Business Advisory Blog Business management information from Robert Griffin.

September 15, 2011

Managing Risk – Get started

My last writing on this was the beginning of summer. At that point I stated that would be a good time to take a step back from the business and give some thought to where your business might be headed and asked if you had thought about what was ahead and if you were prepared for it. I also explained the need to assemble a team of managers and owners to do a  SWOT analysis of all aspects of the company.

Now that summer is coming to a close, fall is here and everyone is back from vacation this is a good time to get started. So where do we start, just take at look at the swings in the market every day and all the various predictions as to where the economy is headed, most of which are not good. Have you looked at how the various changes predicted for the economy might impact your business? What about the still shaky financial markets, is there a potential pitfall there to disrupt your business?

So how do we do a SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis on the economy or the financial markets? By looking at how the various area of each of those could impact your company. To do that think about the following questions:

Where are your markets, do you sell in to Greece, Italy, Spain, Ireland, etc.? These are economies that are in trouble and therefore your business in those economies is
at risk. To take that thought one step further, do you supply product to any of your customers who are not in those countries but who sell into those economies? If you do then your business is at risk and therefore that is a weakness or a threat to the success of your business. On the other hand, if you do not, then it is a strength.

On the other side of that coin, do you buy raw materials or services from companies in those countries? If so then that supply chain is at risk. Economies and governments that are in financial trouble cause problems for businesses that import and export to those countries do to impacts on available financing, import an export restrictions, etc. So if this is the case you have a weakness that could significantly disrupt your business.

To bring this, what I call, external impacts analysis, closer to home, lets talk about your banking arrangement. I know, I know you’ve been dealing with the same bank for years, you’ve never missed a payment, you’ve had the same loan officer for a decade, you’ve always met your covenants, etc., etc.. I understand, and you’re not alone,  I’ve seen lots of those  situations. But I have also seen many times, in that same scenario, the following. You get a call from your long term loan officer and now friend and he wants to stop by and see you. You say sure, of course, and when he comes in he informs you that the board voted to change the banks credit profile based on the current banking environment and the uncertain economic conditions. Based on that change you no longer fit the profile of businesses they lend to. So they want you to pay your loan down by 50% within 90 days and they will then give you six months to find a new lender for the remainder. Can you meet that requirement? I would assume not otherwise you wouldn’t have borrowed the money n the first place. What would you do?

I could go on and on but my point is you need to start by looking at all of the things external to the company that could impact your business and if it did how would you recover. In some cases you will find the risk minimal and decide to live with it. In other cases where the risk is higher and the probability of occurrence is greater you should develop a contingency plan. But if the risk is significant and the probability is high you should find an alternative and implement it as soon as possible because the impact would be to great for the business to absorb.

The common thread with these three items, customers, suppliers and banks, is they are all external to your company and in the past not very many business managers looked at the economies of where there customers or suppliers where or thought about their bank much once they had one. That is not the case today, you must consider all of these things and  more on an ongoing basis.

Robert Griffin
http://www.griffinadvisoryservices.com

March 18, 2011

Stagnant US Unemployment

I have read where various supposedly knowledgeable individuals when stating their solution to the continuing high rate unemployment that we need to increase our exports. Sounds logical but if you look at it historically that has not been a cause an effect relationship.

Fourteen years ago in 1996 we had an unemployment rate of 5.25% with approximately 7.5 million people out of work. At that time we were exporting $68.3 billion a month and importing $76.8 billion a month. Four years later in 2000 exports had increased 32% to $90 Billion and there was a corresponding 30% drop in the number of unemployed to 4.0 million or a 24% unemployment rate decrease. Imports at the time had increase 61% to $124 Billion. So that tells us that our ability to produce product kept pace with export demands. However, there was obviously a huge market expansion in the US the required us to import that we could not, or chose not to produce.

Four years later in 2004 Exports had increased again this time by 13% to $102 Billion per month. Imports increase by twice that rate or 26% and now total $156.6 billion. Over the eight years from 1996 to 2004 Exports have increase 50% while Imports have more than doubled. So in the two four year periods from 1996 to 2000 and 2000 to 2004 Imports have increase by twice the rate of Exports.

Well that’s not so bad if we continue to put more people to work and keep unemployment from expanding. But we didn’t. By 2004 the unemployment rate had risen 31% and was back to 5.25% vs 4% in 2000 and the same as in 1996 and the number of unemployed had risen 52% and now at approximately 8 million people actually exceeded the 7.5 million unemployed eight years earlier in 1996. So Exports increased but the employment picture declined.

Moving ahead to 2008, when Import and Export expansion peaked in July, Exports had risen to a monthly rate of $165.7 Billion, an increase of 62% from 2004, while Imports had increased to a monthly rate of $232 Billion an increase of 48% from 2004. If the theory of Exports = Jobs is correct a 62% increase in Exports must have made a huge dent in unemployment. Well unemployment did go down, it dropped from 5.25% to 5.0% and reduced the number of unemployed from 8.0 million to 7.5 million. That’s a drop of just 6.25% versus a 62% increase in exports or just a 10% correlation. So in the twelve years from 1996 to 2008 Exports increase by $97 billion per month or 142.5% and yet the number of unemployed remained at 7.5 million people the same as in 1996 and the rate down just .25 percentage points.

Since the economic debacle that followed 2008 where are we now, has anything changed? Well obviously everything got worse but did the relationship between employment and exports change? By September of 2010 Exports had declined 7% to $154.1 Billion since the 2008 peak. During that same period the unemployment rate essentially doubled to 9.6% from 5%, as did the number of unemployed increasing from 7.5 million people to just under 15 million.

Yes I know unemployment has gotten better and is now just under 9%, a 6.6% decrease in the six months since September 2010. But lets remember, while the total number of people classified as unemployed has declined the number of people that have given up looking for work has increase 10% over the past year to 2.7 million people. These are called “discouraged workers” and are NOT included in the number of unemployed or the unemployment rate. So while we show an improvement that is somewhat offset by an increasing number of those that drop out of the calculation.

During that same time frame exports have increased by nearly 7.5%, again a better than the improvement in unemployment without consideration for the impact of improving GDP had on the unemployment number.

So it appears unless what we’re Exporting changes to something that requires significantly more people to produce, history tells us, there is no way Exports are going to help the number of unemployed to any great degree.

Robert V. Griffin

http://www.griffinadvisoryservices.com

 

December 8, 2010

Managing Risk – So what should you do?

In my last post “Managing Risk – Who’s doing what?” I gave statistics from both CFO.com and the AICPA as to what companies are doing, or not, about Risk Management and how prevalent formal Enterprise Risk Management (ERM) really is. What the survey says is it’s not prevalent at all at least in the formal sense of ERM. But respondents to surveys from places like CFO.com and the AICPA tend to be companies large enough to support and warrant a CFO and/or an Accounting Manager or the like who are in positions that follow things like CFO.com and the AICAP for reference information and staying current in order to see these types of surveys. I would say hence the term “Enterprise” versus say, Company or Business, or just plain Risk Management.

So if we have an idea what large companies are doing what are small and midsized companies doing relative to managing risk? It’s difficult to say because we don’t have survey specific information to give us an indication, but from those I talk to the responses I get when I bring up the topic of Risk Management to management is we’re already working more hours then ever before, we’re making less money, costs are at the lowest they can be and stay in business and my customers won’t give us any indication as to what they’re business outlook is. Working harder and longer and doing with less is always the first response and that may help your business survive, right now, and management or the owner may feel better because of it, right now, but it leaves a lot not being looked at or at least thought about and that creates a long term risk in and of itself.

My response to management is that they have to periodically back out of the day to day details of running the business and put an action plan together that can be worked on to identify the long and short term risks and opportunitiesl of the business.

Obviously their next question is how do I do that? Where do we start? My answer to that is to do a SWOT Analysis which I find to be very helpful as to the areas to look at and help keep you on track.

We’ll get into the details of a SWOT Analysis next time.

Robert V. Griffin

http://www.griffinadvisoryservices.com

August 24, 2010

Managing Risk

As I said in my blog Risky Business “Every business is at risk every day of having something happen that has a significant negative impact on that business.” So if that;s the case how do you go about dealing with it, i.e. minimizing the impact on your business?

National Association of Corporate Directors (NACD) established a Blue Ribbon Commission on Risk Governance to look into just that. Now most of what NACD does deals with large, mainly public companies, with boards of directors so their aim is towards that audience. However, that does not mean their findings and recommendations are not useful for smaller private companies as well and even at an operating level.

The statement by Admiral William J. Fallon (U.S. Navy, Retired), co-chair of that NACD commission stated that “Risk governance is about three things: understanding the limits of acceptable risk, providing confidence and guidance to management, and anticipating events to set yourself up for success.” It seems to me that any business at any size can think about those three things.

1. Every company, regardless of size, needs to establish the limits of their acceptable risk. But first you have to determine what and where those risks are. Financial always comes to mind but what about customers, vendors, regulatory, human capital, etc.

2. Providing confidence and guidance to management is as simple as having management involved in the risk management process. Whether you are the one and only manager or you have a sizable staff input and involvement of managers is critical.

3. Anticipating events to set yourself up for success is to me simply carrying out items 1& 2. Doing those things identifies what could happen that would be detrimental to your business thereby allowing you to plan a way to avoid those things and therefore succeed.

So what big public companies need to do, so do smaller companies, public or not, just do it differently while using less resources of course.

Robert Griffin

July 22, 2010

Econometrics Continued

So with the economy significantly changed away from the traditional hard manufacturing base to what I would refer to as soft sector based we have to find a new interpretation of what an “Improving” economy looks like versus what a “recessionary” economy looks like.

Lets take jobs. Soft sector jobs, i.e. IT (Hardware and software), and Services (legal, financial, insurance), are areas where output can be increased without a proportionate increase in people, i.e productivity gain. Then when people are added they are professional level people.

On the other end of the spectrum services such as fast food, and hotel and restaurant jobs may increase in relation to the economy but are these real living wage jobs? Is this disposable income or survival income?

So then what’s in the middle? Where are the jobs for those that didn’t or couldn’t go to college, and yet paid a living wage? Answer, those jobs left with the manufacturing work and are now off shore.
If we want to know how the economy is doing jobs is a very important factor and just counting the number of new jobs is useless, all jobs are not created equal. What kinds of jobs and at what pay level is even more critical.

Robert V Griffin

http://www.griffinadvisoryservices.com

July 1, 2010

Risky Business

Every business is at risk every day of having something happen that has a significant negative impact on that business. Ask BP!

Well, no kidding, everyone knows that.

Okay, if everyone knows that, how come so few can tell you what those risks are? (Besides the standard – lost sales, higher costs, and declining selling prices.) Worse yet, few of those who have at least thought about it that far, know what they’d do if any or all of those things happen.

So what else could go wrong?
• What if a key supplier goes out of business?
– Do you know how financially strong they are?
– What would you do? How long would it take to qualify a new supplier and get material?

• What if your bank calls your revolver or changes the terms so you have to write a big check to meet covenants? Do you have the wherewithal?
– You say, “That can’t happen to us. We have a long standing relationship with our bank and we’ve always met our covenants.” Well, you’re wrong. The board at the bank can vote to change terms anytime they want. It may have nothing to do with you. Maybe they just want to lower their risk profile; maybe they feel they have too much out in commercial revolvers in this economy. Whatever the reasoning, you will be impacted. Point is: they can change any time. I’ve seen it, and you will have to deal with it.

• What if you have a major business interruption, for example, a local power outage for two weeks. It happened here in Central MA two years ago. Or what if your business had a fire or other unexpected catastrophe?
– You can’t deliver to your customers. How will you get back up and running? And how long will it take?
• Your customers around the country and the world don’t know, nor care, about your localized problem. They’re worried about their own business. How do you keep them or get them back?
• Do you have business interruption insurance?
– If so, you’ve had to go through the steps of planning for this.
_ If not, you should at least look at planning for this type of occurrence.

Bottom line: You need to think about the things that can negatively impact your business and plan for them so you don’t become the BP of your industry. Obviously, even very deep pockets do not replace good planning.

As Dwight Eisenhower said, “In preparing for battle, I have always found that plans are useless, but planning is indispensable.”

Robert Griffin
http://www.griffinadvisoryservices.com

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