No room for sentiment

There is a growing trend for companies to bully their suppliers over the question of payment terms. It is not unusual for buyers who hitherto had paid on the basis of 30 days to now demand switching their suppliers to 90 day 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.

This is not a new phenomenon. 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.

 

Diversification can seriously damage your wealth

Without doubt one of the most difficult challenges a business faces is diversification.

 

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 challenging.

 

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 own performance.

 

Then the areas of diversification have to be closely considered, 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.

 

Half a loaf

With a pre-tax loss of £259 million in 2011, the Premier Group, Britain’s largest food manufacturer had immense problems in servicing its £1.4 billion debt.

The banking syndicate led by the Royal Bank of Scotland and Lloyds Banking Group agreed to an extension of 2.5 years and relaxed covenants on Premier Foods' loans.

Premier managed to defer interest rate payments as well as contributions to the company’s pension deficit. In turn, the food manufacturer paid its lenders £25 million up-front and pledged to sell £330 million in assets.

Losses narrowed to £23.5m in the six months to the end of June 2012 versus a loss of £45.8m for the same period last year.

Chief executive Gavin Darby commented: "We have already completed the actions to deliver the promised £20m of overhead cost savings for 2013 and continue to keep a tight control over costs.

"The restructuring of our bread and milling business is ahead of plan and we are taking the decisions necessary to create a more sustainable platform for this business."

Now the owner of the iconic Hovis brand has said it is looking for a partner to help with its struggling bread business.

The company has spent £28m on restructuring its bread business this year after closing two mills and three bakeries, and losing several contracts.

Having embarked on a rigorous policy of cost saving and disposals the company is anxious to lose the tag of a “zombie business”.

 

Today’s mantra – keep cutting your costs

 

As operating margins continue to be squeezed it is imperative that all costs are rigorously monitored. It is an incontrovertible truth that the overhead monster is getting hungrier by the day.

 

Every commercial sector is seeing the impact. A prime example is the area of transportation. Wherever possible exporters are moving business from air to slower and less expensive forms of transport.

 

Manufacturers of electronics and mobile phones are now shipping cargo by sea because competition was eating into their profit margins meaning they needed to cut delivery costs.

 

Exporters of perishable goods such as fruit, vegetables and flowers have little choice and as such face a diminishing return.

 

Non-perishable goods will continue to be shipped on water as the cost of moving by air is very energy-intensive and the high cost of jet fuel makes air freight prohibitive.

 

Facing marked resistance from consumers to price increases and a greater level of competition those companies who are unable to exert a firm control over their costs face a difficult future.

 

Turnover vanity, profit sanity, cash-flow reality

A root cause of the failure of many businesses is the focus on increasing sales whilst at the same time ignoring the true benefits of the profits originating from the increased turnover.

It is far too easy to be lulled into a false sense of the company’s welfare by an increase of sales unless it is accompanied by a proportionate increase in the bottom line.

Strong financial controls are crucial as are customer-facing functions or what used to be deemed as “customer service”.

In many cases the best business strategy for a “start-up” or a SME would be to focus on smaller projects with higher margins rather than chasing volumes and sales with thin returns. So called prestige accounts are also a luxury than many companies could do without.

The focus has to be on increasing growth whilst at the same time controlling and wherever possible reducing overheads.

The reality of a strongly managed cash-flow is that profits are then available to be used to settle accounts with suppliers or other operating (overhead) costs. A lax approach to cash-flow will inevitably see the company running out of funds and unable to fulfil its obligations.  

The biters are being bitten

 

There is a certain irony that the latest victims of the downturn are the UK’s Pay Day Lenders who have been targeted by organised crime gangs. In the first 8 months of 2013 cases of identity fraud against loan companies rose by 90% compared to 2012.

 

As the economic downturn continues to bite all businesses and organisations must remain alert to the potential for fraud.

 

Entrepreneurial owners of SME’s are a prime target for fraud as overseeing finances doesn’t always come naturally to them.

 

If a founder is focusing mainly on the product or service being sold, and only minimally on administration, it leaves a business vulnerable to fraud.

It is vital to have systems in place to monitor all the company’s finances in a clear and concise format.

 

After all it is rarely comfortable to find that someone is holding your wallet.

 

However all businesses be they independent or large corporations are vulnerable Corporate fraud can take many forms such as invoice kickbacks, sales schemes, bid rigging and the like.

 

It is an undeniable fact that there will always be people trying a variety of ways to “scam” your organisation; it is a problem that will not go away so vigilance is the order of the day.

 

‘Tis the season to be – focussed

In recent times there has been the tendency for the Christmas holiday season to stretch out over a number of weeks and therefore with a few weeks to Christmas it would seem an appropriate time to consider the implications for business.

 

Without doubt of biggest concern to SME’s will be the impact on cash-flow. Many companies are operating very close to the edge and any delays in payment could have serious consequences.

 

In some instances invoices which fall due for payment after the 18^th December could well not be settled until the 3^rd January – giving an at worse scenario of 3 weeks delayed payment.

 

It would therefore seem prudent to look at your last half December receivables and make a realistic forecast of just how much cash will “come in”.

 

Similarly with “just in time” inventory it would be sensible to ensure that sufficient stock will be on hand for the early days of January when there are likely to be disruptions to the supply chain.

 

In recent years trying to get things done in the UK during the latter half of December has proven to be a challenging task so it would be best to ensure you take appropriate action now and are positioned accordingly.