Weekly Blog by Philip King, CEO of the ICM - 'Stepping out of the bath'

After the good personal news I shared in my blog last week, there's been some heartening news on the economy this week.

The CBI's latest quarterly poll shows that the services sector, which accounts for two thirds of the UK economy, is growing at its fastest rate for six years. Last week, the Office for National Statistics lifted its second-quarter estimate for GDP growth from 0.6 per cent to 0.7 per cent. The EEF, the manufacturers' organisation, said that for the first time more members were reporting that the cost of new borrowing lines was falling than those reporting it was rising. The Bank of England's Deputy Governor suggested the Bank was sending a 'clear signal' that interest rates would not be raised any time soon reiterating the commitment made early in his reign by the new Governor Mark Carney.

 

The editor of our own magazine, Credit Management, drew attention to a number of other positive indices in his column in the September issue which hit doormats at the end of last week so perhaps the CBI is right in interpreting their numbers as evidence of a further build-up of momentum. Certainly, the conversations I'm having with businesses and organisations suggest an underlying sense of confidence that was missing a few months ago.

 

Few people seem to be overly buoyant but they do at least seem to  be moving from A glass half-empty to glass half-full mentality. In the early days of this recession when the debate was raging as to whether it would be V or U shaped, I remember one economist saying it would be bath-tub shaped, with the economy bouncing along the bottom for a prolonged period. It was a description I shamelessly stole and has proved to be pretty accurate.

 

I don't think we're off the bottom yet but I think we're looking upwards now rather than constantly looking behind us, and it does feel like momentum is building. Knowing how important confidence is to achieving recovery, let's do our bit by talking ourselves out of the bath tub.

Weekly Blog by Philip King, CEO of the ICM - 'Testament of Youth'

There was an interesting article in the Financial Times about youth unemployment on Monday. Hot on the heels of the recent revision by the Office for National Statistics (ONS) that has cast doubt on last year's UK double-dip recession, it served as a timely reminder of how dangerous it can be to rely on statistics or to accept them at face value.

 

Both the OECD and the United Nations have recently warned that the spiralling rates of youth unemployment across many advanced economies will have severe consequences following the latest reported figures showing that nearly a quarter of European under-25s are now unemployed. A truly terrifying statistic, particularly in Greece and Spain where the figure is over 50%, and Italy and Portugal where it is 40%, until we get beneath the headline, and let me quote the FT's Kate Allen in explaining.

 

"Youth unemployment figures are meaningless without understanding what proportion of a country's young people are economically active."  "Unemployment figures only reflect the proportion of the population who are economically active ­ i.e. looking for a job, but unable to find one."

 

'Youth' in this context is defined as young people aged 15-24 and inactivity rates can be expected to be very high with many in education or training.  Taking this into account the FT calculates the true youth unemployment rate in Spain to be marginally over 20%, Greece about 17%, Portugal 15%, and Italy 11%.  Indeed, on this basis the unemployment figure for European young people is fewer than 10% rather than the reported almost 25%.

 

There are conflicting opinions about who originally said "lies, damned lies and statistics" but, whoever it was, we should bear their words in mind when we read or hear numbers being quoted in support of a view or argument. Context can be all-important!

 

 

 

Weekly Blog by Philip King, CEO of the ICM -'Directors must take responsibility for their actions'

I received the report from the House of Commons Business, Innovation and Skills Committee on The Insolvency Service (Sixth Report of Session 2012/2013) recently. In more everyday parlance, this was the report from the Select Committee that met last October and heard evidence from the Insolvency Service, R3, the Insolvency Regulatory Bodies and others. One of the comments in our submission has been somewhat over-stated,  and our words used out of context, but I am particularly pleased at the inclusion of another reference which says: 'The Institute of Credit Management summarised the concerns of many of those who submitted evidence to us when they commented: "We would be greatly concerned if the reductions in budget [of the Insolvency Service] resulted in a degradation or reduction of Disqualification Unit activity. We believe any such dilution of activity would send entirely the wrong message to delinquent directors at a time when corporate insolvencies are likely to increase".'

 

In connection with the disqualification of directors, the report points out that 'disqualifications have halved over the last couple of years………whilst the number of directors disqualified each year has remained relatively stable over the past decade (approximately 1,200 a year), the number of cases of misconduct identified by Insolvency Practitioners in the same period has risen from 3,539 to 5,401…..the disqualification rate has fallen from 45% in 2002-03 to just 21% in 2011-12.'

 

It is widely accepted that the UK is one of the easiest countries in which to start a business, and that's good, but business owners need to show some responsibility in return for the 'veil of incorporation' which limited company status affords them. If a company can be formed with £1 issued capital and the directors have no personal liability, there have to be consequences if they are found to be guilty of misconduct that leaves their creditors out of pocket. Insolvency Practitioners are required to submit a return identifying where they believe misconduct to have occurred and they have the right to expect their report to be acted upon. Currently only 20% of reports are taken forward to disqualification and that's not good enough so I'm delighted that the Report recommends 'that the Department provides the Insolvency Service with sufficient, and if necessary, additional funding to disqualify or sanction all directors who have been found guilty of misconduct.'

 

Let's encourage entrepreneurship and initiative but let's not turn a blind eye on sharp practice that leaves suppliers with bad debts and impacts negatively on their business and the wider economy. I happen to believe there should be a minimum amount of issued capital required to form a limited company so that directors and business owners take their responsibility more seriously but I'll save that argument for another day. In the meantime, let's hope the Select Committee's recommendation is fulfilled. It definitely needs to be.

Weekly blog by Philip King, CEO of the ICM -'An added perspective'

I wrote in my blog last week about the danger of imposing prescriptive maximum payment terms on UK businesses and mentioned, by way of example, the reported offering by Canon and Nokia of favourable credit terms in their bid to keep Jessops' shops open as a route to market. 

This weekend the press suggested that the music and entertainment industry is falling over itself to keep HMV outlets open with The Sunday Times carrying the headline: "Music giants rush to keep HMV alive". The report ran: "The world's biggest music labels and film studios are assembling a multi-million pound rescue package to prevent HMV from going out of business. Universal Music, Warner Music and Sony are set to cut the price of CDs and DVDs, and give the retailer generous credit terms……."

Thinking on this reminds me of the wider role that credit professionals play in their businesses beyond risk mitigation and cash collection. When I address 'credit' audiences, I frequently remind them of the value they add to their businesses by contributing to, and in many cases even driving, the sales effort and activity. I refer to examples in my own career when I used a variety of tools and tactics (perhaps archaic by today's standards!) available to me at the time ranging from a credit reference agency to identify and pre-approve business customers for a number of mobile phone connections as a way of driving sales, to creative financial packages to allow my employer (a computer manufacturer) to supply product. We had a network of dealers, few of whom were good – on a credit basis – for any supplies on open account terms at all. Escrow accounts, back-to-back deals, end-user guarantees and many more solutions enabled us to ship product that would otherwise have remained unsold in the warehouse.

And this is where credit management comes into its own; where we can demonstrate real value. It is why credit management is such a challenging and rewarding career. In my 34th year as a credit professional I still get a huge kick out of it and even greater pleasure from leading an organisation of which I'm so proud and which remains committed to delivering the vital support our members need to deliver the cash.

Weekly Blog by Philip King, CEO of the ICM - 'Fatal distraction'

So Wonga has entered the business loan market and added to what is already a fast and dramatically changing landscape.  The introduction of services such as Funding Circle and MarketInvoice have already had a big impact on how businesses can source finance and the recent Breedon Report recognised that alternative funding sources are here to stay.  Couple that with last week's Bank of England Trends in Lending report which said….. "The annual rate of growth in the stock of lending to UK businesses was negative in the three months to February. The stock of lending to small and medium-sized enterprises continued to contract….." and you can see why Wonga might sniff an opportunity.  I'm not sure Wonga is a good solution for small businesses strapped for cash but it's little different to a small business owner funding his business using a personal credit card or two, and that's been happening for years.

 

What worries me more is the suggestion touted in the media and elsewhere that solutions like MarketInvoice are a cure for late payment.  They're not.  MarketInvoice allows a business to sell invoices to a network of institutional investors and it can release the capital tied up in those invoices in real time.  In the short term it can therefore address the cash-flow problem caused by late payment but it's not a cure.  Payment still has to be obtained and, if the invoice is not eventually paid, the amount will have to be refunded to the investor.

The problem as I see it is that – having obtained funding against the invoice(s) - the business owner has removed the immediate cash-flow hole caused by non-payment and can focus attention elsewhere.  The problem hasn't gone away though, and if there is a fundamental problem preventing payment it still needs to be resolved.  Let's not forget, and let's make sure that small businesses don't forget, that the best way to avoid late payment is to get the basics right: knowing your customer, agreeing payment terms in advance, invoicing correctly and promptly, and chasing payment immediately it becomes overdue.  Anything that slows that process, or distracts from it, could lead to far more serious problems; timing is all-important in the management of cash-flow and collection of amounts due and, while attention is elsewhere, the slow-paying customer could fail and become a bad debt rather than just a late payer.

Cashflow keeps business in business and good credit management is vital to maintaining that cash-flow. Mixing messages is not helpful.

http://www.creditmanagement.org.uk/bisguides.htm

Weekly Blog by Philip King, CEO of the ICM - 'Putting the lifeblood back into business'

The highly regarded Ernst & Young Item Club came out at the weekend with a forecast growth for the year of a dismal 0.4%. Although Item Club uses the same economic models as the Treasury, its forecast was much worse than the Treasury's a few weeks ago. Speaking on Radio 4 earlier in the week, its commentator attributed this largely to timing and the dynamic nature of economic factors. The Club says Britain's economic growth will remain anaemic because companies are hoarding their cash, and it will stay on the "critical list" until companies start spending again.

I talk to many businesses of all shapes and sizes and the vast majority tell me that they are struggling to find customers who are willing to spend or make significant investments. This is a feeling particularly prevalent among the SME community whose fundamental priority seems to be one of survival rather than planning for growth or expansion. We're all waiting for real signs of recovery before we can start to feel confident, and until confidence returns we won't want to spend or invest. Until we do, however, "Britain's economic growth will remain anaemic because companies are hording their cash, and it will stay on the "critical list"......" (see above). It seems like the classic vicious circle to me!

There is one thing that companies could do though that would generate cash-flow for the whole business community and would definitely aid economic recovery. Pay their bills on time! Some do, and there are examples of really good practice, but many - big and small - don't, and because of that their suppliers struggle for healthy cash-flow and in some cases fail to survive. The Prompt Payment Code hosted by the ICM for BIS was launched to help change the culture to one where paying on time and to the agreed payment terms was the norm rather than the exception. Well in excess of a thousand organisations have signed up to the Code but many more could do so.

Paying on time has many advantages: it releases money tied up in unpaid debtors; it allows business owners to focus on selling and providing a better service rather than chasing payment from tardy customers; and ultimately it helps more businesses to survive and prosper. The Prompt Payment Code can be found at http://www.promptpaymentcode.org.uk/.

Weekly Blog by Philip King, CEO of the ICM - 'Be careful what you wish for'

In a Financial Times survey of 83 economists (including 11 former members of the Bank of England's Monetary Policy Committee) earlier this week there was a consensus, by a majority of three to one, that the economic outlook in 2012 would deteriorate. It also showed that almost all of those expressing an opinion said the UK outlook would be much worse if the Euro collapsed. I can't say I'm surprised by the findings - I think we've all known for a while that this year is going to be tough and little better - if at all - than 2011.

I quoted Richard Tyler of the Telegraph in my blog on 1 December saying that we should all commit not to say Britain would have another recession on the basis that these things can become self-fulfilling. I'm not sure what impact our words have but I do know something of the positive impact credit professionals can have on their businesses and that is something we certainly should be talking about.

2012 is the year when we, as credit professionals, need to stand up and be counted. We need to make sure that our peers, colleagues, and Boards know and understand the contribution we can - and do - make. When a potential order is difficult to accept, we can engineer payment terms and security to make the unacceptable acceptable. When a coveted order is almost out of reach, payment terms used cleverly can make the unattainable attainable. When a situation with a debtor is looking like it could go horribly wrong, careful management and close contact can make the potentially irrecoverable recoverable.

Whatever sector and industry we work in, and whatever our role, we need to show our professionalism, be proud of our profession, and raise awareness of the significance of our contribution. Two practical steps we might take: firstly, calculate the cash-flow value of one day's sales to our businesses so we can talk about our contribution in terms of hard cash rather than the reduction of one day in DSO (the former is much more meaningful to the rest of the business). Secondly, we can show we are professionals and belong to an organisation representing our profession by wearing the new ICM badge. If you haven't got yours yet, simply send an email to members@icm.org.uk quoting your correct email address and saying how many people currently work in your credit department.

I'm not a great believer in New Year's resolutions but I do passionately believe in setting goals, and showing commitment to them by monitoring progress. For 2012, be proud of your professionalism, stand up and be counted, and don't be afraid to demonstrate your value.

Weekly Blog by Philip King, CEO of the ICM - 'Keep calm and carry on'

Not much good news from George Osborne yesterday then: six more years of austerity, even more public sector jobs to go, falling household disposable incomes, earnings growing slower than inflation until 2014, only 0.7 percent growth in the economy for the whole of next year, and potentially even worse if the Eurozone can't sort itself out. And I'm writing this in a London coffee bar with hoards of police outside in anticipation of a planned march and the biggest strike action for years.

Yet despite there being plenty of reasons to be depressed there was a moment that tickled me during the Chancellor's statement in the House yesterday when the Speaker stopped him mid-stream and said: "The House needs to calm down; one Honourable Member has probably already shouted enough for one day"! The antics of our politicians never cease to amaze me with behaviour that you'd see nowhere else, except perhaps a playground!

So what can we do about it and is bemoaning our lot going to improve things? I think not. I was struck by a tweet by Richard Tyler, Enterprise Editor at the Telegraph. Richard and I don't always agree but I couldn't argue with the sentiment he expressed when he suggested - in response to the expected grim statements in the House and the OECD saying Britain may have another recession - that we should all decide 'not to say it and it won't become true'.

We're surrounded by economists forecasting gloom; most of our businesses are probably struggling, and yet if we keep reminding ourselves how bad things are, we're in danger of talking ourselves into a depressing vortex.

As credit professionals we make a valuable contribution to our businesses in maximising cash-flow and mitigating risk. It's time for us to raise our professionalism further by actively looking for opportunities that the sales team can exploit, by finding ways of doing business that we might otherwise have to reject, and by being seen as the bright corner of the organisation where people can think - and act - in a more positive light.

Weekly Blog by Philip King, CEO of the ICM - 'Tug of war with no winner'

There has been some interesting press comment recently about the tug of war between retailers and consumers. One article talked about supermarket promotions that 'rip chunks out of the manufacturers' profit margins' and are unsustainable. It talked about the impact of declining consumer confidence and the impact of consumers feeling poorer. Although we all like a bargain, the vicious cycle of more promotions and price-cutting chasing more difficult-to-achieve sales is not good news. And there's worse!

We've seen in the last week reports of double digit falls in year-on-year quarterly sales from the major electrical and homeware retailers and analysts saying the outlook is bleak as people grow more nervous about their financial security and put off purchasing decisions. Add this to the recent spate of insolvencies and it's clear that the retail sector is under huge pressure.

But it's not just retail; industrial output is suffering too, and there is an interesting contrast between the UK and Germany. The Office for National Statistics reported a drop of 0.2% in industrial output in July; in contrast, industrial production in Germany jumped by 4% that was, apparently, way above expectations. It seems that foreign demand is weak and, coupled with a drop in confidence in the business market, things are not looking good.

Matthew Rock, editor of realbusiness, tweeted recently about a meeting with a board director of major energy business and noted a big change in mood over just six months - "they've moved from talking of growth to 'cost review'," he says.

All this bad news made me think about how credit professionals can add value to their businesses when their skills are exploited. Good credit management is about finding ways to do business that otherwise might not be acceptable. In my career, I have often worked with sales teams and others to engineer ways of taking business that we might otherwise have declined.

Now is the time for credit professionals to step up to the plate and help their businesses through what are, without doubt, difficult and challenging times. If you've ever been called the 'Sales Prevention Officer', you can dispel that myth by working closely and creatively with the rest of the business and demonstrating real professionalism.