Don’t say you weren’t warned

 

Monitoring counter party risk is the key to maintaining a healthy business.

In the majority of failing companies the distress signals were plainly visible for some time before the flame out.

Any analysis of a company’s published accounts or even monthly management accounts are by definition “out of date”.

It is vitally important that all counter parties are monitored closely and “real time”.

In the case of customers look out for unusual ordering patterns, repeated delays in payments – these are early indicators of more serious problems ahead.

For any organisation facing mounting problems it is obvious that the solutions will of necessity be painful. However, radical and decisive surgery is often the only way to ensure a patient’s survival.

Many companies adopt the Mr Micawber attitude that “something will turn up”.  For many of these organisations the only people likely to turn up are the administrators/liquidators.

Be it merely inertia or fear of addressing the issue, the outcome will remain the same.

Starved of cash

 

Latest figures show that bank lending to small and medium enterprises fell by another £152 million net of repayments in May whereas advances to non financial firms in general increased by £3.4 billion.

This further underscores that although Banks are willing to lend more the situation for SME’s remains difficult.

The Bank of England recently commented that lending to “small businesses remains constrained with little change in banks risk attitude”.

Having suffered the consequences of their previous reckless attitude to lending the Banks remain nervous about the prospects for the UK economy.

After the spectacular failure of their previous policies there was always likely to be an excessive over reaction on the part of lenders.

The tragedy for many small businesses is that they are being strung along whilst Banks prevaricate about increasing facilities and in the meantime much damage ensues.

Now more than ever any application for funding must be accompanied with a stand-up strategy together with evidence of strict control over all elements such as cash-flow, debtors and stock turn/ inventories.

In this current climate, the Banks will look to any shortcomings and or operating deficiencies as justification to turn down increased funding and or to reduce or even call in previous agreed facilities.

 

When China wakes up, the world will shake

 

The above quotation which is attributed to Napoleon during his exile at St Helena is almost 200 years old. It was an extremely prescient view and certainly resonates today.

During the last decade we all saw the results of the dynamic Chinese export programme as goods poured into the US and EU markets.

Latest figures show that China's manufacturing activity grew at its fastest pace for six months in June, suggesting that recent stimulus moves have started to have an impact.

China's economy expanded at an annual rate of 7.4% in the January to March period, from a year ago, down from 7.7% growth in the final quarter of last year.

There has been a marked step up in acquisition of assets following the recent economic problems particularly in the US.

However there is another factor emerging as China steps up its demand for raw materials particularly agri commodities.

The burgeoning Chinese middle class will continue to demand products which traditionally consumed in the Western world.

As dietary patterns change this will lead to upward price pressure in all sectors of the food industry.

This demand will only continue to grow and it will surely become a case in the Western world of “wake up and smell the Coffee” – whilst you can.

 

Commercial post mortem a forlorn exercise

 

All too often in the course of commercial post mortems, the management and shareholders of troubled organisations end up asking “how did that go wrong?”

It is an incontrovertible fact that many companies fail to address problem issues early enough to avoid an oncoming crisis. When in reality the causes of the problems were all too readily visible.

The signs of a troubled business are all too apparent – these include lack of controls, lack of strategic vision, a demotivated workforce and obsolete or valueless stocks etc

Instead of grasping these nettles, often the preferred option is to engage in a variety of exercises ranging from ill judged acquisitions (think RBS/ABN), totally pointless projects such as rebranding or the launch of another product range destined to fail for the above reasons.

Inevitably the harsh realities come into play but for many companies it is at that stage too late in the day.

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.

 

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.

 

Symbiotic relationships offer path to growth

 

When evaluating the respective role of the supplier/consumer the focus often accentuates the adversarial nature of the relationship i.e. who is getting the better of the deal?

However one of the benefits that can be derived from the current business climate is the value that can be gained by the customer/supplier in having a mutual understanding of each other roles and obligations.

As increasing numbers of business operate on a just in time inventory basis it is vital that a good understanding exists between supplier and consumer.

In as much as a supplier will be prepared to go the extra mile to ensure that his buyer receives his goods on time and in good order so it behoves a buyer to ensure that he pays as required and is not abusing the goodwill of his supplier by delaying payments in order to seek some extra period of credit.

If both parties work together in a professional and commercial manner then it will strengthen the relationship and both will benefit from a renewed confidence in each other and a better based business for the long term.