Trust –the defining business requisite

 

As trading 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 saw last year with the 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.

 

Consumers 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.

 

A question of balance

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.


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.

 

Pick your shots

Much media focus has been given to the burst of retail sales in the pre Christmas/ post New Year period. However, when an objective analysis is made the results will show that although retailers moved stock their operating margins were unacceptably low.

With tightening household budgets it should have come as no surprise to retailers that consumers would be hard to attract and some more innovative marketing in the last quarter of 2013 would have paid dividends. As it is Kamikaze discounting makes little commercial sense and the results of this policy is likely to be more casualties in the High Street in the coming weeks

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, there are times when subsequent events show that on occasion 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.

 

Thought for the day

What’s the difference between an inside straight and an inside trade?

One involves gambling in a game of poker, and the other involves wagering with your life.

One may net you $5,000 in a poker tournament while the other may result in you serving 5 years prison time.

A check list to drive sales

Focus on niche markets - there is an advantage in positioning your company as a market leader in a niche market.

Target a niche market that drives the greatest sales, profitability and quickest sales cycle.

This will produce sales growth with the least amount of effort. Niche market leaders generate strong sales revenue and profit growth driving up the value of their business.

Promote your products - drive increased sales growth by offering customers bespoke packages such as volume discounts, extended contracts or product bundles.

There is no merit to be gained from discount pricing on your offerings if they truly provide the value described.

Develop your brand - unique design, functionality and technology can make your products proprietary, which can increase the desirability of your products/services and the price a buyer is willing to pay. Branded products offer protection from the competition and enabling sales of products at a higher price and profitability.

Highlight your USP - even if your company are offering products that are not proprietary, it is vital that customers recognise what makes your company different to the herd.

When you do this successfully, your company becomes the first choice and achieving sales targets will not be an issue.

Jettison underperformers - the best way to dramatically lower your costs and improve profitability is to shed underperformers. Evaluate all of your products and services and delist them if they are not profitable or helping to drive sales of your other products.

Ensure that marketing is delivering a positive return on investment. Less easy is the evaluation of the sales team but in reality underperformers are a luxury no organisation can afford.

Auditing the Auditors

The majority of the flak following the recent failures in the global financial system has been largely directed at one sector i.e. the Banking industry. One group of participants remained largely unscathed for their part in the train wreck, the Auditors.

There are now signs that the activities of this sector is coming under closer scrutiny. Auditors are in a very privileged position and their integrity is paramount.

Earlier this year in the UK subprime lender Cattles has launched a multimillion-pound claim for damages against PwC, alleging “audit negligence” for failing to spot major holes in its accounts in 2006 and 2007.

Cattles said the failure resulted in it piling up £1.6bn in debts and liabilities, bringing the FTSE 250 firm to the brink of collapse and forcing it to suspend shares in 2009.

A spokesman for Cattles said, "After a thorough, independent and objective review of the merits of this claim, it is clear to us that PwC were negligent in their role as auditors. As a consequence, Cattles and its creditors suffered very significant losses."  

Meantime in the US authorities have brought criminal and civil charges against  former senior partners at accountancy giants KPMG and Deloitte Touche over alleged insider trading.

 

However it is not just about negligence or illegal activity, there are many instances of conflict of interest such as taking on consultancy work for clients and becoming too cosy with management teams. 

Back in April, John Griffith-Jones, the former boss of KPMG (and now head of the Financial Control Authority) was under pressure after it emerged that he was involved in setting the terms of an investigation into the collapse of HBOS despite the fact that KPMG were auditors to HBOS from 2001 to 2009.

Recently it was announced that the former head of HMRC Dave Hartnett was joining Deloitte who have helped large corporations avoid large tax bills.

At the lower end of the scale it is all too easy for companies to bully the young staffers sent in to do the grunt work. For example what chance has a newly appointed auditor walking around a factory warehouse to adequate value stock?

In reality they have to rely on the company for “valuations” and this can result in a totally inaccurate picture being presented. Very often the senior management of the company being audited and the auditors can end up signing off on a “nod and a wink”. 

The validity of a company's accounts reflects both the integrity of the company which is being audited and that of its auditors.

 

 

Squeezed by leverage

As a legacy of the private equity boom an increasing number of companies are now finding their activities largely targeted to satisfying their repayment obligations to their bankers. Companies are finding their growth restricted as money which is needed for new projects is swallowed up in servicing debt.

 

A case in point is Birds Eye, Europe’s largest frozen food producer. Birds Eye has had to pay about £5 million in penalty charges to win breathing space from its lenders. Total bank borrowings now stand at Euro 1.8 billion with a further Euro 1 billion owed to investors in the form of loan notes.

 

Banks that formerly were willing to take a more lenient attitude and renegotiate loans are playing by much harder rules.

 

As companies increasingly find their ability to borrow restricted, they have to revisit payment terms with their customers. It becomes a vicious circle from which very few are immune.

 

The key is to make the most of available cash resources which inevitably leads to some hard commercial decisions. Late payers are a luxury that no company can afford in this climate. Stock must be turned as efficiently as possible.

 

Those who either will not or cannot adapt to the demands of today’s business will join the growing list of casualties.