Gilding the lily

In the current economic environment some companies are camouflaging their poor performance with some suspect off-balance sheet shenanigans other dubious activities.

 

Directors of many companies simply do not have the understanding of the mechanics or the day to day activities of the business which they purport to run.

 

There have been graphic examples of this recently, the gross mismanagement and ineptitude at the Co-op Bank and the manner in which Tescos was being run. This lack of commercial expertise has been especially true in the case of non-executive directors.

 

In trading environments it is not uncommon that totally unrealistic profit targets have been passed from board level to trading departments. No cognisance having been given to the disproportionate risks which need to be taken to achieve these targets.

 

Some of the most spectacular financial flame outs have followed a period of ostensibly highly successful trading.

 

 In their desire to recognise these “profits” no thought were given as to how they were being made. In such times it would be well to take note of the old adage that is something looks to be too good it usually is!

 

If a company is bucking the trend in these difficult times it may well be that they are implementing a winning formula.

 

However history tells us that it is prudent to implement some rigorous analysis in order to avoid any unpleasant surprises.

 

Symbiotic relationships offer the path to growth

When evaluating the respective role of the supplier/consumer the focus often accentuates the adversarial nature of the relationship i.e. who is getting the better of the deal?

 

However one of the benefits that can be derived from the current business climate is the value that can be gained by the customer/supplier in having a mutual understanding of each other roles and obligations.

 

As increasing numbers of business operate on a just in time inventory basis it is vital that a good understanding exists between supplier and consumer.

 

In as much as a supplier will be prepared to go the extra mile to ensure that his buyer receives his goods on time and in good order so it behoves a buyer to ensure that he pays as required and is not abusing the goodwill of his supplier by delaying payments in order to seek some extra period of credit.

 

If both parties work together in a professional and commercial manner then it will strengthen the relationship and both will benefit from a renewed confidence in each other and a better based business for the long term.

 

The Greek crisis is a perfect metaphor for our times.

 

A customer develops a pattern of late payments but far from being called to order the supplier fearful of alienating the customer allows this to become the norm.

When the inevitable tipping point is reached there is no alternative to continue to support the errant buyer or risk realise a loss.

As it is with the Greek situation and the realisation that concessions will have to be offered by the international community in order to keep the plates spinning rather that witness the typical Greek folk custom of plate smashing.

 

Accompanying this need to reach out to the fledgling Greek government there is a growing perception that the problem is just being kicked down the road.

However as the international banking community continues to ponder the consequences of another serious blow to its capital structure the UK banking community will not be immune. At the very least there will be a renewed focus on exposure and this will impact on their willingness to lend.

Now more than ever businesses must demonstrate that they have full control over all aspects of their operations. Reporting procedures must be strictly observed and any potential problem areas or customers brought quickly into line. As it becomes harder to borrow, positive cash-flow is critical.

 

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.”

 

The importance of morale

To achieve success all organisations must have effective leadership. It is the quality of this leadership which determines the morale of the company.

 

Management has the responsibility 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.

 

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

 

Letting your employees express their feelings, needs and concerns will make them feel appreciated. The most efficient companies are those where the workforce feel an integral part of the set-up and not merely there to make up the numbers.

 

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. Show appreciation of a job well done, admiration will boost your employees morale.

 

It is important to recognise a job “well done” and that employees know that their contribution has value.

 

Create a positive working environment – if an employee doesn’t feel comfortable or motivated by their surroundings, morale will plummet. It’s important that you create an environment that employees will want to work in and will thrive in.

 

Building 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 will always derive more benefit from a good mentor than from any course or training exercise.

 

A false sense of well being

 

Until such times that they are directly faced with a problem it is the nature of most companies to assume that all is well with their systems and operating procedures.

 

These are the companies that are most likely to be blindsided.

 

Constant monitoring of counter party risk is the order of the day combined with disciplined inventory control.

A customer’s previous reliability can provide a false sense of comfort. Past performance is unfortunately not a failsafe guarantee for the future. Be alive to tell-tale signs such as unusual ordering patterns, delays in payments etc.

 

In truth very few businesses fail overnight and there are usually enough warning signals which should enable a vigilant supplier to reduce its risk.

Current market conditions will continue to test but undoubtedly there will also be opportunities for those placed to take advantage of less efficiently organised companies.

 

By far the biggest danger to the financial wellbeing of any organisation is complacency.

 

Holding a tiger by the tail

Many companies find themselves 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 diversification is one of the most difficult challenges facing any business, and the mechanism for achieving this objective can be particularly difficult to implement.

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

 

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

 

Then the areas of diversification have to be closely considered, many times 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 embattled balance sheet.