Don’t get trapped in quicksand

 

Despite many warnings and scares many companies are still failing to adopt a robust approach to their financial controls.

 

These companies fail to recognise the need for strict discipline in respect of stock turn and control but what is even more disturbing is the reaction to the debtors’ book.

 

As more and more customers seek actively to delay payment this element of business policing is even more critical.

 

When a customer exceeds the agreed payment terms, they are in reality using the supplier as an alternate (unsecured overdraft).

If left unchecked this situation can spiral out of control so that in a worst case scenario the supplier is forced to keep “supporting” the errant customer for fear of realising a bad debt.

 

Think of the parallel to the recent Eurozone debts (Eire/Greece etc.) – it is a slippery path.

 

Without a vigilant approach it will not be unusual for payment terms of 30 days drifting into 60 and beyond. The implications for your company’s financial position is all too obvious.

Failure to spot a crisis – FSA for short

The ongoing fall-out arising from the departure of the Chairman of the Co-op Bank continues. Flowers was the £132,000-a-year chairman of the 'ethical' Co-op Bank from 2010 until May this year when he stepped down as the bank's financial woes became apparent. The bank lost £700 million in the first six months of this year.

The failure of the regulatory authorities specifically the FSA (the UK’s Financial Services Authority) again highlights the fact that they really did not understand the complexities of the business which they were in the position to regulate.

Furthermore the FSA's seemingly lackadaisical approach to his appointment was - many would say - compounded, by the fact that it allowed Co-op Bank for months on Flowers' watch to negotiate another huge deal. This would have resulted in the bank trebling in size by buying more than 600 branches from Lloyds (a deal from which Co-op ultimately withdrew, when it belatedly recognised it was beyond its management capabilities).

Following the closure of the FSA, on 1^st April the Prudential Regulation Authority (PRA) became responsible for the prudential regulation and supervision of banks, building societies, credit unions and major investment firms.

In promoting safety and soundness the PRA focuses on the harm that firms can cause to the stability of the UK financial system. A stable financial system is one in which firms continue to provide critical financial services – a precondition for a health and successful economy. Hopefully it will be more efficient than its predecessors.

The situation at the Co-op Bank is an outstanding example of a business out of control. At the same time it begs the question how many businesses are similarly basket cases yet by smoke and mirrors are able to befuddle and confuse both their shareholders and bankers.

For example as the owner of an SME are you really confident in the integrity of the figures presented to you by your finance department? Or as the shareholders of RBS are you merely content to receive good news without challenging the how and whys of these results being achieved?

It all boils down to the age old fact that if something looks too good to be true it usually is.

Developing and sustaining relationships

 

Business practises have changed markedly in recent years.

 

Although many operations are completed electronically in this virtual world, we should never forget that essentially commerce is about people trading together.

 

The reality of the real world is that goods need to be moved from point of production to point of consumption and obviously the diverse elements which make up this chain cannot be achieved solely via a computer terminal.

 

It makes sound economic sense to foster and maintain good customer relationships as it has been determined that it costs up to five times as much to win a new customer as it does to retain one.

 

There is an old adage “know your customer,” this maxim has never been more relevant than in these uncertain and challenging times.

 

Banking practices – not in my name

The latest revelation to further damage the credibility of the banking system comes with the report that RBS (which is 82% owned by the tax payer) have according to a report submitted to the Business Secretary “forced vibrant businesses into financial trouble only to profit from their distress by squeezing them for exorbitant fees and charges and ultimately seizing their assets to swell their own vast property empire”. It is a damming indictment.

Following on from the financial chaos precipitated by the banks own negligence and poor management it has become increasingly difficult for businesses particularly SME’s to gain or in some cases maintain funding from the banks.

As the banking community sought to repair their damaged balance sheets they have resorted to any means both fair and foul to generate income.

This latest example follows on the heels of other misdemeanours such as PPI miselling, rigging of LIBOR and currency rates.

Contrast the actions of the banks with those of merchants and suppliers whose business is supplying goods to customers on credit terms.

Unlike the banks these companies rely on a simple mechanism of payment, an invoice.

Goods are delivered and are due for payment on a specified date it is the ultimate statement of trust and as such should not be abused.

 

Still on life support

With talk of the timing of increase in interest rates the Bank of England are ever mindful of the spectre of the so called “zombie” businesses.

 

Latest reports suggest that there are as many as 432,000 companies in the position of generating only enough cash with which they can service their loans and continue to trade.

 

This figure equates to roughly 1 in 7 companies, a rise of 16% from 3 years ago. It is estimated by solvency experts that up to 4000 could fail following a modest 0.5% rise in interest rates.

 

In reality there are many businesses stagnating - being kept alive by the forbearance of banks, rather than being shut down as they would have been during previous recessions.

This has prevented the “natural shake-out” which normally accompanies recession.

Until such times as the UK economy presents itself with a more robust backdrop it is unlikely that the Bank of England would take the risk of lifting rates.

 

Shark infested waters - don't fall overboard

 

In the present economic climate all businesses and organisations must remain alert to the potential for fraud.

Tens of millions of UK email users could be targeted in 'mass spamming event' designed to harvest their financial details the UK National Crime Agency has warned.

Small and medium businesses are particular targets of messages that appear to be emails from banks, the NCA said recently.

Emails contain attachments that look like details of suspicious transactions are actually malicious software that encrypts user's computer allowing fraudsters to harvest sensitive information and access bank accounts.

 

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.

 

It is essential to have systems in place to monitor all the company’s finances in a clear and concise format. After all it is never comfortable experience to find that someone is holding your wallet.

 

All businesses be they independent or large corporations are vulnerable.

 

It is an undeniable fact that there will always be people trying a variety of ways to “scam” your organisation; it is a problem that will not go away so vigilance should remain the order of the day.

 

Sound management principles

In order to achieve success all organisations must have effective leadership. It is the responsibility of management to lay down a set of ideas and objectives that are articulated, understood and supported by the workforce .Good people do not like working for organisations whose values are muddled.

Managers have to take difficult and unpleasant decisions. These often need to be made swiftly balanced against conflicting demands. It is not always possible to access cast-iron evidence to support the decision making process. This is one of the tests of strong management.

A clear and defined vision are essential requirements. Managing a large company, and dealing swiftly with a variety of challenges and issues is a complex task.

The desire to succeed which provides the drive and focus on excellence is one of the hallmarks of a good manager.

The workforce is the company’s most precious asset. Accordingly the ability to judge people and value their contribution is an essential prerequisite for any manager.

To build a talented team requires working with people who may be better at their job than you are at yours, and to guide and motivate them. People learn far more about the art of leadership from a good mentor than from any course or training exercise.

The ability to respond quickly will prove invaluable when things go wrong. Surviving a reverse and changing direction is the utmost test of resilience and flexibility.