Credit Matters Newsletters

2016 is going to be year riddled with issues that business professionals and owners, might not be prepared for or want to contemplate. All of us involved in operating a business will be caught up in these changes.

The problem will be managing the pace of change. No one person or business can hope to keep pace with all the changes. Furthermore, not all changes will be valid or affordable for your business. At times it is better to move forward a little slower until you are convinced any change is right for you.

It will certainly be beneficial to ensure you have cash reserves available to cover for any emergencies or opportunities which may crop up.

The two aspects which will be constant throughout 2016 is:

1  risk is a factor which will affect us all;

2  despite the level of risk factors, going in to your shell and doing nothing is not a good option.

I cannot advise you where the opportunities will be for your business. However, here are some of the risk factors for consideration in 2016.

Globally - unlike last year, 2016 looks like it may be a difficult year for many. It seems the global business opportunities, with a few exceptions, will be contracting. The signs of optimism we had hoped for in 2015, do not appear likely in 2016.

There are many areas of conflict within the world today causing further disruption to normal trade. It appears few of these conflicts will be resolved in 2016.

Europe is undergoing further change after effectively being invaded by refugees from the major conflict areas in the world. The major disruption to commercial endeavours cannot be underestimated in the short-term. There is every hope of course, the influx of refugees, if managed properly, will lead to long-term benefits.

However, with people being what they are, and with disruption of this magnitude, nothing can be taken for granted. For instance, we are already seeing the divisions of political unrest developing within individual European countries as they struggle to deal with the sheer numbers of refugees.

The world economists and their counterparts in business, do not seem to agree on the best method of restarting morbid business environments. There is strong debate for instance, on whether lowering interest rates any further will prove successful or in turn, cause other problems.

Australia - is said to be in pretty good shape economically, despite a few pockets of disadvantage people and workers. The trouble is; that message appears to be at odds with what is experienced by many people in the wider community.

We are told the Australian economy is in fine shape because business and consumers' confidence in many areas is positive. This evidence is supported by retailers stating they expect an increase in Christmas sales to reach a new high. Other positive evidence put forward suggests many new jobs have been created and the jobless numbers are better than expected.

Other commentators who disagree would suggest otherwise. They put forward the proposition for another interest rate reduction to boost the economy because mining export prices are declining, the numbers of people who are underemployed, youth unemployment problems etc.

Another factor will be the reduced spending power of those workers which will increasingly be retrenched from the motor vehicle manufacturing industry from next year. No doubt a few workers will find new well paid jobs. Many workers of course will not.

Meanwhile the government is using the tax department as its tax collector. As such, the ATO has first call on business bank accounts or directors' assets in the event of non-payment of taxes and superannuation requirements. In such situations where funds are called upon, money which could be spent on goods and services, is drained out of the economy.

In addition, self-funded retirees and pensioners have less money to spend as their investment income reduces with lower interest rates.

In such situations, sadly these people may be tempted to take greater risks to increase their returns. As we know, all too often they end up losing everything to unscrupulous spruikers and doggy investments.

We also observe, almost every retailer has another sales drive and "cutting prices" to increase sales. Whether these increased sales lead to increased profits is another story. It is not unusual to find out at the end of the sales period, profits have not increase one bit.

Currently the low exchange rate favours exporters and other internationally associated businesses. As a consequence, a windfall profit may eventuate which should be as a little bit of cream on top of the normal business activities. Unfortunately, this really occurs.

In many cases, these windfall profits give management an inflated opinion on the profitability of the business. Management then takes their eye of the main business operations and the windfall profits are frittered away on bonuses or wild ideas. The profits on the other hand, could have been used to help make a more resilient business or have been reserved for future use.

Banks and other major financial institutions - within Australia and globally, are one of the greatest hindrances to growing a business or the business community in general. Those businesses most at risk are the micro or medium sized business which often do not have security to secure their lending requirements.

Without access to capital and finance, business enterprises have only three options.

1  Stay small and grow organically or from existing capital reserves.

2  Seek alternative funding, which is often more expensive than that offered by the major banks.

3  To slow pay their suppliers and effectively use them as their bank for interest free loans.

Who said there are no free loans anymore?

Finally, as unsecured lending is a core income producing product of the banks, this begs the question: "If banks are no longer prepared to offer unsecured business credit for a fee, why should a business offer free credit when it is not a core product?"

Business payment options - seem almost endless these days. A new Fintech business with a new payment option seems to start up almost daily. How secure and reliable these new payment platforms are against existing payment options, is still debatable.

As mentioned in our 2015 report, there is another call from "experts" to eliminate cash. Little do these advocates understand the outcomes which will result from a "cashless society".

Two outcomes are obvious.

1 The fear of "big brother" controlling all business transactions, will encourage some business managers to try other payment options.

2  The costs of trying to obtain and install third party payment facilities, plus the fee for each transaction. These are yet another cost burden as the payment facility provider will want their cut of each transaction.

Legislators and Regulators - have always tried and protect consumers from suffering the negative consequences of their own lack of financial discipline. We have seen how successful that has been!

Increasingly, consumers are finding that once they have a bad record because of their lack of fiscal discipline, it becomes extremely expensive and time consuming to obtain finance again in the future. In specific circumstances, businesses no longer offer credit to consumers.

Now we see, where Legislators and Regulators which failed to help consumers control their undisciplined behaviour, extending their reach in to the world of commerce.

The outcome of increased regulation in the business environment, will be the same as it is in the consumer finance area. A debtor that does not want to be held accountable for signing contracts they acknowledge as having read and understood, will have another option to avoid their responsibilities.

In addition, if Legislators and Regulators keep adding layers of costs in order to protect debtors to the disadvantage of creditors, suppliers may stop offering credit.  There is no value in offering credit if you cannot enforce the payment contract at a reasonable cost.

The new proposed rules on insolvency to help start-ups will cause further problems, if initiated. For instance: (i) creditors will have fewer measures to protect themselves from insolvent and phoenix type trading, and (ii) proving and prosecuting directors for insolvent trading and phoenix business operations will be increasingly difficult.

It is all very well for the Government to offer incentives for starting a business, as these costs will be allowed for upfront. What about the business creditor who has supplied goods and service in good faith and after due diligence? They have no chance of costing these insolvencies in to their business operations.

Business owners and managers - in many cases today, are so caught up on the use of technology to reduce their business costs, they have not noticed the hidden costs of poor technology implementation.

Technology is only a tool of business. Technology tools may be implemented without critical thought or support and are often bought for a price and not for performance. In such situations, these tools will inevitably cause as many problems as they are said to solve.

The best business operations will continue to use appropriate technology for their business backed up by committed employees. Committed employees will always provide good value to the business over the long-term.

One of the ongoing and fascinating observations of the business community is to note the behaviour of many management teams. Often these managers are great slow paying tacticians in regards to their suppliers' invoices. Unfortunately, they seem to have little understanding of how to combat their business's own slow-paying customers.

Creditworthiness - seems to be less valued today than the opportunity to make another sale. Hence completing due diligence and working with customers to ensure they pay within agreed terms is often completed on an ad-hoc basis or when cashflow is critical.

I suspect until a business is badly burnt by slow paying customers and bad debts, there will be little change in management thinking.

Organisational and Personal Integrity - will always provide you with both critical and positive advantages, in both good and bad times. A good reputation is literally worth dollars in the bank.

Social Media - as we have seen this and previous years, will continue to show us the best and worst in people. 

The impact of social media will continue to grow in our personal and business lives and you ignore its effects at your peril.

In Summary

The trends for 2016 appear to be for a contracting business environment, both in Australia and globally. In addition, legitimate and affordable credit from recognised lending institutions at a fair price, will be difficult to obtain.

Holding back the growth of business will be the amount of debt, in all countries and at all levels of government, institutions and consumer. The diminishing returns of investments, for self-funded retirees and pensioners, will further impact negatively on the growth of business.

In this type of economic environment, where will people and businesses, get their money?

It appears the business community will probably be the funding source of choice. Why would you go anywhere else? You can obtain an interest free loan and without the need for security. What is even better, most of the time, there is little or no penalty for not paying the account.

When times are tough, as criminologists explain, people such as your customers and employees, will steal to survive.

In the tough times ahead, business managers would be wise to invest (i) in robust due diligence practices, (ii) on technology suited for their business and (iii) in reputable stakeholders.

Understanding the art of business would be advantageous. The art of business also involves how and when to say NO. At times NO is the only answer. On other occasions, NO maybe the word that starts a more equitable sales and payment dialogue.

Cash has and always will be king. When people want your cash, they call it lazy money or you can get a much better return by ...!

It may cost you a small fee to keep your cash safe at the bank. The truth is: cash is never lazy. It is just waiting for the chance to help you seize another business advantage. In tough times, there will always be good opportunities providing you have the cash.

In conclusion, 2016 will be a tough year for many. If you are in business, you just cannot sit by and wait for it to get better because you will be overtaken by other events. You will also miss out on the opportunities that become available, even in the tough times.

See you at the end of 2016 and all the best in between.