Hard sledging for SME’s

During March UK insolvency figures show that 2112 companies went into liquidation. SME’s are finding it particularly hard to survive against the current economic backdrop.

Funding as always is the main problem and the rejection of applications for bank loans makes for stark reading – in the North East 46% were turned down, West Midlands 47% and in the South West 41%.

With the marked reluctance of the Banks to lend, it becomes imperative that all businesses focus on their areas of exposure – rigorous policing of the Debtors book must be a priority and Stocks must be kept at a minimum.

More companies will try and improve their cash-flow by dragging their feet with payments and trying to put more of the burden of carrying stock onto their suppliers.

Those that adopt a passive approach to these issues will find themselves increasingly vulnerable and heading down a slippery slope.

 

Spotting those early warning signals

 

 

Very few companies implode like a supernova. The distress signals are 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Any analysis of a company’s published accounts or even monthly management accounts are by definition “out of date”.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”. 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 issue, the outcome will remain the same.

 

Euro woes

It is evident that while the threat of a Eurozone break-up may have subsided, a long term solution to the debt crisis is yet to be found.

The problems in Eurozone have not gone away. Essentially people are either choosing to ignore them or are seeing what they want to see.

Currently unemployment continues to rise in countries such as Greece and Spain, a delayed solution may see the crisis escalate, a move which is likely to hurt investor morale.

Gross domestic product in the Euro zone shrank 0.6 percent in the October-December quarter from the previous three months, Eurostat, the statistical agency of the EU reported from Luxembourg. The figure, the same as the initial estimate made Feb. 14, confirmed the gloom surrounding the region’s economic prospects.

All of the major Euro area economies shrank in the fourth quarter, with Germany contracting 0.6 percent, France 0.3 percent, Spain 0.8 percent and Italy 0.9 percent.

Household spending fell 0.4 percent from the third quarter, while investment fell 1.1 percent and exports fell 0.9 percent.

For all of 2012, GDP in the Euro zone shrank 0.9 percent from 2011.The Eurozone is clearly the main weak link in the global economy.

Countries such as Greece and the Republic of Ireland that have been bailed out by international lenders continue to see their economies shrink. Meanwhile larger economies such as Spain have imposed spending cuts in an attempt to avoid having to ask for a bailout.The current situation in Cyprus serves to highlight the problem.

 

The austerity measures in many countries - mostly in southern Europe - have combined tax rises with cuts in salaries, pensions, benefits and social services.

Apart from the social cost the spectre of unemployment represents a major threat to economic recovery within the EU together with all the global implications it brings.

 

 

In these difficult times the “hard nose” approach has merit

 As funding issues continue to bite more and more Customers are actively employing various tactics to delay payment to Suppliers. Credit control and the monitoring of payments is an increasingly critical element for every business.

 

When a Customer exceeds the agreed payment terms, they are in reality using the Supplier as an alternate (unsecured overdraft). 

This situation if left unchecked can spiral out of control. In a worst case scenario the Supplier is in reality forced to keep “trading” with the errant Customer for fear of realising a bad debt. 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. 

Take a long hard look at your accounts receivable – are you comfortable with 30 day terms drifting into 60 and beyond? 

Consider the damage that is being done to your company’s financial position and then ask yourself “who is taking advantage of us?”

 

A question of trust

As the various pressures increase on businesses the integrity of financial reporting has never been more crucial.

 

With companies and individuals desperate to achieve profit targets the potential for abuse may prove to be too much of a temptation.

It is important that systems are in place to prevent misreporting and in worse case scenarios fraud and these systems should be reviewed and rigorously checked.

The fall out from recent LIBOR fixing scandal illustrate how vulnerable institutions are if their personnel choose or are allowed to camouflage the extent of their exposure to unanticipated market movements. 

Fraud is not confined to any one business sector.Despite the increased presence of computer modelling to monitor risk there is always the “human element” which has to be considered.

Nobody has devised a fail-safe system which affords 100% comfort but in many instances a closer objective scrutiny would have given sufficient warning to have averted a train wreck.

 

The damage being done by short-termism

 Former Institute of Directors boss Sir George Cox has produced a report citing that the pressure to deliver quick results to the potential detriment of the longer-term development of a company had "become an entrenched feature of the UK business environment".

He said almost three-fifths of the senior business leaders he had consulted believed short-term thinking was a major or a significant impediment to economic growth.

Sir George said: "Short-termism curtails ambition, inhibits long-term thinking and provides a disincentive to invest in research, new capabilities, products, training, recruitment and skills."

There is no doubt that the main reason which precipitated the financial meltdown was the slavish following of short terms goals which hitherto had been labelled “get rich quick” schemes but have been shown to be the very opposite.

The problem facing the business community now is as companies struggle with funding issues and the spectre of more corporate failures it becomes increasingly difficult to focus on long term objectives as opposed to satisfying the immediate requirements of the shareholders.

 

The value of the human touch

 

Companies have traditionally thought of customer service as a cost centre, which made it a ripe target for cuts during the downturn. That has contributed to increasing frustration among consumers at poor service in recent years

Although many operations are completed electronically in this virtual world we should never forget that essentially commerce is about people trading together.


The reality of the real world is that goods need to be moved from point of production to point of consumption and obviously the diverse elements which make up this chain cannot be achieved solely via a computer terminal.


It makes sound economic sense to foster and maintain good customer relationships as it has been determined that it costs up to five times as much to win a new customer as it does to retain one.


There is an old adage “know your customer,” this dictate has never been more important than in these uncertain and challenging times.