The bullies are at it again.

 

During recent years many companies focussed on the element of supplier’s credit as they sought to improve their own bottom lines.

By virtue of their purchasing power large corporations such as the supermarkets are able to squeeze their suppliers.

It is the SME’s who are feeling the pressure with the latest report from BACS (the payment body) showing that the average small business was owed £31,000 in overdue payments in April, amounting to £30.2bn across the UK economy. According to the BACS report SMEs currently wait an average of 38 days.

In the UK already late-payment laws that give small businesses the right to charge interest, but many avoid doing so for fear of upsetting customers.

The EU issued a directive in March which aimed to enforce similar measures across the union, with public bodies given 30 days to pay and businesses 60.

Cash flow is a vital element for any business and timely payments are crucial for small businesses trying to grow.

Over the past couple of years many companies have lengthened payment terms seeing the suppliers as a soft target.

With suppliers consistently facing a declining return it should come as no surprise when they conclude that the game is not worth the candle.

Ignore the warning signs and they will bite you

IThe hackneyed response from recalcitrant Debtors used to be that “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, we are all operating in difficult times and it is 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.

 

 

The hidden risks of diversification

 

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 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 vulnerable balance sheet.

 

That’s not the way to do it!

 

There’s a sense of déjà vu about the latest debacle to surface from the Banking industry. This time it’s the US Bank JPMorgan under the spot light having ran up a staggering loss last year of $6.2 billion on derivative trading.US Prosecutors are to file criminal charges resulting from the alleged cover up of the losses.  

The comment from the Bank’s CEO was truly astonishing “In hindsight, the new strategy was flawed, complex, poorly reviewed, poorly executed and poorly monitored” he added “The portfolio has proved to be riskier, more volatile and less effective as an economic hedge than we thought. There are many errors, sloppiness and bad judgements. It puts egg on our faces and we deserve any criticism that we get”. As a mea culpa that statement takes some beating!

Despite the havoc that their action caused to the global economies, these self appointed “Masters of the Universe” are still trying to control the world through their own form of financial engineering.

By developing trading instruments and programmes of ever increasing complexity they have created monsters which just like Dr Frankenstein they cannot control.

Unfortunately the implications of their misplaced arrogance go far beyond the damage done to their own bottom line. Contrast the position of the senior personnel at JPMorgan with the owner of a cash-starved SME operating against the current backdrop.

It is ironic that the Banks are reluctant to fund legitimate operations at a time when their own activities have in so many instances been so damaging.

 

Gilding the lily

There is no doubt that in the current economic environment some companies are camouflaging their poor performance with some suspect off-balance sheet shenanigans other dubious activities.

 

Directors of many companies simply do not have the understanding of the mechanics or the day to day activities of the business which they purport to run. This has been especially true in the case of non-executive directors.

 

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 prudent to implement some rigorous analysis in order to avoid any unpleasant surprises.

A rose by any other name

Following the financial crisis of 2008 there was much talk of a collective reigning in and return to the principles of sound business.

However memories are short and it is never long before the blurring starts again and risky practices again become more and more the norm.

There is now a concerted move afoot to rehabilitate the image of leverage. This was the mechanism which more than any other precipitated the disaster in the financial system.

Companies no longer speak of leveraged deals but are now taking on “sponsor finance”.

This re-branding has in-built danger as witnessed previously, complacency has resulted in the demise of numerous organisations.

As George Santayana commented “those who cannot remember the past are condemned to repeat it”.

 

Beyond this place there be dragons

 

The combination of recent market volatility, the ongoing problems in
the Eurozone coupled with latest pronouncements from politicians and economists alike have done little to restore confidence and now more than ever is the time for good housekeeping and firm controls.

Rigorous 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 guarantee as to future performance. Very few businesses fail overnight
and there are usually enough warning signals which should enable a supplier to reduce its risk. Be on the lookout for early warning indicators 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.