Triple AAA Rating – the failure rate continues to climb

Every business transaction contains an element of risk, yet at the same time how satisfactory are the mechanics for managing risk?

In recent years we have witnessed just how costly the laissez faire attitude to risk and burgeoning debt has been for 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 abandoned. An analysis of recent disasters from the subprime fiasco in the US through to the Greek Debt debacle all have one common denominator – the architects of these calamities went hurtling over the cliff like lemmings.

The UK is now forecast to be close to losing its Triple AAA status with most forecasters still failing to properly capture the negative impact of "deleveraging" - or households, businesses, banks and the government trying to cut their big debts – coupled with a serious risk of a further worsening in the Eurozone's mess. Against this back drop it is questionable whether even the anaemic recovery expected by the Office for Budgetary Responsibility in 2013 will take place.

A forensic analysis of your company’s current Debtors Book at this time might make for uncomfortable reading but like most unpleasant tasks it should not be ducked.

Better to take remedial action such as a write down whilst you are in control of your own destiny rather than have a 3^rd Party appointed to do it for you.

 

The price of denial

How often do we ignore the obvious and subsequently ask ourselves “why did that go wrong?”

A large number of companies fail to address problem issues early enough to avoid an oncoming crisis.

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 totally pointless exercise such as a rebranding campaign or the launch of another product range destined to fail for the above reasons.

The operating style of many doomed companies can be likened to Nero’s pastime of fiddling whilst Rome burns.

Don't get blind sided

 

From a company Manager’s perspective the recent market gyrations and latest pronouncements from politicians and economists alike have done little to calm nerves and now more than ever is the time for good housekeeping and firm controls.

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

Just because a customer has always being reliable in the past is unfortunately no guide as to future performance. Look out for tell tale signs such as unusual ordering patterns, delays in payments etc.

The coming months will continue to test but undoubtedly there will also be opportunities for those placed to take advantage of less efficiently organised companies.

Make sure that when the dust eventually settles that your company emerges in a stronger position.

 

Managing in challenging times

 

Working with companies over the past months I have noticed 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 the Management to ensure that during these times Staff members are encouraged 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.

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.

 

Financial legerdemain – nothing new

As we head towards the end of 2012 more reports are surfacing in respect of companies who have been camouflaging their poor performance with some suspect off-balance sheet shenanigans.

The latest example comes from the wrangle between the US short sellers Muddy Waters Research and the Singapore based commodity group Olam. At the heart of Muddy Waters' claims is how Olam values its assets.

According to the US firm, Olam now shows many of the assets as being more valuable than when it bought them. It has booked the difference in the purchase and as profit in its balance sheets.

However, it alleges that the difference in price is not because Olam acquired the assets at a bargain but because it revalued them at the time of acquisition.

The American company also alleges that some of the accounting practices adopted by Olam are uncannily similar to those followed by the collapsed energy giant Enron.

This is not an isolated event, think of the recent problems with losses incurred by various Banks.

However it highlights 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.

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 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.

Diversification the hardest trick to pull off

 

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.

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 the Management in respect of their own performance. Then the areas of diversification have to be closely considered, very 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 embattled balance sheet.

 

Accepted Commercial Practice or Subliminal Warning?

 

The traditional response from recalcitrant Debtors was “the cheque is in the post”. This generally bought some time as generally Suppliers met this response with a weary resignation.

Times have moved on and the latest mantra is “its set up for next week’s payment run”.

Basically the name of the game remains the same, buy some time - achieve a payment extension thereby effectively squeezing the Supplier’s margin.

Obviously it is a difficult balancing act between keeping the customer happy and managing your own company’s cash-flow.

However, all the signs are that the last months of 2011 will be a particularly difficult period across all sectors – it will be vital to keep full control of receivables.

Delays in payment will impact on the bottom line, however the worst scenario is that neglecting to strictly monitor a failing company could result in a total write off.