Time to bite the bullet

 

Every business transaction contains an element of risk, yet often the mechanisms for managing risk are flawed.

In recent years we have witnessed just how costly the laissez faire attitude to risk was in many institutions from large corporations to smaller SME’s.

In the never ending quest for larger profits many of the disciplined measures of business were neglected or abandoned.

An analysis of recent business failures all have one common denominator – the architects of these calamities went hurtling over the cliff like lemmings.

There has never been a more pressing need to examine all areas of exposure.

A thorough analysis of the current Debtors Book might make for uncomfortable reading but like most unpleasant tasks it should not be ducked.

It is far better to take remedial action such as a write down whilst you are in control of your own destiny rather than have a 3rd Party appointed to do it for you.

 

Nurturing the company’s assets

 

When dealing with companies over the past months it is noticeable that there is an increasing sense of demoralisation amongst many sectors of the work force.

The causes for this are readily identifiable, many people are struggling with their own domestic finances whilst at the same time the need for increased levels of performance and efficiencies at work have rarely been as intense.


It is the responsibility of management to ensure that during these times staff members are encouraged to give of their best.


Unfortunately too many managers are remote from the day to day activities of their staff and appear to have the attitude that the people who report to them are lucky to have a job.


This mentality is counterproductive. Staff need motivating and incentives do not necessarily have to come solely in the form of financial rewards.


Some of the best run and therefore by definition most successful commercial entities are those where the workforce is engaged and feels part and parcel of the organisation rather than merely there to make up the numbers.

 

Fraud the enemy within

One of the lessons of the recent economic downturn was the need for all businesses and organisations to 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.

 

In smaller organisations fraud can take many forms e.g. invoice scams, to suppliers providing kickbacks for inflated purchases, theft of stock, fictitious expenses etc.

 

For larger organisations the potential for various fraud activities exists but the numbers involved are far greater.

 

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

 

Simple but effective systems of checks and balances can go a long way to limiting if not removing the risks.

 

It is all but impossible to ensure that any organisation is “fraud proof” but by establishing robust and efficient systems some measures of comfort can be introduced.

 

After all it is never comfortable experience to discover that someone else is holding your wallet.

Putting on the squeeze

It has become the norm for large companies to unilaterally change previously agreed payment terms. Towards the end of 2013 Marks and Spencer advised its suppliers of a shift in payment from 60 days to 75 days as it attempted to dress up its figures.

The issue is that the majority of supply chain contracts are one-sided arrangements. Large buyers can vary terms and for the most part the burden for this is borne by small independent suppliers who have little muscle and therefore can be bullied into acceptance.

Faced with supporting “extended” payment terms suppliers generally discover the chance to obtain funding from their banks is usually limited. They are left with having to seek other ways of improving cash-flow such as factoring but this adds costs and erodes profit margins.

There is a potential fall out for buyers looking to squeeze their suppliers.

Diminishing returns can result in suppliers concluding that the game isn’t worth the candle or those that decide to accept the new terms may well find it to be uneconomic in the long term and cease to trade.

Stretching payment terms may well provide short term benefits for buyers but the longer term implications could turn out to be very damaging in terms of continuity of supply and reputation in the market place. 

Europe’s strong man takes a breather

In the last quarter of 2013 Germany saw little or no economic growth. A combination of Eurozone’s woes and a general slowdown in global growth impacted on business confidence and investment in Germany.

 

One bright spot was that German exports continued to hold up, thanks in large part to the competitive price edge afforded to them by a weaker euro.

Latest figures show that Germany's economy grew by a weaker-than-expected 0.4% in 2013 according to the first official estimates.

However, most economists expect the economy to bounce back in 2014 with growth of up to 2% compared to the Government’s forecast of 1.7%.

Improving economic conditions in the rest of the Eurozone and the US - both big export markets - should help Germany to grow and outperform the rest of the Eurozone for several years to come.

Germany's economy has remained a strong point of the Eurozone, and was credited with helping to haul the single currency bloc out of recession last year.

 

Houston we have a problem

 

When the crew of Apollo 13 contacted Mission Control in April 1970 there was no ambiguity. Following an explosion the crew faced a potential catastrophic situation which they quickly identified and a successful course of action was implemented.

Contrast this to the on-going situation within the banking community. Despite re-assurances that they were putting their houses in order there is a growing feeling that many of the problems have been swept under the carpet rather than acknowledged and dealt with.

It is hard to believe that we have seen the end of issues with the banks when we consider their recent history of financial mismanagement and sheer incompetence on a level that beggar’s belief.

 

Not only would the internal controls of these institutions appear seriously deficient but there is a question mark concerning the obvious lack of professionalism on behalf of the independent auditors.

 

It has become a quetion of whose accounts can you trust?

Warning signals

 

Very few companies explode like a super-nova the warning signs are usually visible for some time ahead.

The following is a basic check list which should help to determine whether the problems are of a temporary nature or have more serious implications for the future of the company:

The most important element in any business is maintaining a healthy cash flow. It is imperative that a strict control is maintained on all outstanding invoiced amounts.

The value of an efficient credit control system cannot be over emphasised.

Do not focus on generating sales with little margin in the belief that over time things will improve. Being the “cheapest supplier” will not provide an automatic route to more satisfactory profits in the long term. It is often better to keep your powder dry.

If you are constantly in danger of breaching your credit arrangements with the banks or suppliers this is a clear indication that the company is not trading satisfactorily.

As conditions deteriorate more and more time is spent focussing on the problems and not enough on to how to position the business for the future.

Particularly for owners of SME’s it is not easy to take the necessary remedial actions and very often this is where an outsider can be of assistance in repositioning the business before it is too late.