Cleansing 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 financial 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.

 

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 only way to redress this imbalance is with tough legislation.

The danger sign are visible

 

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 the company’s financial health deteriorates 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.

 

 

Efficient Stock control

 

Stock turnover ratio equals cost of goods sold during a specific time frame, divided by the average stock holding during the period.

 

The result of this ratio gives the "number of days that on average money is tied up in stocks". The longer this is, obviously the worse this is for the business as the money is not available to be used elsewhere.

 

An stock turnover ratio of 20 means that the average amount of stock holding during the year has been renewed, or turned over, 20 times over the course of the year.

 

Dividing the number of days in the period under consideration by the turnover ratio tells you how many days it takes, on average, for the warehouse to empty and then be refilled. The number of days in a year, 365, divided by 20 is 18.25. So the entire stock is fully sold and replenished every 18.5 days, on average.

 

As a general rule, the higher the stock turnover ratio, the more efficient and profitable the firm. A high ratio means that the firm is holding a low level of average inventory in relation to sales.

 

Carrying stock ties up money. This money is either borrowed and carries an interest charge, or represents funds that could otherwise be better used in servicing other elements of the business.

 

There are additional costs in holding stocks such as storage and the risk of getting spoiled, breaking, being stolen, or simply going out of style.

 

Wherever possible companies need to reduce stock holdings and there are various means by which to achieve this aim:

 

Liquidate slow-moving or obsolete stocks.

 

Introduce more efficient production techniques to reduce stock holdings.

 

Rationalise the product range weeding out the under performers and thereby reduce stock carried.

 

Negotiate sale or return with suppliers in order to avoid being stuck with unwanted product.

 

Keyboard crime the new growth industry

 

Losses from online banking fraud rose by 48% in 2014 compared to a year earlier.

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.

 

All organisations should 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.

 

 

The era of the mega-ships

 

The world’s largest cargo carrier the MSC’s “Oscar” is now in full service. It has the capacity to carry 19,224 standard 20 foot containers. Thirty years ago no vessel was able to carry more than 5000.

Manufacturers of electronics and mobile phones are shipping cargo by sea because competition was eroding their profit margins focussing their attention on cutting delivery costs.

 

Each 20 foot container can hold 13,000 smart phones with a transportation cost from China to Europe of 7 pence per unit and a transit time of approximately 25 days.

 

Currently there are over 6000 container vessels operating with a significant number engaged in the East to West trade routes.

 

China’s economic success remains export driven as illustrated by the cost of shipping a container. Inward from China to Europe costs around US$1500 with the reverse journey only commanding a rate of around US$700.

 

As evidenced by the Japanese shipping company MOL commissioning 6 vessels capable of carrying 20,000 standard containers traffic will continue to moving onto the water.

 

The alternative moving goods by air is very energy-intensive and the high cost of jet fuel makes air freight too expensive.

 

 

A regular review of the company’s business plan is a necessary discipline

 

As business practices change and external factors come into play a regular review of the company’s business plan will ensure that the company stays ahead of the game.

 

The review if done correctly should result a realistic, objective and clinical appraisal of the business.

 

Following an analysis of the business plan it should be easier to communicate objectives and strategies to those funding the operation and also to the company’s employees.

 

The review will serve as a reference point when determining the effects of alternative courses of action on business operations.

 

A clear assessment of current working practices should highlight areas where the company may require outside assistance.

 

An analysis of the current inventory levels and receivables will provide the answer to the future growth and capital requirements of the business.

 

Achieving better sales performance

 

There are some basic tactics which you can employ to increase your sales.

 

Companies that are increasing their sales turnover usually have an attractive staff incentive programme in place.

 

Make sure you keep track of what type of “carrot” your competitors are offering to their sales force.

 

Upselling is a cost effective way to boost bottom line returns.

 

Essentially, upselling involves adding related products and/or services to your sales portfolio and making it convenient and necessary for customer to buy them. Crucially when upselling the customer has to be persuaded of the benefit.

 

Give your customers the inside track.

 

Try to stay ahead of the competition by having up to date brand and market information combined with technical back-up. For example if a new product launch is imminent it is better to keep the customer’s interest “warm” rather than push them into a purchase which they shortly will become dissatisfied with.

 

Differentiate your customers.

 

There should be a clear and obvious difference between your regular customers and others – a difference that your regular customers perceive as showing that you recognise and appreciate their value.

 

Repeat business is the life blood of any sales force.

 

Loyalty cuts both ways and becomes meaningless if all customers are treated as “someone off the street”.