs were there to see but these were readily ignored. One quotation springs to mind “they that sow the wind, shall reap the whirlwind"

The problem now is that as always there is an over-reaction and just as we never saw the top there is also the certainty that we will not see the bottom.

What is needed is a clear and unemotional assessment of the current climate, whilst few would dispute that difficult times lie ahead we are far from a financial Armageddon.

As always the markets are driven by fear and greed but the importance of sentiment should not be overlooked. Until and unless the Doomsayers gain a sense of perspective it will be hard to imagine business and markets on a sustained stable footing.

 

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 difficult 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.

 

Euro woes continue to mount

Unemployment in the eurozone hit a fresh high of 18.2 million in August,  a record high of 11.4%.

The highest unemployment rate was recorded in Spain, where 25.1% of the workforce is out of a job, and the lowest of 4.5% was recorded in Austria.

Last week, the European Commission warned of the existence of "a real social emergency crisis" due to the fall in household income and growing household poverty.

Youth unemployment remains a particular concern, with the rate among under-25s hitting 22.8% across the eurozone, and 52.9% in Spain.

The commission repeated its call to governments and businesses to act to try to avoid the "disaster" of "a lost generation".

In Greece, the most recent figures recorded in June show that more than 50% of the young workforce has no job.

Apart from the social cost the spectre of unemployment represents a very major threat to economic recovery in the EU with all the global implications that this brings

KYC know your customer

In the US this basically refers to a due diligence process undertaken by Banks and financial institutions to combat fraud, identity theft and general scams.

It is however a mantra that most organisations would do well to adopt.

Rapid advances in technology continue to transform the way we do business. Everyday business tools would have been regarded as flights of fancy not so long ago. With the unstoppable rise of e-commerce come challenges.

One of the biggest dangers is the lack of personal contact between a company and its customers. Obviously this is not an issue for online retailers selling product over the net and being paid via a Debit card or Pay Pal etc.

However the is an increasing trend for B2B ales to be concluded by email and even SMS. With the loss of the personal contact the identity and customer relationship suffers. The surest way to avoid problems is by knowing your customer and understanding their business.

This relationship and mutual understanding cannot be achieved via a key pad and electronic ordering system.

 

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.

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

However an objective assessment may well lead to the conclusion that in this instance the business would be left to others.

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 not only protects the company’s bottom line whilst allowing focus to be placed on more profitable activities.

 

Failing to act, acting to fail

 

Very few companies implode like a supernova. All too often the distress signals are visible for some time before the flame out.

Such signals may include erratic ordering patterns, consistent delays in settling invoices even repeated failure to return calls or answer emails are  all "early wanrning" indicators that the company may be in serious touble.

When faced with mounting problems it is highly likely 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”. In the overwhelming majority of such cases the only people likely to turn up are the administrators/liquidators.

Be it merely inertia or fear of addressing the problem issues, the outcome will inevitably remain the same.

 

Smoke and Mirrors

During the recent failures in the global financial system one group of participants have remained largely unscathed for their part in the train wreck, the Auditors.

For example in Japan  the former Olympus chairman, Tsuyoshi Kikukawa, has pleaded guilty to charges of falsifying accounts, covering up losses of $1.7bn(£1.1bn). Kikukawa and 2 senior executives admitted to hiding losses dating back to the 1990's.

This begs the question that during that lengthy period how many Auditors examined the validity of the reported accounts?

Essentially 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.

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.

The validity of a company’s accounts reflects the integrity of the company which is being audited. As was demonstrated with the banking crisis in Spain an unrealistic valuation of the property portfolio either through deviousness or sheer incompetence will ultimately have disastrous consequences.