Everybody loves a winner

One recurring theme from the analysis of losses made in the financial sector is that in many instances 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 trading positions spiral out of control 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.



It is always worth remembering that if something looks too good to be true it invariably is.

 

Beware of Greeks bearing debts

 

“If you owe the bank $100 that's your problem. If you owe the bank $100 million, that's the bank's problem” the famous quotation from JP Getty neatly sums up the dilemma faced by the international community in dealing with the Greek debt problem.

 

Following Sunday’s election in Greece the stock market in Athens has suffered a fall of10%.The biggest losers were bank shares with Piraeus Bank down more than 20%.

In the two sessions following the election, banks have seen 23% of their value wiped off, with investors fretting that the possibility of Greece leaving the euro would see bank accounts converted back into a new Greek national currency.

The sharp movements came after new Greek Prime Minister Alexis Tsipras said in his first cabinet meeting that he planned to negotiate with creditors over the €240bn (£179bn; $270bn) bailout.

In spite of the hard line talk it will be no surprise to see realpolitik coming into play and a fresh compromise being offered to the Greeks, in effect kicking the problem further down the road.

 

The fact is the international community will have to learn to accommodate the spectre of countries failing to grapple effectively with their debt burdens. In turn this will inhibit growth and impact upon the speed and strength of global economic recovery.

 

It will be an uncertain time but one undisputable outcome of the above will be the hard ball attitude of banks towards companies seeking funding.

 

It will become ever more necessary to demonstrate effective control over all areas of cost and exposure as the banks will undoubtedly remain cautious providers of finance.

The bullies are in evidence again

 

During recent years many companies focussed on the element of supplier’s credit as they sought to improve their own bottom lines.

 

By virtue of their purchasing power large corporations such as the supermarkets are able to squeeze their suppliers.

 

It is the SME’s who are feeling the pressure most acutely. The average small business is owed £31,000 in overdue payments, amounting to over £30 billion across the UK economy.

 

The UK has late-payment laws that give small businesses the right to charge interest, but many avoid doing so for fear of upsetting customers.

 

The EU issued a directive in 2013 which aimed to enforce similar measures across the union, with public bodies given 30 days to pay and businesses 60.

 

Cash flow is a vital element for any business and timely payments are crucial for small businesses trying to grow.

 

Over the past couple of years many companies have lengthened payment terms seeing the suppliers as a soft target. As many as 17% of suppliers claim that they have been subject to intimidation over payment terms by their buyers.

 

There is evidence that the bigger the company, the harsher the terms. For example chocolate manufacturers Cadbury and Mars are now seeking payment terms of 120 days from their suppliers.

 

With suppliers consistently facing a declining return it should come as no surprise when they conclude that the game is not worth the candle.

 

The dragon pauses to catch its breath

Since 1978, China's economy has doubled every eight years. Today, the average Chinese person has some ten times the purchasing power they had just a quarter century ago.



China was the engine room powering the global boom of the early 21^st century.

However there are signs now that the Dragon is catching its breath.

 

Growth in the world’s second largest economy in 2014 missed its official  annual growth target of 7.5% for the first time in 15 years albeit that the actual figure of 7.2% was higher than most analysts had forecast.

 

European markets are crucially important to China but with European economies in a fragile state the implication for exports is obvious and the continuing pressure on the euro could result in a decline in export growth in the months ahead.

 

Caveat emptor

After a process lasting two years the Serious Fraud Office has closed its investigation into alleged wrongdoing following the 2011 takeover of UK technology firm Automony by Hewlett-Packard.

 

The SFO has concluded that based on information available there is insufficient evidence for a successful conviction.

 

A year after the takeover HP were forced to write down the value of Autonomy by $8.8bn (£5.9bn), having bought it for more than $10bn in summer 2011.

 

Meg Whitman, the chief executive who took over as the acquisition was being completed, blamed a "wilful effort" to inflate the company's figures, and that they "severely impacted HP management's ability to fairly value Autonomy at the time of the deal".

 

The numbers are truly eye watering and begs the question that during the due diligence process how many auditors examined the validity of the reported accounts?

 

Despite the decision by the SFO Hewlett-Packard continue to pursue the legal battle in the US as they attempt to “hold the architects of the Automony fraud accountable”.

 

How well do you know your customers

 

In just a few short years, rapid advances in technology have transformed the way we all conduct business.



Much of business is today conducted in the so-called virtual world of paperless trading. However, we should never forget that essentially commerce is about people trading together.



Whilst computer “stop loss” mechanisms are the order of the day for “paper trading” the reality of the real world is that goods need to be moved from point of production to point of consumption and obviously this cannot be achieved via a computer terminal.



There is an old adage “know your customer,” this dictate has never been more important than in these uncertain and difficult times.

 

One of the biggest problems associated with the rise of e-commerce has been the accompanying lack of personal contact between a company and its customers.



Obviously this is not an issue for an online retailers selling products over the net and being paid via a Debit Card or Pay Pal etc.



However, there is an increasing tendency for B2B sales to be concluded by email or even SMS. The personal element has been lost and so has the identity and customer relationship.

 

The surest way to avoid problems is by knowing your customer and understanding their business.



It is simply not possible to nurture this relationship and mutual understanding thru a key pad and email ordering system.

 

 

The real cost of cheap food

In a market where prices are squeezed to the absolute and in order to protect margins suspect practices and questionable ethics will inevitably come to the fore.
 
The current economic reality will continue to underpin the demand for cheap food but in satisfying this demand there is a price to pay.
 

The combined effect of the recession, the growth in online retailing and the increased market share of discounters such as LIDL and ALDI has shaken the likes of Tesco, Sainsbury and Morrison’s. For supermarkets focussing on market share food prices must be kept down, at all costs.

 

But in the case of farming it is such a long cycle and there is little account taken of retrospective costs for the producer.

The latest casualty is the UK dairy industry. Global milk prices have fallen 50% in the past year to an 8 year low. The NFU said in December that the number of UK dairy farmers had dipped below 10,000 for the first time - a 50% fall since 2001.This reflects the worsening conditions for producers some of whom are currently faced with accepting a price of 22 pence per litre of milk versus a production cost of 28 pence.

Looking back 25 years ago, British people spent about 22% of their disposable income on food .In 2015 the spend is roughly between 4 and 8%, so food has actually become cheaper.

 

The reality is that the 'bog-offs' - the buy-one-get-one-free deals are not actually sponsored by supermarkets. They are paid for by the producer who has to agree to them under tight terms and conditions.

 

As the margins of the big supermarkets fall from 5% to nearer 3% producers will be expected to absorb more of the pain.