The integrity of financial reporting

 

There is a growing trend in companies to camouflage poor performance with deliberate misreporting and suspect off-balance sheet shenanigans.

 

This practice is increasing, think of the recent problems with losses incurred by various Banks. It underscores the need for senior management to 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. This was graphically illustrated by the recent testimonies of senior bankers to the House of Commons Select Committee looking into banking failures.

 

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 the 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.

 

Reading the runes

 

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Any analysis of a company’s published accounts or even monthly management accounts are by definition “out of date”.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.

 

Everyman for himself

 

There is a growing trend from companies switching all their Suppliers to lengthened payment terms.

 

Such terms can only be served by larger organisation with adequate cash reserves. For the small to medium supplier it further ratchets up the pressure as Banks are unwilling to increase their credit lines.

 

For some time companies have sought to stretch the length of their payment terms by all manner of means both fair and foul.

 

As profit margins are further squeezed by increased operating costs the importance of maintaining cash flow is vital.

 

Business is hard-won in the current climate, but above all there has to be a commercial raison d’être for any transaction.

 

Mutual reciprocity has to be the basis for the Customer/Supplier relationship for it to remain worthwhile.

 

Keeping all the plates spinning

 

Managing a business in today’s environment 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.

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 – can I keep all those plates spinning?

Funding issues - are you prepared?

 
Despite assurances from the major Banks, we are still witnessing a reduction of loans to companies in the face of tightening liquidity – now is the time to take a long hard look at your Company’s financial situation.

Any approach to your Bankers could be very uncomfortable in the current climate so it is necessary to demonstrate you have full control of your exposure.

Make sure that the Debtors book makes for healthy reading and that inventory control and stock turn are being monitored very closely.

Ironically it is the activities of Banks themselves who have once again precipitated the financial crisis but that will not prevent them from playing hard ball with anyone trying to seek support in the current climate.

 

Tapping the barometer

Very often the best indicators are the least sophisticated. The UK economy remains in a very fragile state – the clearest evidence of this can be seen as you walk down any High Street.

The rising number and popularity of charity shops tell underscore that many families are struggling.

The recent furore over the so called pay day loan companies (charging interest rates in excess of 4000%) further illustrates just how near the edge many families are.

At the same time the latest results from Marks and Spencer the favourite chain for the over 40’s reported Pre-tax profits by 14 per cent to £564.3m over the year to 30 March, which was its worst performance since 2005.

Data suggests there are as many as 160,000 so called “zombie businesses”  being kept from going under by means of low interest rates and patient tax authorities.

As the knock on effects percolate back down the chain many businesses will suffer. External factors by definition are difficult to handle but at the same time in-house disciplines can at least provide some level of insulation.

Cash-flow will be very difficult to manage over the coming months so as always strict governance of debtor and inventory control will provide some measure of comfort.

 

 

The overhead monster takes some feeding

 

The UK offers a very attractive market for companies wishing to export their products. Counter party risk is identifiable and can be successfully managed.

 

However one barrier may be the perception of high operating costs.

 

There is no doubt that to commission and run a UK operation can prove a costly commitment. The lists of outgoings such as rent, communications, staffing costs are daunting, particularly in a start up situation where income streams are lagging far behind these costs.

This is where we can assist you, as an established independent company, we have experience of representing overseas organisations in marketing product into the UK.

In addition to opening up new markets for your products and services we can also police the all important areas of logistics and payment of your invoices.

 

An introduction to our activities can be seen on our web site www.glbconsulting.co.uk or alternatively why not contact me at gordon.blackburn1@btinternet.com to arrange a meeting to discuss how we assist you in entering the UK market.