It is always worth asking the difficult question

One recurring theme from the analysis of any company reporting losses is that the management were totally unaware of the risks which their institutions were running.

 

To be effective, risk management and risk controls rely on the people operating them.

 

As has been well documented all too often corporate culture is dominated by fear and greed and these together make for a toxic combination.

 

When strategies fail and businesses lose their way these two elements come very much to the fore.

 

 Fear can often lead to individuals embarking on an even more reckless course of action in the misguided belief that it will all come right – the gambler’s doubling up mentality.

 

At the same time recklessness is often driven by greed; the larger the risk the greater the reward should it prove to be a successful course of action.

 

Against this background it is incumbent on the management to ask the uncomfortable questions and not merely rely on the assurance that all is well and going to plan.

 

The old adage that if something looks too good to be true it invariably is still rings true.

Collecting the cash

Policing receivables has never been more important than in today’s environment.

 

It must be a priority that all businesses ensure that their customers are settling invoices on time.

 

With slim operating margins the norm, very few companies can afford the spectre of significant bad debts.

 

Small businesses in the UK are owed billions of pounds in late payments, but new research has shown that a third are reluctant to chase slow-paying customers because they are worried about upsetting them or feel embarrassed.

 

Four in five, SME’s say they avoid chasing debtors because they find the process 'uncomfortable', while the remaining 20% are afraid of antagonising customers.

 

This is a dangerous approach resulting in more than a third of UK SMEs reportedly writing off thousands of pounds of bad debt every year.

 

The following are some procedures which companies can employ to increase the efficiency of credit control.

 

Set credit limits for each customer and review these regularly.

 

Be concise in trading terms for example it is better to specify 30 days from date of invoice rather than 30 days from end of month.

 

Issue monthly statements detailing invoices paid and those outstanding.

 

Score your customers and set a collection policy accordingly.

 

Do not let overdue payments go unchallenged.

 

Evaluate aged debtors on a weekly basis.

 

Prioritise collections and press for settlement of the highest values first.

 

Have a plan of action if payment is not forthcoming within a set date.

 

Despite the vital importance of maintaining a healthy cash flow three quarters of SME’s do not have a person or a procedure in place for chasing bad debt and a vast majority have no established escalation process for late payments.

 

This is a recipe for disaster.  

 

 

Its within our power

 

External factors over which little control can be exerted will continually buffet all business sectors.

 

However, every organisation does have a potentially winning weapon in their armoury namely the opportunity to offer excellent customer service.

 

In today’s business environment everyone expects ultimate value for their cash be it the corporate customer or the man in the street.

 

It is a paradox that as trading conditions become tougher and business harder to win the level of service offered by many suppliers is falling very short of acceptable standards.

 

How much revenue is lost arising from an existing or potential new customer not wishing to endure the frustrations of automated answering and merely hanging up?

 

How much “repeat business” is lost owing to the failure to meet agreed delivery schedules?

 

With such experiences customers are left feeling that their business is not valued. It is little wonder that they choose to vote with their feet.

 

Customer service is not a difficult act to pull off – in reality all that is required is to give the customer the feeling that their business is important and they are valued, not just “one of a number” or even worse a nuisance.

 

Those businesses that focus their energies on customer service will see their business reaping the benefits

 

 

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.