The value of a pre-emptive strike

The current economic inputs point to the fact that the coming months will continue to produce difficult challenges for all.

As domestic budgets are ever more squeezed this will impact on businesses across the board.

This is an appropriate time to conduct a top to tail analysis of your business.

Undoubtedly there are areas which would benefit from some radical adjustments/ change of direction. The consequence is not acting now could have very negative effects in the next few months.

Now is the opportunity to prepare for difficult times rather than adopting an ostrich "head in the sand" attitude.

When trying to explain a disastrous strategy to your shareholders or bankers there is little merit in falling back on the old standard “it seemed a good idea at the time”.  

The cost of denial

As a result of ignoring obvious problems the management and shareholders of troubled organisations subsequently end up asking “why did that go wrong?”

It is simple, a large number of companies fail to address problem issues early enough to avoid an oncoming crisis.

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, the preferred option in many instances is to engage in a totally pointless exercise such as a rebranding exercise or the launch of another product range destined to fail for the above reasons.

At the time it seems a rather painless way to deal with problem issues but for the most part it only buys a limited reprieve before the harsh realities come into play.

 

More evidence of smoke and mirrors

RBS have announced that they may face full-year losses of up to £8bn, after the bank said it needed another £3.1bn for claims relating to the financial crisis.

The boss of RBS stated "the scale of the bad decisions during that period means that some problems are still just emerging."

This is straight out of the manual under the heading “nothing to do with me guv”.

There have been repeated assurances that the banks were putting their houses in order but there is a growing feeling that many of the problems have been swept under the carpet rather than acknowledged and dealt with.

This announcement from RBS adds credence to this view.

 

It is hard to believe that we have seen the end of issues with the banks when we consider their recent history of financial mismanagement and sheer scale of incompetence.

 

 

There is no doubt that the internal controls of these institutions appear seriously deficient but there is a question mark concerning the obvious lack of professionalism on behalf of the independent auditors.

 

 

Time to bite the bullet

 

Every business transaction contains an element of risk, yet often the mechanisms for managing risk are flawed.

In recent years we have witnessed just how costly the laissez faire attitude to risk was in many institutions from large corporations to smaller SME’s.

In the never ending quest for larger profits many of the disciplined measures of business were neglected or abandoned.

An analysis of recent business failures all have one common denominator – the architects of these calamities went hurtling over the cliff like lemmings.

There has never been a more pressing need to examine all areas of exposure.

A thorough analysis of the current Debtors Book might make for uncomfortable reading but like most unpleasant tasks it should not be ducked.

It is far better to take remedial action such as a write down whilst you are in control of your own destiny rather than have a 3rd Party appointed to do it for you.

 

Nurturing the company’s assets

 

When dealing with companies over the past months it is noticeable that there is an increasing sense of demoralisation amongst many sectors of the work force.

The causes for this are readily identifiable, many people are struggling with their own domestic finances whilst at the same time the need for increased levels of performance and efficiencies at work have rarely been as intense.


It is the responsibility of management to ensure that during these times staff members are encouraged to give of their best.


Unfortunately too many managers are remote from the day to day activities of their staff and appear to have the attitude that the people who report to them are lucky to have a job.


This mentality is counterproductive. Staff need motivating and incentives do not necessarily have to come solely in the form of financial rewards.


Some of the best run and therefore by definition most successful commercial entities are those where the workforce is engaged and feels part and parcel of the organisation rather than merely there to make up the numbers.

 

Fraud the enemy within

One of the lessons of the recent economic downturn was the need for all businesses and organisations to remain alert 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.

 

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.

 

After all it is never comfortable experience to discover that someone else is holding your wallet.

Putting on the squeeze

It has become the norm for large companies to unilaterally change previously agreed payment terms. Towards the end of 2013 Marks and Spencer advised its suppliers of a shift in payment from 60 days to 75 days as it attempted to dress up its figures.

The issue is that the majority of supply chain contracts are one-sided arrangements. Large buyers can vary terms and for the most part the burden for this is borne by small independent suppliers who have little muscle and therefore can be bullied into acceptance.

Faced with supporting “extended” payment terms suppliers generally discover the chance to obtain funding from their banks is usually limited. They are left with having to seek other ways of improving cash-flow such as factoring but this adds costs and erodes profit margins.

There is a potential fall out for buyers looking to squeeze their suppliers.

Diminishing returns can result in suppliers concluding that the game isn’t worth the candle or those that decide to accept the new terms may well find it to be uneconomic in the long term and cease to trade.

Stretching payment terms may well provide short term benefits for buyers but the longer term implications could turn out to be very damaging in terms of continuity of supply and reputation in the market place.