The inherent dangers of diversification

Without doubt one of the most difficult challenges a business faces is diversification.

Very often a company is faced with the dilemma of diminishing revenue returns and a tired business model which is either irrelevant or obsolete

.

Diversification is seen as the solution to this dilemma. However, the mechanism for achieving this objective can be particularly difficult.

The first step is examining why the current business model is not working.

This requires an honest appraisal from management in respect of their performance.

Then the areas of diversification have to be closely considered, often people plunge into businesses in which they have little knowledge or experience and the results pretty quickly show up these deficiencies.

Thirdly one should always respect geography it may be very tempting to consider that there are opportunities just waiting to be picked up but to underestimate the advantage of local knowledge and conditions can again prove costly.

In essence diversification can provide the answer to a company’s need for increased revenue but without a clearly defined strategy it can equally provide another drain on an already vulnerable balance sheet.

 

Tesco still beleaguered

 

The fallout from the revelation that Tesco had been overstating their profits continues to be immense.

 

Whilst the investigation undertaken by the Serious Fraud Office will take a considerable time to complete some shareholders have already decided to instigate legal proceedings over the £263 million overstatement of profits which led to significant shareholder losses. Not least of which included Tesco employees who bought into the company’s share scheme and have seen the value of their investment drop by 50% in the past year.

 

The components of this story are the usual suspects, loose governance, directors preoccupied with their own bonus structure, Auditors not getting to grips with the fundamental issues of the business they are auditing.

 

Meantime the UK’s top financial regulator (FCA) has launched an investigation into whether Tesco broke rules on adequate financial disclosure and it will

The figures are wrong through incompetence or deliberate falsification it can only be one of these two issues.

 

In smaller companies it is not unusual for management under pressure to resort to “massaging the figures” whilst unacceptable business practice it does not have the implications that accompany the Tesco situation.

 

The damage to shareholder confidence and the brand itself is incalculable coming at a time when Tesco is facing rapidly declining sales.

 

It will be difficult to rebuild trust from either the market of its customers with the overhanging feeling that there may well be more skeletons lurking in the cupboard.

 

 

Shining a light

One of the conclusions arising from the foreign-exchange rigging scandal was that the regulators such as the Financial Conduct Authority were blind to institutional wrong doing.



This was not the case of an isolated “rogue trader” but was corruption on an industrial scale as witnessed by RBS who in addition to having paid fines to the regulatory body are now investigating up to 50 members of the staff for their part in the market rate rigging between 2008 and 2013.



The integrity and reliability of any organisation’s reporting structure are vital to its long term survival. All too often risk controls are lax or can even be ignored in the pursuit of profits.
 

It can also prove a false comfort to rely on the findings of the auditors.



As we have seen some of the financial instruments employed by the banks were so complex that even their own architects could not fully understand the full implications.



Even with the most rigorous reporting procedures any company is still heavily reliant on the calibre of the people operating the business and recording each and every transaction diligently.



A prudent exercise for any organisation is to regularly assess and test the systems in place for monitoring risk both transactional and counter party to judge that they are fit for purpose. At long last both the banks and the regulatory authorities are waking up to this.

 

As the holiday season approaches

In recent times there has been the tendency for the Christmas holiday season to stretch out over a number of weeks and therefore with a few weeks to Christmas it would seem an appropriate time to consider the implications for business.

Without doubt of biggest concern to businesses will be the impact on cash-flow. Many companies are operating very close to the edge and any delays in payment could have serious consequences.

In some instances invoices which fall due for payment after the 19^th December could well not be settled until the 5th January – giving an at worse scenario of 3 weeks delayed payment.

It would therefore seem prudent to look at your last half December receivables and make a realistic forecast of just how much cash will “come in”.

Similarly with “just in time” inventory it would be sensible to ensure that sufficient stock will be on hand for the early days of January when there are likely to be disruptions to the supply chain.

Trying to get things done in the UK during the latter half of December has proven to be a challenging task so it would be best to ensure you take appropriate action now and are positioned accordingly.

 

Tough going for SME’s

 

Latest research illustrates that in the UK 50% of start up companies fail to last beyond 5 years. The biggest obstacle that these companies fail to negotiate is the vexed question of securing adequate funding.

When approaching lenders it is vital that the business plan is realistic and clearly defined.

With the marked reluctance of the banks to lend, it becomes imperative that all businesses focus on their areas of exposure – rigorous policing of the outstanding receivables must be a priority and inventory kept at a minimum.



More companies will try and improve their cash-flow by dragging their feet with payments and trying to put more of the burden of carrying stock onto their suppliers.



Those that adopt a passive approach to these issues will find themselves increasingly vulnerable and heading down a slippery slope.

Nurturing the company’s assets

For any company to succeed it is necessary to have a motivated work force. However in today’s environment there is a discernible sense of demoralisation amongst many workers.



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 receive encouragement if they are expected to give of their best.
 

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. Instead of engaging with their staff they opt to manage by diktat.



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.

 

Where’s the money gone

One of the biggest drains on a company’s financial well being is the high cost of carrying stocks .



In these competitive times it is staggering that so many companies be they large or small fail to keep a control of their inventories.



Whilst management consistently push for increased sales performance, the question of housekeeping is often put on the back burner or it would appear totally neglected.



There are various costs attached to carrying stock and as such it is an area of the company’s exposure which needs constant monitoring to ensure the acceptable rate of stock turn is being achieved and that stock losses are kept to a minimum.
 

The same level of focus should also be applied to debtors to ensure the effective management of cash flow.



Now might be considered as timely to conduct a pre-emptive review of your operating systems for stocks and debtors rather than wait for the post mortem results.