What’s in a name?

 

Following the financial crisis of 2008 there was much talk of a collective reigning in and return to the principles of sound business.


However memories are short and it is never long before the blurring starts again and risky practices again become more and more the norm.

There is now a concerted move afoot to rehabilitate the image of leverage. This was the mechanism which more than any other precipitated the disaster in the financial system.

Companies no longer speak of leveraged deals but are now taking on “sponsor finance”.

This re-branding has in-built danger as witnessed previously; complacency has resulted in the demise of numerous organisations.

In the words of Machiavelli “Whoever wishes to foresee the future must consult the past; for human events ever resemble those of preceding times. This arises from the fact that they are produced by men who ever have been, and ever shall be, animated by the same passions, and thus the necessarily have the same results.”

Ignore the warning signs at your own peril

 

The hackneyed response from recalcitrant Debtors used to be that “the cheque is in the post”. This generally bought some time as generally Suppliers met this response with a weary resignation.

Times have moved on and the latest mantra is “its set up for next week’s payment run”.

Basically the name of the game remains the same, buy some time - achieve a payment extension thereby effectively squeezing the supplier’s margin.

Obviously it is a difficult balancing act between keeping the customer happy and managing your own company’s cash-flow.

However, we are all operating in difficult times and it is vital to keep full control of receivables.

Delays in payment will impact on the bottom line; however the worst scenario is that neglecting to strictly monitor a failing company could result in a total write off.

Battling for the customer

 

Amazon is predicted to be 9^th biggest retailer in the world by 2018 but has no stores.

The Group has reported further losses in its last quarter totalling US$ 126 million compared to US$7 million in the corresponding period last year. The costly shift towards digital content and consumer electronics businesses were cited as the main reason behind this loss.

Obviously Amazon is playing the long game and one of the keys to their future strategy is the latest buzzword "personalisation".

bbThis is the mechanism of presenting customers with tailored, relevant content as they shop and in doing so increase conversion and generate loyalty

Despite the increased usage of this technology, it is still relatively new to the market but will undoubtedly evolve to become a prime factor in driving the future of ecommerce.

More ecommerce companies are devoting increasing resources to develop personalization software.

Several leading brands are assigning more internal resource to creating a truly personal customer experience by appointing teams of ‘personalization experts’.

As with traditional retailers ecommerce companies are now placing greater emphasis on using real insight to make customers feel like valued individuals as they spend time shopping on line.

All of this blurs the traditional lines and retailers face a common problem delivering what the consumer demands efficiently and free of delivery charge at prices which reflect ever squeezed profit margins.

 

Squeezing till the pips squeak

 

Against the current economic backdrop companies are constantly looking for ways to boost their bottom line.

Particularly over the past year we have seen companies trying to extend their payment terms by all manner of means – some fair, some foul.

In addition to this many are looking into the question of obtaining “rebates” from their suppliers. Suppliers will be asked for a 0.75% rebate if their sales grow by 10%.

Earlier reports have suggested said the rebate would rise to 5.25% if sales grew by more than 50%.

Amongst suppliers there is always a battle to secure sales but there also has to been a commercial realism.

If by securing so-called “prestige” business the overall operating margin carries a disproportionate return then it becomes a question of commercial realism.

In such situations it may well be argued that such business is best left to others.

 

Ahead of the silly season

 

As we approach the summer holiday season it would appear to be an appropriate time to tackle potential problem areas with some effective housekeeping.

One of the first areas for scrutiny is the level of inventory which you are holding.

Make sure you are achieving the best level of stock turn and that you are not carrying any obsolete stock.

Rather than be faced with a “fire sale” it may well be prudent to lighten up now with some innovative marketing strategies.

How is your company’s cash position?

Despite their rhetoric the banks are still reluctant providers of additional finance and this is particularly true in the case of SME’s.

Therefore it is an absolute priority to maintain positive cash-flow and this can only be achieved by keeping debtors well managed and under control.

Carrying out these simple but effective measures will ensure that your company enters the latter months of 2014 in good order.

Make stock turnover work for you

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.

 

Keep a watchful eye of costs

With operating margins being continually squeezed it is imperative that costs are rigorously controlled.

Every business sector is seeing the impact of spiralling costs e.g. air transport companies have seen their customers moving business from air to slower and less expensive routes.

Manufacturers of electronics and mobile phones are now shipping cargo by sea because competition was eating into their profit margins meaning they needed to cut delivery costs.

Traffic will continue to moving onto the water because moving goods by air is very energy-intensive and the high cost of jet fuel was making air freight too pricey.

Facing marked resistance from consumers to price increases and a greater level of competition, those companies who are unable to control costs face an uphill struggle to maintain their position in today’s market place.