Holding a tiger by the tail

  

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 embattled balance sheet

 

All that glitters

During the UK recession one business which went from strength to strength was pawn broking. As the price of gold soared and people sought quick and ready access to funds many opted to pawn jewellery.

Pawnbrokers such as Albemarle & Bond were among the beneficiaries of the financial crisis, with more people using their services as mainstream banks offered fewer loans

Nothing lasts forever and the 30% decline in the value of Gold since the end of 2011 is having a seriously damaging effect on the pawn broking industry. Albermarle & Bond the UK’s second largest pawn broking group is suffering the consequences of a fall in gold prices combined with a spiralling debt book.

At the end of December the groups borrowing stood at £50.3 million whereas profits for the year to the end of June are forecast to have fallen by around 50% to £12 million.

Now with the spectre of breaching its banking covenant there is the irony of a pawn broker looking to seek funds from its shareholders or trying to raise additional funding from other sources to secure its survival.

Closing the stable door

It is just over 6 months since the UK food industry was embroiled in the effects of the horsemeat scandal where horsemeat was passed off as beef. The so called “Horsegate Affair”.

At the time the Chartered Institute of Purchase and Supply reported that almost half of supply chain managers “do not have a means of monitoring their entire supply chain”.

Even more damaging was their comment that “how few chief executives and boards take supply chain issues seriously”.

Initially the effects of the horsemeat scandal were dramatic. In the first two months following the reports of horsemeat being found in ready meals sales of these products were down 5% year-on-year, frozen food sales dropped 13% and there was a fall of 3% in chilled ready meal value sales.

One of today’s buzzwords is “traceability” – it being incumbent on companies to monitor all aspects of their supplier’s performance with failure to do so having far reaching and damaging consequences.

In the eye of the storm it appeared that the days of a “cosy” relationship between Buyer and Supplier, the archetypal nod and a wink would have been consigned to history.

Now six months later nobody has faced any penalties or sanctions for what was described as the worst scandal in the history of the UK supermarkets.

In reality its business as usual and a further indicator of the power and influence that these groups exert in the UK.

 

There is nothing new, only different

 

It is rare in life either privately or in a commercial environment to come across an entirely unique or new situation.

The financial crisis which last faced the world markets and business has parallels with previous financial crises such as the 18th century South Sea Bubble, the Victorian Banking crisis of Overend & Gurney, the Great Depression which followed the 1929 Wall St Crash, and the Dot Com Crash.

In all of these episodes the common denominators were reckless pursuit of profit whilst fundamentals were ignored, the so called “get rich quick” school of business.

Following each of these debacles there was a collective reigning in and return to the principles of sound business.

However memories are short and it is not long before the blurring starts again and risky practices again become more and more the norm.

Complacency has resulted in the demise of numerous organisations.
As George Santayana commented “those who cannot remember the past are condemned to repeat it”.

 

Trust –the defining business requisite

 

As economic conditions remain tough more than ever the question of trust is of paramount importance.

 

Operating margins are being squeezed and people are looking for ways to protect their bottom lines. As we witnessed earlier this year with the furore over horse meat contamination in “Beef products” there will always be those who disregard regulations or flout the law in the belief that they will get away with it.

 

At the time a government minister stated "People should have absolute confidence in what they are buying. The responsibility for that lies with the retailers, who need to be absolutely sure that what they're selling is what they think it is."

 

It boils down to the integrity of the supplier, no matter how many factory audits are conducted or how many QA questionnaires are completed it is essentially an issue of trust and reliability.

 

The same can be said of the Buyer, if goods are delivered on a credit basis this should mean that the Supplier has every right to expect that the agreed settlement terms are adhered to.

A good relationship / reputation takes time and effort to build and sustain, once damaged it is hard sometimes impossible to restore.

In the words of Warren Buffet Warren Buffett - "It takes 20 years to build a reputation and five minutes to ruin it. If you think about that you'll do things differently."

 

KYC - know your customer

In the US this basically refers to a due diligence process undertaken by Banks and financial institutions to combat fraud, identity theft and general scams.

 

It is however a mantra that most organisations would do well to adopt.

 

Rapid advances in technology continue to transform the way we do business. Everyday business tools would have been regarded as flights of fancy not so long ago. With the unstoppable rise of e-commerce come challenges.

 

One of the biggest dangers is the lack of personal contact between a company and its customers. Obviously this is not an issue for online retailers selling product over the net and being paid via a Debit card or Pay Pal etc.

 

However the is an increasing trend for B2B ales to be concluded by email and even SMS. With the loss of the personal contact the identity and customer relationship suffers.

 

The surest way to avoid problems is by knowing your customer and understanding their business.

 

This relationship and mutual understanding cannot be achieved via a key pad and electronic ordering system.

 

Turnover vanity, profit sanity, cash-flow reality

 

More than ever, all businesses operating in today’s climate need to have constant and rigorous focus to their commercial exposure.

 

Against the current competitive background it is very difficult to contemplate turning away business especially from a customer of long standing. 

However as business conditions remain difficult we are witnessing a growing trend for companies to squeeze suppliers in various ways. This can take the form of a decision to arbitrarily extend payment terms, decide not to take up previously agreed deliveries or introduce respective price discounts. 

From a suppliers perspective this erosion of operating margin means that in some instances the best business decision was to leave it to your competitors. 

When stricter controls are in place over such elements as payment terms and credit limits the result is likely to be a reduction in turnover. 

The upside of such fiscal discipline carries its own rewards. Avoiding defaults by customers is the surest way to protect the company’s bottom line at a time when profits are hard won and losses easy to establish.