Would your company pass the "stress test"

The European Central Bank has released its findings after “stress testing” the financial health of Europe’s banks

Twenty-four European banks have failed "stress tests" of their finances, the European Banking Authority (EBA) has announced.

The banks now have nine months to shore up their finances or risk being shut down. No UK banks are included.

The review was based on the banks' financial health at the end of 2013.

Ten of them have taken measures to bolster their balance sheets in the meantime. All the remaining 14 banks are in the Eurozone.

The health check was carried out on 123 EU banks by the EBA to determine whether they could withstand another financial crisis.

The list of 14 includes four Italian banks, two Greek banks, two Belgian banks and two Slovenian banks.

The exercise involved collating data provided by 6,000 auditors and central bankers from across the continent.

Problem loans buried since the financial crisis of 7 years ago were excavated.

The stress test came as a timely reminder that 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. Business which carries a disproportionate risk/reward ratio is best left to competitors.

It may well be that turnover suffers when stricter controls are in place over such elements as payment terms and credit limits.

The reward for such fiscal discipline is obvious.

Avoiding defaults by customers still remains the surest way to protect the company’s bottom line.

 

Keyboard crime the new growth industry

With the ever increasing reliance on computer based transactions all businesses and organisations must be alive 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.

One area of particular concern is invoice fraud. Fraudsters send in fake emails which contain new payment details. If a company is not vigilant payments are then made and by the time that the mistake has been identified the fraudsters have long since transferred the funds.

In one recent case a Norfolk based manufacturer fell victim to this scam. Believing that the invoice came from a usual supplier they transferred £350,000 to a fraudulent account and were unable to recover this money.

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.

Competition is hard enough without having to face another drain on your company’s resources.

 

Who is auditing the auditors?

The majority of the flak following the failures in the global financial system was 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.

Now with the admission from Tesco that accounting irregularities were in excess of £263 million for its first half accounts the activities of this sector is again coming under closer scrutiny. Auditors are in a very privileged position and their integrity is paramount.

Last 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."

In the US authorities 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.

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.

In many instances 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.

 

Symbiotic relationships a clear way forward

 

All too often the focus on the current economic background accentuates the negative. However one of the benefits emerging from the current business climate is the value that can be placed on a mutually beneficial customer/ supplier relationship.

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 “pinching” 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 emerge from the current difficult situation with a renewed confidence in each other and a better based business for the long term.

 

Manage stock to protect the bottom line

For suppliers and manufacturing companies alike the efficient management of stock is a vital element of their business.

In many cases business failures can be traced back to the inability of a company to turn its stock back into cash within an acceptable time frame.

It is worth noting the costs associated with carrying stock:

Holding stock ties up working capital with otherwise could be used for other purposes therefore it has an opportunity cost.

All stock being held incurs storage costs such as rent and other utilities. Insurance especially for high value goods also is an expensive add-on.

If goods are being funded via a Bank overdraft or loan this may well inhibit the company’s ability to finance other activities as Banks are reluctant to extend terms.

There is always the danger that stock can become obsolescent or in the case of perishable products deteriorate and become a write off.

The only way to ensure that a company keeps track of this area of exposure is by constant monitoring of stock levels and focussing on unusual or irregular patterns in the movement of stock.

 

The danger signs are there if you look

There are numerous tell tale signs which point to the fact that a company may be heading into trouble.

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.

 

Cleaning the Augean stables

 

Following the financial crash of 2008 there was a general feeling that those perceived responsible for financial shenanigans should be held to account.

Some years later a tough new law to prevent future financial collapse is about to be introduced. For the first time non-executive directors could face the possibility of criminal charges if finanicial misconduct occurs on their watch.

As the various banking disasters unfolded we heard how ostensibly “mega profits” were being generated and that nobody thought that this seemed too good to be true.

When an individual or group of individuals are labelled “star traders” the culture of these financial institutions is such that it is virtually impossible for anyone to check or challenge them.

There are few prizes for killing the golden goose.

Even more ludicrous is the lack of independent controls which left many of the traders to self-police their own portfolio.

Whether by design or delusion what trader facing enormous losses is willingly going to face up to the reality of the situation?

The preferred course of action is to continue betting more heavily in a forlorn hope to recoup the losses. It is an all too familiar tale.

The regulatory authorities may pursue some of these irresponsible traders in an effort to appease those who think that the bankers “got away with it”.

In due course a few of them may end up going to prison but the vast majority will have nothing to fear.

In reality the really guilty parties are those who were operating at the very highest levels in the banking communities.

Whilst not directly responsible for the specific transactions they oversaw the deeply flawed system. Whether driven by greed for increased profits or fear of not keeping pace with their competitors they presided over the ultimate train crash whilst being rewarded handsomely.

The new tougher legislation may go some way to redressing this imbalance.