Follow the money…..

Happy new year to you all! Many writers tend to start their first blog of the year by offering predictions for the coming year but I am going to resist that temptation, not least because 2012 is shaping up to be the most unpredictable year ever!

With the New Year only a few days old we have already had a raft of positive and negative statistics  lending themselves to both optimistic and pessimistic interpretations. Based on this I think it is safe to say that “Old Dogg’s Alamanac” will not be making an appearance in 2012.

Finance Directors as a breed like to know where we and our businesses stand at any one time so this uncertainty does not sit easily with us. Nonetheless, like many of the companies we work with, we have had to change our way of thinking and carrying out scenario planning with copious “what if” analyses is now as regular a part of the FD routine as monthly management accounts and weekly cash flows.

However life and business goes on and there remains a need to find and develop profitable opportunities. We can’t continually keep saying “no” or “wait”. But how do you get them? Moreover how do you evaluate them?

My mind goes back to my days as a naïve young accountant in industry and when I was introduced to a newly appointed business development director. Keen to learn about life beyond the finance function I asked him how he would go about getting new work in. I expected him to say he carefully researched what projects were happening and where, and then worked out which ones he thought the business had the best chance of getting. However his response was short and to the point. “I’ll just follow the money”, he said.

Follow the money. Simple yet obvious. Find out who actually has money to spend and what they intend to spend it on. Then you can focus on what you can do to help them spend it. If you are dealing with a business credit checking, common sense, industry gossip and the past histories of any individuals help. If you are dealing with consumers it’s a question of need to haves and nice to haves.

By following this money trail you can ensure that you don’t waste time on things that clearly are not going to work financially, especially in this climate. People can talk about projects and products that they are working on till the cows come home but unless there is money in the background somewhere there is little point in you as a business chasing them.

When I first asked that question I thought I knew how money worked. And I guess in terms of debits and credits and P&Ls and Balance Sheets I did. But good finance people realise that it works in many other ways as well, and understanding these and working them into our financial management processes is just as important as all those technical skills that we and our clients and employers take for granted.

Inflated influence….

I had my annual rail fare shock recently when I took my first trip into central London of the year. As I no longer require a season ticket, I am at the mercy of the various peak and off peak fares that my local operator charges. Once again the fare increase was noticeable and comfortably above what is laughingly known as the headline inflation rate.

Inflation is certainly back in various guises. There is currently the CPI rate that is almost twice the level which the Bank of England is meant to target. Petrol, utility and transport costs seem to have a life of their own. Global commodity prices are soaring. China is no longer the cheap production centre it used to be. And to cap it all VAT has just gone up.

With incomes stagnating for many people we should probably be feeling a lot poorer. Indeed the Governor of the Bank of England seems to think that this is a good thing. Hence the renewed fears of a double dip recession following the release of this week’s GDP figures which showed an apparently surprising decline in the last quarter of last year.

Back in the seventies, prices went up 20% and so did wages. It was an unwritten law of the UK economy at that time. Nowadays prices are going up and wages are not, a reversal of the so called new economic paradigm of the previous decade.

Some price increases are obvious and immediate such a train fares and petrol. Some are not. Many retailers have not passed the increase on as yet, probably because they snuck most of their increases in before Christmas and then have disguised the rest by imaginatively spreading them across their product portfolio and using promotions to disguise overall increases.

So are things really that bad? And what should clever businesses be doing about it regardless? Managing during this “phoney war” period of inflation is challenging, particularly as we now live in a flexible global economy where there are a myriad of influences affecting prices and wages.

However switched on businesses can look closely at all their costs and all their products. They should be able work out where they can increase prices, do deals with suppliers and keep their key staff happy. At times like this businesses really do need a good understanding of their finances so that they can model and manage their income and costs.

Of course the real threat to the economy remains interest rate increases. Price increases can be managed to a certain degree. I suspect higher interest rates will be much harder to do so.

Feeling good – for now…..

The latest business trends survey released this morning by BDO , the accountancy firm, reveals that business confidence  has reached its highest level for four years.  This pretty much fits with much of the anecdotal evidence that I have gleaned from clients and contacts over the past few months, and is a welcome antidote to the gloom and doom that has been prevalent for the last year or so.

But anybody who takes this as being the end of the recession and the beginning of a glorious sustained recovery is being a tad naïve. As the survey itself says, much of the boost in output has been down to companies deciding to re-stock after letting their stock levels run down during the recession, and that a significant, and as yet unidentified, increase in private sector investment is needed to keep any recovery on track.

Many businesses that have cut things back to the bone in response to the downturn are now having to get their stock levels back to a least a reasonable level.  Building maintenance and basic equipment upgrades can only be postponed for so long.  But like the VAT reduction and quantitative easing, these are only going to be one off boosts to economic activity.

UK economic growth is driven by public sector spending, consumer demand, business investment, and export activity.  It is the latter two that are likely to lead the way out of this recession, and given the comments above regarding investment and the fact that global demand is still not exciting enough for there to be a strong expansion of exports, the situation remains fragile.

Add to this the fact that businesses are understandably not believing any pre election pledges about what the parties intend to do, and are waiting for the reality of the post election economic situation and the actions that will be necessary to deal with that, you can understand why I am still cautious about the immediate future.

I still believe that it will be up to businesses to make their own recovery in 2010 (and maybe even 2011), and that the basics of business planning and financial management that many companies have had to revisit during the recession will play a key role in any success they hope to achieve.  There is still a long way to go.

Fundraising made simple…..

Tinchy Stryder, who is apparently something big in the pop world these days and therefore a suitable role model, has been advising young people to invest and save wisely. I think this is a great initiative, and personally believe that lessons in business and finance should be compulsory in all schools from as early an age as possible (as apparently does Ed Balls). However, what particularly struck me when reading about this, is the fact that he partially financed his debut album by selling clothes.

In a world where everybody from pop stars to business people seem to be looking for somebody else to fund their dream, it is a timely reminder that the best way to generate cash to finance investment is to sell something at a profit and then make sure you collect the money that is due to you.

There are countless stories of entrepreneurs who have held down two or three jobs to raise the necessary funds to finance their dream and then have “bootstrapped” (i.e. used funds generated from their own business operations) their way to fame and fortune. The Beermat entrepreneur, Mike Southon, is a big fan of this approach, and it certainly saves the time and hassle of trying to find, and negotiate with, potential investors. Such an approach will require sound and disciplined financial management, but it does mean that you will have more control over your own destiny than if you allowed external involvement in your business.

I know this sounds glib, and yes of course some businesses do require significant development capital which can only be acquired through outside investors. However, I do think that some entrepreneurs spend too much time obsessing about how to raise money and lose sight of the fact that they ought to be thinking about how they should actually be making money.

Business is not meant to be easy, but it is simple, and perhaps business people of all ages could benefit from learning from Tinchy Stryder’s approach to financing their dreams.

Britain’s got (financial) talent….

Businesses fail because of bad financial management. And we are not just talking about businesses that go bankrupt here. We are also referring to businesses that do not make as much money as they could have done. Potential world beaters that get overtaken by seemingly less well resourced businesses.

And yet if you look at most business plans or proposals, while they will provide full details of the sales, marketing, creative and operational talents within the team, there is often very little reference to the finance talent that will be required to manage the money, and provide the financial returns that are faithfully promised to potential investors and finance providers.

In the heady atmosphere of developing an exciting business idea, it seems that financial management is almost an afterthought (as opposed to finance, which of course is seen as vitally important, especially when it is provided by somebody else).

I can recall all too many instances where financial management skills have been reluctantly brought in at the last minute in an attempt to avert a catastrophe. I say reluctantly, as the management still seems to want to haggle over the cost, as if you are a burden rather than the one thing that stands between them and financial oblivion. And yet this is the same management that has probably splashed out vast sums on the other talents in the team (and themselves) with almost carefree abandon. That is of course until the money has almost run out.

So entrepreneurs, if you want the money men to be interested in you, and achieve the best result for yourself, you need to make sure your have somebody in your team at a very early stage interested in looking after their money. Britain really does have financial talent – make sure you use it and value it.

A moat too far – MPs expenses and financial management

Now, what can we possibly say that hasn’t already been said about the MPs expenses debacle?

Well from our perspective it has a number of characteristics in common with other financial scandals whether in the public or private sector, which illustrate poor financial management and control.

1. An unclear policy
Much has been made by many MPs trying to mitigate their disgraceful behaviour by claiming that the expenses policy and regime was unclear. Certainly by what has been reported in the press, the fees office seemed to have a high degree of discretion in how much for example of a £2,300 plasma TV would be reimbursed. They also had policies which weren’t communicated eg. that they would normally pay no more than £750 for a TV. But if that was the case why didn’t they write it in and communicate it? Why did the John Lewis list only eke out into the public domain by chance last year? This can only have increased confusion and inconsistency in the application of the policy, such as it was.

2. A weak finance function
Most MPs are a pretty forthright lot. Perhaps they don’t always smack you on the chin like John Prescott but I suspect many of them can be fairly intimidating to administrative staff in the fees office. It does seem that the sarcastic and patronising correspondence from MPs to fees office staff that has come to light may have placed pressure on the fees office to pay claims which they might not otherwise have done. Apparently, there was also a fair bit of bullying going on .

3. Management override
A powerful management team or CEO in any organisation can often get their own way (passim. Fred Goodwin etc.). In this case the fees office seem not to have been supported by anyone in the House of Commons. Indeed two of the three main political parties consistently voted against greater disclosure and even for their own exemption from the Freedom of Information Act 2000!

4. Unclear reporting lines
On top of all this the reporting lines for the fees office were somewhat unclear and incestuous as The Guardian has clearly shown . If there’s no one at the “board” level with accountability then those at the board level have greater lee way to abuse the system. In the Commons, the most important person is the Speaker and it is his responsibility to safeguard the reputation of the House. His failure to do so and his mocking of those seeking it would be a dismissible offence in most organisations.

5. A misunderstanding of the ethos
Most people would understand clearly that expense claims are for costs incurred so that you aren’t out of pocket in performing duties for your employer. Was it really beyond MPs to understand this? Or was it even stated anywhere? Or was it as a concept overridden by daily sloppy practice in the organisation? Who was the guardian of financial prudence in the House?

When you get one of these issues arising it’s a cause for concern, but when you get all five it’s a disaster waiting to happen.

So what next? Well, in most organisations an issue like this would be dealt with quickly to produce an effective solution which have broad support. The measure of the House, the Speaker and the party leaders will now be how quickly they can produce a solution which meets the publics expectation for common sense.

Steve Easterbrook, CEO of McDonalds UK was on Question Time last week and was the voice of common sense and good business practice and was puzzled why this could not be fixed within 48 hours.

We wait with bated breath to see how quickly the honourable members take to deal with the issue and when the moat will stop rocking this hitherto fine institution.

(Meanwhile, this is a classic- See Eric Pickles MP explaining why he needs two homes in the capital to do his job).

Ash Mehta

Look after your suppliers? No really – look after your suppliers….

The announcement yesterday that Zavvi, the music, games and DVD retailer is to close a further 15 stores, has brought home a salient point about the recession that often gets overlooked in those “top tips on surviving the recession” listings.

Nearly everybody will suggest that you imagine a scenario when one of your top customers goes bust, but very little emphasis is put on the situation when one of your main suppliers goes the same way. Yet that is precisely what has happened in this case, where the key supplier in question was Entertainment UK, which was a casualty of the Woolworths demise. Not only did Zavvi lose its key supplier at a time when it desperately needed stock i.e. the run up to Christmas, but more importantly it lost valuable credit facilities, which could not be replaced as new suppliers demanded immediate payment.

A salutary lesson for everybody – when your key supplier goes down not only do you lose products that you need for your business, you potentially lose a valuable source of finance. One to add to those key financial relationships that have to be managed.

Antony on the road (4)

Thursday

My turn to be star attraction this morning, turning up bright and early at Ashford Manor Golf Club in Surrey to give a seminar to the Surrey Chambers of Commerce (http://www.surrey-chambers.co.uk/) on how to survive and thrive in the current economic climate. The seminar is based on our Orchard SMART programme which has been specifically devised for the current situation and which aims to focus clients on looking for opportunities whilst ensuring that they tighten up on the basics financial control and management. In addition to finance, the programme also addresses sales, marketing and people issues and it intended to help business for whom financial management was not so important in the good time but is now essential in the current climate.

More details can be found on our website but what was encouraging was the positive attitude of many of the businesses there to the current situation and the belief that they could be SMART enough to survive and thrive.