Cheques and balances?

In light of recent “Black Holes” banks have been rigorously running “health checks” on their banking systems.

Events have underscored how vital it is that clearly defined operational and reporting procedures are in place.

In many organisations the senior management simply do not have the understanding of the mechanics or the day to day activities of the business which they purport to run.

For example from my experience in trading environments it has not been uncommon for totally unrealistic profit targets to be 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!

Companies that are bucking the trend in these difficult times may well be implementing a winning formula.

However history tells us that it is sometimes a prudent course of action to look under a few stones – just in case.

 

Taking liberties- or a wakeup call?

 

Historically the standard response from recalcitrant debtors was “the cheque is in the post”. It traditionally 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 computer payment run”. 

Basically the name of the game is the same, namely to achieve a payment extension 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. 

Now more than ever it is vital to keep full control of the debtors book.

 

Whilst delays in payment can damage bottom line, the worst scenario is that neglecting to monitor a failing company could result in a total write off.

Money to burn

 

According to research from the University of Florida, Twitter, which lost $79 million in 2012 and is poised for a bigger 2013 loss, is hardly alone in losing money as it prepares to go public. The University estimates that 68 percent of this year’s IPOs were also losing money.

After all, based on their history, there is no basis for concluding that these unprofitable companies will ever make money.

That’s the stock in trade for a company about to float whilst losing money. If it were making a profit before its IPO, it would be harder to make bullish forecasts about how much profit the company will generate in the future.

Ironically for a company losing money, the sky’s the limit when it comes to predicting how bright its future revenues will be.

In tandem with the ability to forecast a spectacularly profitable future is the functioning of one of the market’s most basic laws: momentum. In other words powered by its own performance a stock that is gaining value up will continue to appreciate in value just because it is going up.

More specifically, when there is no real positive cash flows on which to value a stock, its price will rise because investors who do not own the shares will want to climb aboard the bandwagon rather than miss out.

This wave of “new buying” can help to drive up the shares further, which will attract a new buyers creating a dangerous bubble.

It would probably be a more prudent strategy to avoid the money-losing IPOs and invest in companies who are making a profit before they try and float their shares.

However forecasting the price of stocks remains an inexact science and unfortunately for the investor there is as yet no failsafe basis on which to explain why stocks go up and down.

Swimming against the sea of debt

  

Last week’s Budget deal in the US which Funds US government until 15 January 2014 can be viewed as merely kicking the can down the road.

The US has a total debt pile of almost $17 trillion (£10.6 trillion), which is expected to rise to almost $23 trillion in the next five years.

Japan is not far behind, with current debts totalling $11.5trillion.

Much of this debt has been accumulated over the long term, but the numbers have rocketed in recent years as governments have struggled to cope with the 2008 financial crisis and the subsequent recessions that have ravaged almost all major economies. Banking bailouts, economic stimulus measures and falling tax revenues have all forced governments to borrow more.

For example, in 2007, the UK's debt pile was just 44% of GDP compared with 88% last year. This reflects in part the country's large financial sector relative to its overall economy. The US's debt-to-GDP ratio in 2007 was 64%, the same as France and Germany.

As always after peering over the brink that is a collective sigh of relief but there remains no doubt that the spectre of indebtedness will re-emerge to haunt both markets and governments.

 

Batten down the hatches

 

As we approach the final two months of the year and the oncoming holiday season it is most likely that we find ourselves operating against a difficult background. 

Without question, the real effects of the cut-backs and general downturn in many people’s incomes will be felt most keenly in the final weeks of 2013. 

The recent hike in utility charges will start to bite and a further downturn in consumer confidence appears likely. More and more will the mantra “heating versus eating” be heard. 

Running any business will provide challenges and there could not be a more pressing time to address the question of operating costs and the rigorous policing of stocks and debtors. 

By taking appropriate actions now, companies should find themselves well positioned to ride out the inevitable storms.

 

The Long March – 21st Century version

The impact of the French Revolution? - “too early to say.” 

This was the response from Zhou Enlai to questions in the early 1970s about the popular revolt in France almost two centuries earlier. 

The former premier’s answer has become a frequently deployed cliché, used as evidence of the sage Chinese ability to think long-term – in contrast to impatient westerners.

Fast forward to today and the ability of the Chinese to play the long-game has never been in more evidence.

In a single decade from 2001 up to 2010 Chinese trade with the rest of the world increased from £325 billion to £1.9 trillion.

Since 2005 China has invested £320 billion across the globe with 75% of this in developing countries. As the world's second largest economy, the fastest growing economy in the G20 and with more than a trillion dollars sitting in various sovereign wealth funds, China has a pile of cash to invest. 

There is an insatiable demand for raw materials to fuel the economic growth in China and commodities such as Oil, Minerals, Precious Metals and Fuel are all prime targets.

China's demand for energy is expected to triple by 2030 so countries with abundant natural resources will continue to attract the most money from China. 

Meantime the ongoing crisis in Western economies has provided ample opportunity for China to assert its economic strength and China has now usurped the US as the largest foreign investor in Germany.

Chinese companies are investing in such diverse areas as the French Wine industry and the UK’s nuclear fuel programme in addition to making acquisitions in the US/European Food Industry and this will undoubtedly continue as China accelerates its move into Western markets.

Beyond this place there be dragons

A combination of recent market volatility, the budget wrangling in the US Congress have damaged business confidence. 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.