The Water Stone of the Wise aka the philosopher’s stone.

 When trying to boost the bottom line, there are 2 obvious solutions, (a) Cut operating costs and (b) Increase Revenue. If you’re the FD you’ll probably aim for the double.

 

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”.

 

 

 

 

Europe’s strong man starts to falter

 

A group of leading think tanks in Germany have cut growth forecasts for the country and warned of recession.

The economic institutes said Europe's biggest economy would only grow 1% next year instead of the 2% they had been expecting six months ago.

But this assumes that the crisis in the eurozone does not worsen.

They also criticised the European Central Bank's latest initiative to ward off the crisis, saying its debt purchases risked fuelling inflation.

Last month the ECB unveiled plans to buy up the government debts of struggling eurozone members, but only if those governments first signed up to a rescue package, including strict conditions on cutting their overspending and reforming their economies.

Some analysts are concerned that in the longer term there is a great danger that the ECB will continue to purchase bonds and provide excessive monetary policy stimulation even if states deviate from the adjustment programmes, which could drive up prices and lead to an increase in inflation expectations.

The eurozone's woes, coupled with a general slowdown in global growth, is now impacting on business confidence and investment in Germany, despite the fact that German exports had continued to hold up, thanks in large part to the competitive price edge afforded to them by a weaker euro.

Over the forecasting period as a whole the downside risks prevail and there is a great danger that Germany will fall into a recession with unemployment in Germany rising from its current 20-year low of 6.2% to 6.8% next year.

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

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.

Consumer prices inflation in Spain rose to a 16-month high in September of 3.4%. High inflation is particularly unwelcome in a country that is already struggling with shrinking incomes and uncompetitively high wage costs within the eurozone.

It will also make it even harder for the government to cut its overspending from 8.9% of Spanish economic output this year to 4.5% in 2013, as Spanish state pensions are indexed to the inflation rate.

Meanwhile in Greece, the unemployment rate rose above 25% for the first time in July, according to the Greek statistics office.

The record 25.1% was up from 18% a year ago. The unemployment rate in Spain is also 25%.

The poor state of the eurozone, along with the risk of massive automatic government spending cuts in the US early next year, prompted the IMF  to issue yet another warning about the state of the global economy last week.

"Whether you turn to Europe, to the United States of America, to other places as well, there is a level of uncertainty that is hampering decision makers from investing, from creating jobs".

Unserviceable debt – the spectre at the feast

 

“If you owe the bank $100 that's your problem. If you owe the bank $100 million, that's the bank's problem” the famous quotation from JP Getty neatly sums up the dilemma faced by the international community in dealing with the Greek debt problem.

Greece has asked for two more years to meet the spending cuts demanded by its lenders, which include the Eurozone countries through its bailout funds and also the IMF.

The IMF’s Ms Lagarde backed the calls, but Germany have maintained their previous line that on the terms of the 130bn-euro (£105bn; $168bn) bailout - Greece's second since 2010 - Athens must be held to what it agreed.

At stake is whether Greece should receive the next tranche of the bailout, worth 31.5bn euros. Without it it risks running out of money by the end of next month.

In spite of the hard line talk it will be no surprise to see real politik coming into play  and a fresh compromise being offered to the Greeks, in effect kicking the problem further down the road.

The fact is the international community will have to learn to accommodate the spectre of countries failing to grapple effectively with their debt burdens. In turn this will inhibit growth and limit the speed and strength of global economic recovery.

 

It will be an uncertain time but one undisputable outcome of the above will be the hard ball attitude of the Banks towards companies seeking funding. It will become ever more necessary to demonstrate effective control over all areas of cost and exposure as the banks will undoubtedly remain reluctant lenders.

Running out of rope

With the continued funding difficulties experienced by SME’s it will come as no surprise that trust in banks and other financial institutions is falling, according to a survey from the British Chambers of Commerce (BCC).

Half of the 1,560 businesses questioned said they mistrust banks and building societies, while 38% said they trust them less than a year ago.

The BCC survey said 57% of firms felt confident they could secure external finance, while 37% said they were not confident of doing so.

Despite the rhetoric from politicians it is difficult to foresee an environment where Banks and other financial institutions will be more receptive to requests for increased funding/credit lines.

It is the spectre of risk management or more pertinently the lack of management which overhangs the market.

Any approach for funding must be accompanied by a clearly defined strategic plan to take the company forward. At the same time those seeking to access increased lines of credit must demonstrate that they are strictly managing cash flow and have robust risk control procedures already in place. 

Commercial post mortem – could we have saved the patient?

All too often in the course of commercial post mortems, the Management and Shareholders of troubled organisations end up asking “how did that go wrong?”

 

It is an incontrovertible fact that many companies fail to address problem issues early enough to avoid an oncoming crisis. When in reality the causes of the problems were all too readily visible.

 

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 variety of exercises ranging from ill judged acquisitions (think RBS/ABN), totally pointless projects such as rebranding or the launch of another product range destined to fail for the above reasons.

 

Inevitably the harsh realities come into play but for many companies it is at that stage too late in the day.

 

Wake up and smell the Coffee – whilst you can

 

The rise of the developing world is really just a return to business as usual.

 

After all, until the 18th Century, India and China were the richest countries on the planet. For 18 of the past 20 centuries China had the largest economy in the world until the 19^thcentury and the industrial revolution.

 

Chinese companies will continue to make international acquisitions such as the purchase by Bright Food of the controlling stake in Weetabix, which owns the breakfast cereal brand as well as Alpen and Ready Brek.

Bright Food acquired a 60% stake in Weetabix in a deal that valued the company at £1.2bn.

 

Meantime as evidenced by the recent purchases of US Corn, China will continue to be a major buyer in the international agri markets in response to demand from its burgeoning middle classes.

 

By 2020 China’s consumers will be spending an annual £ £3,830 billion and their Indian counterparts £2,200 billion contrast this with British consumers who spent £937 billion last year.

A Chinese person born in 20009 will consume 38 times as much over his lifetime compared to one born in 1960.

 

With a population in excess of 1.3 billion (approximately 20% of the world’s population) imagine the implication for Western consumers should an early morning cup of coffee become the beverage of choice!

 

Food price inflation its getting uglier

Since 2007 the increase in food prices in the UK has been in excess of 30%. In September prices rose by 1.7%.

 

On a global basis the recent hikes in price of key grains such as corn, wheat and soybean have been described by the World Bank president as "historic".

 

The bank warned countries importing grains will be particularly vulnerable.

 

From June to July this year, corn and wheat prices each rose by 25% while soybean prices increased by 17%, the World Bank said. Only rice prices decreased - by 4%.

 

In the United States, the most severe, widespread drought in half a century has wreaked havoc on the corn and soybean crops while in Russia, Ukraine and Kazakhstan, wheat crops have been badly damaged.

 

The World Bank said that the use of corn to produce ethanol biofuel - which represents 40% of US corn production - was also a key factor in the sharp rise in the US maize price.

 

Overall, the World Bank's Food Price Index - which tracks the price of internationally traded food commodities - was six percent higher than in July of last year, and one percent over its previous peak, in February 2011.

 

Livestock and milk related products will rise in accordance with the higher costs of grain based feedstuffs.

 

Food manufactures are caught in a vice; the buying pattern for many has been “just in time” reflecting the need to keep inventories as low as possible.

However without the safeguard of a “buffer stock” they are now more than ever exposed to the harsh reality of having to “pay up” in order to secure the raw materials to keep their facilities in production.

 

At the same time they will continue to face the problems of operating in the current economic background with buyers seeking to delay payment, renegotiate contracts etc.