Weekly Blog by Philip King, CEO of the ICM - 'A chorus of disapproval'

I was at the ICAEW Insolvency & Restructuring Group Annual Conference in London earlier this week and took part in a panel looking at 'Breaking down barriers between participants in the insolvency process'. It was a good debate, and the whole conference had some excellent speakers and content, not least a presentation by Justin Urquhart Stewart on the global economy that was both insightful and highly entertaining. The reason for writing about the conference here, though, is that I had an issue with three views expressed by different presenters, with which I personally disagreed.

The first view was that the low rate of corporate insolvencies is likely to continue and unlikely to rise even when the economy starts to recover. I've had a long-held belief that insolvencies will spike when things get better and that remains my view. The demand for cash in struggling businesses will inevitably put them under more pressure and a greater likelihood of failure, and it will be accompanied by an environment in which the banks and other creditors will take a less tolerant view of businesses in distress. We were told that this recession is likely to be different from previous ones and the cyclical rise is less likely to happen. I disagree.

The second, from a politician, was that one of the prime reasons for the zombie companies about which we read (and I've written) so much is the failure of the banks to lend. I questioned the linkage he'd suggested and he clarified his point which was that the original failure to lend had created the shortage of working capital that had created the 'zombie state'. I acknowledge there will be some cases where having more working capital would have made the business stronger and allowed it to perhaps expand and thrive but, more generally, the problem must be that the underlying business model is flawed such that either turnover or profitability is inadequate to sustain the operation. Yes, we want the banks to lend more (to businesses that will be able to repay) but not if it means they will become a bigger write-off in due course.

The third was from an eminent senior banker who said he had yet to see a 'zombie company'. Maybe his definition is different to mine but I see, and hear about, plenty of businesses that are living from day to day covering the interest element of their debt with difficulty and knowing they are in no position to reduce the capital borrowing. And that goes for individuals too who are borrowing from one source to cover the minimum repayment on another.

I guess the value of conferences like this is that we learn, we hear different views, and we get the chance to challenge - or reinforce - our own thinking. I'm often wrong, indeed it's one of my well-known strengths, but I'm not sure I am on these issues.
 

Weekly Blog by Philip King, CEO of the ICM - 'Falling on deaf ears'

I was interested to see the ICAEW (Institute of Chartered Accountants in England & Wales) quoted by James Hurley in the Telegraph last weekend making the same point the ICM had made in its submission to a government consultation in March this year. The consultation related to the implementation of 'Simpler Financial Reporting for Micro-Entities'. The Telegraph article is here and the changes include a reduction in the amount of information filed with Companies House and the opportunity to mix two different types of accounting – the traditional ‘accruals’ approach and so-called ‘cash accounting’.

 

The government claims that the measures will reduce red tape for small businesses making it easier for them to do business. We believe, however, that it will reduce the availability of credit and stifle the economy rather than the claimed positive alternative. Our argument focuses on four key issues. Firstly, to abridge or abbreviate accounts – or indeed any document – you first need to have the full version to work from. Filing less information does not, therefore, reduce the preparation time, indeed if anything it will increase it. Secondly, the presentation of prepayments and accrued income, and accruals and deferred income is vital to understanding the true financial position of a business and to being certain that it is solvent.

 

Thirdly, the absence of reported information will encourage suppliers to simply refuse requests for trade credit rather than go to the trouble of seeking more detailed information from the potential customer, particularly when the amounts involved are small. It is these modest transactions that accumulate into real economic activity and potential growth. Our final argument is that by categorising a business that turns over £440,000 and employs ten people in the same way as a genuine micro-business that might trade solely on a cash basis is ludicrous. What is worse is that the turnover and net assets limits have been substantially increased since the original discussion paper was published in August 2011.

 

Another example of unintended consequences resulting from a failure to listen adequately to the voices of those who live in the real world, I fear.

 

 

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 - 'Reading between the lines?'

Last week Vince Cable announced that the Government was tabling the Statutory Instrument to implement the planned changes to accounting thresholds.  The accompanying BIS press release heralded the fact that allowing 36,000 more companies to choose not to have an audit "will help save UK companies millions every year and free them up to expand and grow their business, which ultimately benefits the entire British economy".

 

How frustrating it is to see the Government fail to grasp a fundamental principle of trade credit and business. Suppliers make credit decisions based on the information available to them; the more information, and the more reliable it is, the better will be the quality of the decision.  It follows that, where the information supports it, credit will be more readily available to the business requiring the goods or service.  Most likely, 36,000 companies will now follow the implicit steer from Government and leave potential suppliers struggling to justify the granting of credit.  Will that aid economic growth? I think not!

 

We should remind ourselves what audits do.  Formally, they ensure the accounts represent a true and fair view of the company's financial situation giving suppliers confidence in the status of the business they're being asked to support through the provision of goods or services on credit.  But they do much more besides.  Very often, they highlight errors in the business's accounting system, records or processes, they identify any gaps or omissions that could be attributable to inefficiency or, worse, fraud, and they provide an independent and objective view of the business.  A good auditor can be very useful to a business; I know the ICM's auditor takes a real interest in its business and our discussions go far beyond the accounts and the numbers.

 

Interestingly, only this week, I saw a draft article for a European magazine by a university academic referring to the positive impact of the changes in 2006 that obliged German companies, especially small and medium-sized ones, to disclose financial statements and the resulting increased transparency!

 

I understand the thinking behind the changes and I have no problem for micro-businesses with very low turnover where accounting is cash-based and simple, but we're talking here about businesses with turnover up to £6.5m and 50 employees.  When an error eventually comes to light and the company fails because it's too late to do anything about it, there will be impacts on the business, its suppliers, its employees and the economy.  The suggestion that something that can be so invaluable is an unnecessary regulatory burden is misguided, naive, and unhelpful.

Weekly Blog by Philip King, CEO of the ICM - 'A journey of discovery'

In my blog last week I mentioned that I'd seen a really good example of the Government working with the wider business community to deliver growth through tangible and practical support.  I said that sometimes Government has to create an environment in which something can be created and delivered without its direct and ongoing involvement.

I was referring specifically to the launch of the Start-up Loans Company, which many of you will by now have seen in the press.  You may also have learned from our own ICM announcement that I've been invited to join the Start-up Loans Company board.

The Start-up Loans Company is different from any previous Government scheme I have ever seen.  It is not a case of ministers throwing money at a problem just to say that they are doing something – money that is often squandered. This scheme is much more focused, and has a specific purpose.

The Start-up Loans Company is a limited company with an independent board chaired by respected entrepreneur James Caan.  While the funds come from the Government purse, our role as a board is to be responsible for identifying appropriate delivery partners, and for setting the ground rules that they will have to follow. Government is stepping back, letting the board lead the initiative, and giving us the autonomy to be able to drive the scheme forward.

Loans will be at a competitive interest rate, and are likely to average £2,500 (though not a maximum as has mistakenly been reported elsewhere).  They will be repaid over a period of up to five years.  Crucially, the initiative – as Lord Young stressed as the launch event – is not just about the cash; it is also about the support the young entrepreneurs (aged between 18 – 24) will receive from a network of mentors across the country, to help turn their dreams into reality.

The board is also comprised of experts chosen to help the scheme succeed.  Each board member has a particular area of responsibility and will be expected to deliver real tangible results.  It is especially gratifying to see the importance of cashflow and credit management being recognised and getting their rightful place. My brief is to ensure we have the right mechanism, process, procedure and drawdown facilities in place to enable the smooth running, and monitoring, of the issuing and recovery of loans.  The sort of things that credit professionals do every day, but not what you'd necessarily and ordinarily expect to see included in a government initiative.

I can't wait to get started, and I'm going to enjoy working alongside Lord Young, James Caan, Bev James, Julie Meyer, Duncan Cheatle and the other directors.  I believe they are going to teach me more than a thing or two along the way and I know I'm going to get as much out of this journey as I put in.  Seeing youngsters set up their own businesses and take steps towards their dreams is a massive opportunity and I feel privileged to be part of it.

Weekly Blog by Philip King, CEO of the ICM - 'Setting the future agenda'

I attended the ICM's 15th Regional Roadshow yesterday. Held at The Royal Armouries in Leeds, the attendance was excellent and so was the content. Gerry Barron focused on the concept that this is the time for credit managers, whereas James Perry, a solicitor from DWF, talked about what credit professionals can do to improve the chances of recovery in legal action to recover debts. I also shared my thinking about the credit management profession and the professionalism of those working within it.

The event prompted three thoughts to stand out in my mind: firstly, Gerry's statement that credit managers should be setting their own agenda in the current economic times; secondly, that we should be proud of our professionalism and the real value we add; and thirdly, that we should be smarter in the way we communicate to the audience beyond the credit professional.

Gerry worked through an example showing how the profit on a simple debt of £50 was eroded by late payment or, worse, non-payment and set out in absolute terms the impact to the business. The Benchmarker module for ICM Online Services available at: http://www.icmos.org.uk/ has a profit erosion calculator that demonstrates the same realism. It's a good way of making you think, and would be usefully shared with colleagues across our organisations as an indicator in real terms of the value we add. There is, after all, a positive impact to contrast with every negative impact - the opposite of profit erosion is profit generation - and that's where our professionalism can make a real difference!

The first and third thoughts are linked: if we're going to set the agenda, we also need to communicate in the right way and using the right language. All too often, we talk about DSO which means everything to a credit audience and almost nothing to anyone else. I believe strongly that DSO is a good and useful measure, especially on a trend basis, but it's rarely appropriate for a wider audience who would understand alternatives such as the amount of available cash collected for the additional amount of cash released into the business. Guess what, if we use graphs for the last two, an upward line is good news that matches the graphs used by our colleagues in almost every other area of the business. Credit people are, by their very nature, good communicators and a simple, subtle change to language and presentation could generate an exponential rise in the way we're perceived in our own organisations. It's time for us to set our own agendas!

Weekly Blog by Philip King, CEO of the ICM - 'Never underestimate the value of good credit management'

The Bank of England published its Credit Conditions Survey for quarter 4 of 2011 last week. In summary, it said that although lenders expected a small increase in overall credit availability in the coming three months, it will be impacted negatively by factors such as the economic outlook and tighter wholesale funding conditions. Furthermore, a key determinant of credit availability will be developments in the euro area and their impact on banks' funding conditions. It noted that demand was down across all areas but most significantly from small businesses where it fell sharply. I guess a succinct way of distilling the 17-page report down to a few words would be: a stagnant economy where lack of confidence is stifling demand to spend or invest, and where external factors could have a major effect!

I'm often reminded by our members - and I in turn remind government in meetings - that trade creditors lend more to businesses than the banks and - just as bank lending decisions impact on the ability of the economy to grow - so do the credit decisions of credit professionals. When they decline or accept an order or contract, they impact on the whole trade cycle for themselves, their customer, their customer's customer and so on either negatively or positively. That in turn impacts on the economy and its capacity to grow. In isolation of course, an individual transaction is probably not material, but cumulatively the impact is immense.

In my blog last week, I talked about showing and being proud of our professionalism - that professionalism is manifested in the decisions we reach throughout all credit management activity. Getting them right, whether we're dealing with multi-national corporations or individual consumers, is vitally important and we shouldn't underestimate the impact we have, not only on our own organisations but on the wider economic well-being.

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