2018 THE YEAR THAT WAS

In 2018 we saw the complexity of the modern business and social environments continue to grow. This means we all need to keep working on our businesses, not just in them.

This year we saw the first signs of the next recession starting to become evident.

My core observations as a financial risk management professional, business owner and front-line operator follow.

Globally –2018 started with some optimism the business environment would improve over the coming year. Indeed, there have been signs in a number of countries that things are on the improve, particularly in Australia and the US.

However, there are still the existing problems which were highlighted in previous newsletters for the global community. Increased business volatility, increasing debt in all its forms, the rise of nationalism and the new trade wars. Then there is Brexit where there seems to be a decline in business optimism within the UK and Europe. In the US, there seems to be a rise of business confidence, however there seems to be a decline in new business start-ups.

Nothing seems to have changed in people’s perceptions about China, which is an ongoing conundrum for many experts. The accuracy and quality of the commercial information coming out of China is still subject to discussion. It also appears, if you dare criticise China’s actions in any way, there are trade implications.

When you add all these factors together, it is difficult to see how global trade can be increased by any meaningful amount.

Equally disturbing are the continuing scandals which occur in every country. The use of social media, changing attitudes to business practices, changing community expectations and a willingness to challenge the status quo, are amongst the factors causing scandals to become exposed with increasing frequency.

Government interventions continue unabated which often defy common sense, add additional costs and red tape which restricts genuine and honest businesspeople. In the face of overwhelming evidence that many of these interventions only help the unscrupulous and fraudsters, governments persist with their interventions.

Stock markets globally and here in Australia, have lost value over the last year. Housing prices are also coming off their highs and a great deal of money has been lost due to the decreasing values in all cryptocurrencies. The consequences of the losses in the values of these assets has not yet been fully felt.

Probably the greatest warning sign that business factors have not improved during 2018 has been the continued rise of global debt in all its forms. Even more importantly, much of this debt is still hidden by creative accounting practices and undocumented lending.

All the above factors are compounded by the use of technology by people with malicious intentions.

As a final observation, there is increased commentary about the potential of another recession which is likely to be exacerbated by a global tightening of credit.

Australia – according to the economic commentators, is supposedly in reasonable economic shape, albeit there are areas of concern.

There are good news stories and the mining industry seems to be selling more and increasing profits. Meanwhile, the government budget seems to be benefiting from these increased sales.

In the analysis of economic conditions, the negative factors which impact on the success of the Australian economy, are often overlooked or minimised. The social issues of more people accessing aid, adult under employment, youth unemployment, drugs, gambling, and the number of people without a regular roof over their heads, are not going away.

The rise in robberies on homes, the elderly and soft business targets continue. It is a well-known fact within the field of criminology; that more “good” people will commit crimes in tough times just in order to survive.

Australian households continue to be the most indebted in the world and this is starting to affect retail sales in most situations. This situation will be exacerbated as house values fall due to the effects of the Banking Royal Commission, the loss of many Chinese buyers, and the banks changing attitudes to refinancing interest only loans.

In regard to China and Asia, our politicians, business experts and academics, seem to be putting all our economic eggs in the one basket. If there are problems within the Chinese economy or conflict between our Asian neighbours, the ramifications could be less than pleasant.

A final indicator that all is not well is reinforced by the RBA being unable to raise interest rates. They do claim however, the economy is improving and is expected to improve, plus there is no imminent debt crises.

In summary, these are all classical signs that the Australian community may not currently be in a good place, despite what many proponents would suggest.

Banks and other financial institutions

The current banks’ strategies are providing alternative funding providers with opportunities with their range of products and easy access to finance. However, when we start to notice such terms as “shadow banks, shadow bank loans, liar loans”, the potential for unforeseen negative factors to cause problems cannot be overruled.

Crowd funding seems to be another viable funding source. To date, there does not seem to be too many issues raised by disgruntled stakeholders, however it would be prudent to review this category of funding if you are considering becoming involved.

There are a lot of possible negative factors at stake in the current business environment with business funding. Desperate business owners or those seeking instant success and looking for finance, do not always explore all the factors of these alternative funding models properly.

As we come to the end of 2018, we note the effect of The Royal Commission into the Banks has impacted on their practices, many of which have been deemed unconscionable. As a result, they are trying to adjust and this is impacting on all levels of lending. There is no doubt all borrowers will face increased difficulties when seeking finance.

Business payment options – are now available in such a range it is becoming confusing.

The viability of all the new payment options over the long term is still unknown. Another concern will be identifying the ownership and the financial resources of these finance providers. The truth is, not all these new business enterprises and payment methodologies will survive over the long term.

Other issues affecting payment options these days include the cost of establishing and operating the different payment facilities. Then there are the continuing disruptions of service because of outages with service providers or power failures which make digital payment options inoperable.

In light of the aforementioned issues, many businesses still seem to survive and grow by only accepting cash.

In discussing cash and its demise as a payment option, the propaganda from advocates, federal bodies and businesses continues unabated on its demise. One problem however is the incorrect figures on the frequency of cash transactions verses digital transactions. These figures present a totally false picture of the number of cash transactions verses digital transactions. After all, because cash rarely leaves a footprint, it is almost impossible to present an accurate figure of transaction numbers.

The other reasons these advocates voice their approval of digital payments include a failure to realise the implications of a cashless society, are lazy, believe it will make business easier or is to control your money.

Payment by and the ownership of cryptocurrencies are ongoing. The main issues with cryptocurrencies include: (i) accessibility, (ii) trust, (iii) usability, (iv) avoidance, and (v) the lack of a stable price and finally, but not least, the focus by government and central banks.

Governments and central banks hate secrecy, uncertainty, loss of control and missing out on revenue. Consequently, if governments believe they are losing control, they can easily declare cryptocurrencies illegal. After all, if they can declare bank notes of a particular denomination as illegal tender, they can do the same with cryptocurrencies.

On the other hand, if governments start endorsing cryptocurrencies, then that will only because they have found a way to control the process and gain control over transactional data.

Unfortunately, many of the later day converts to cryptocurrencies will continue to lose money.

Legislators and Regulators - continue to try and protect consumers and small business operators from the consequences of their lack of business acumen and financial disciplines. We know this from the stated purposes of their regulation and legislation, plus the lack of equal rights for creditors and honest businesspeople.

The intentions behind many do-gooders and government initiatives are well meaning and they have the best of intentions. The problem however is their solutions often produce unintended and negative outcomes in the real world.

There are many examples that with every do-gooder or government initiative, the fraudsters and others with less honourable intentions, benefit at the expense of genuine business people.

The Privacy Act continues to be a major negative business issue. Employees and customer fraudsters all too often get away with committing their crimes because of the Act. As a result, business people suffer further losses when these fraudsters commit further crimes.

Despite promises to reduce government red tape and regulations, it continues to increase and genuine business people and organisations are continually penalised by these costs. Meanwhile, the less ethical and fraudsters get away selling their services and products cheaper because they simply ignore these government imposed costs.

Business owners and managers – regretfully, continue to show they do not learn from their own mistakes or those from the history of business. As evidence of these shortcomings, we see many of these people failing to learn the lessons of the GFC.

We also see business owners and managers focused on the short term of cheaper business inputs to reduce costs. As a result, they believe technology and outsourcing is the answer to all their problems. As circumstances and history shows however, unfettered use of technology and inappropriate outsourcing only changes the nature of problems. The end result is that this focus on short-term success places their long-term financial wellbeing and reputation at risk.

The shortcomings of many business operators are also seen in their failure to understand that people are the link between each business and each part of every business. After all, people have the money to buy things and to make buying decisions, not technology. It is also people who can communicate effectively between supplier and customers and within each business. Yes, technology can help improve communication. Equally important, technology can impede communication.

Those business owners and managers which follow the herd and use technology, outsourcing and other cheaper business inputs, often join their competitors in a race to the bottom and failure. In such situations their business loses any point of difference with their competitors and often upsets customers. As a consequence, business disruptors will enter into the marketplace as the incumbents fail to respect their stakeholders’ needs.

Business people now also fail to understand the art of business. One good example is the fact there are customers willing to pay a fair price for quality and peace of mind. This is unfortunate because these customers are usually easier to deal with, forgive an occasional mistake, are more loyal and therefore, more profitable.

Creditworthiness – is a priceless commodity too often taken for granted. Your creditworthiness is often a guarantee of receiving better service, a pricing advantage and peace of mind.

There are no financial measurements on the value of peace of mind in business. Never the less, there are always financial benefits which are worth dollars in the bank when things go bad. No business works perfectly and bad things do happen from time to time.

Organisational and Personal Integrity – are becoming increasingly important to the younger generation, to your business stakeholders and to the general public. Your integrity is one of the foundation factors which helps you survive and grow your business.

Your reputation is another key to business survival, whatever your motives for the longevity of your current business. For instance, and it is a legitimate business objective, it is okay to start a business with the view of selling it once it becomes profitable. Maintaining your long-term business objective to be seen as a credible entrepreneur, is therefore essential.

On the other hand, if you are looking to build a long-term business, your individual and organisational integrity will be one of the core factors in the survival and growth of that business.

Affecting future B2B commerce will be the changes in attitudes and requirements when extending credit. The focus of current government legislation, the beliefs of the “entitlement generation” and as the costs for creditors increase, means the laissez-faire fashion of extending B2B credit will become increasingly and commercially unviable. In future, your creditors and financial providers may expect their customers to pay on time, be socially acceptable and legally compliant. With such expectations, there will be an increasing focus on your reputation, financial creditability and social acceptability.

Social Media – is growing ever more powerful in the success of your business.

There is nowhere to hide anymore. If you have a secret which may harm your reputation, you can only pray it never comes to light. Furthermore, when bad news is exposed, responding in the old-fashioned way of denial and silence will just not work

More than ever, if you post something you shouldn't, or act contrary to what is deemed to be acceptable behaviour, there are many possible negative consequences, including conviction by association.

As social media continues to become more invasive, it would seem your future focus should include trying to act responsibly in order to protect your business and personal reputation at all times. We all make enough mistakes. To continue to make mistakes because of sloppy or unethical behaviour, will only hinder your business’s recovery from the negativity of mistakes, even harder to overcome.

Additional Threats to Business

In the later part of 2018, these developments have occurred which are of concern.

1          A decision in the High Court which has thrown doubt on the use of casuals in the work force. Despite finding casuals, despite being paid a higher wage in place of normal employee entitlements, are entitled to normal employee benefits, has ramifications for all concerned.

Whilst there are cases pending which will dispute this decision, the effect of the unknown is causing extreme stress for many.

2          The ATO is now seeking to overturn the established convention of what advice is still protected by legal privilege. Again, there are serious ramifications for all concerned with the push by the ATO access such information. It can also be expected for the possible extension of this right of legal privilege to other matters in the future. As we all know, once a convention is broken, no one really knows what other legal areas may be affected.

3          The Australian Government is considering “late payment shaming” of governments and big business which delay payments to smaller businesses. This practice is already occurring in the UK.

In addition, the call for whistleblowing protection and legislation is increasing, plus the call for increased action against bribery and cartels.

4          As the tightening of, and the ease in obtaining credit starts to affect consumers, home borrowers and business, the chances of a recession in the near future are increasing. Historically, credit restrictions have usually been one of the main causes of a recession.

In Summary

The ramifications of the events seen and reported in 2018, send a clear message to all business professional and business enterprises that nothing stays the same. Furthermore, changing social and global issues, indicate further turmoil is to be expected in 2019.

I would suggest the key messages of 2018 were:

1  Business people have continued their focus on quick and cheap fixes to their problems without understanding the factors which are required to create a profitable long-term business.

2  Technology and outsourcing has continued to be used inappropriately to the point where it is starting to impact negatively on the long-term viability of many business enterprises.

3  Cybercrime and criminality continues unabated and with increasing reach into our lives.

4  The amount of sovereign and household debt has continued to grow and impede local and global business development.

5  There are no secrets anymore due to impact of social media, disenfranchised employees and whistleblowers.

6  Government legislation and the costs of do-gooders will continue to impact negatively on creditor rights at the expensive of honest and genuine businesspeople

7  Reputation and financial creditability have become even more important factors in the survival and growth for everybody, especially as another recession looms.

2019 and Beyond

There is no doubt, further turbulence can be expected in 2019 based on what we have seen in 2018. Business owners and managers in particular, will need to be very careful to ensure their business is protected by taking care of who they do business with and protecting their cashflow. After all, nothing beats cash and a business without cash cannot survive.

Those that prosper will do so because they understand their business does not operate in a vacuum. Every business and person, lives and operates in both a local and global business community. What affects one community or country, affects another.

In such environments, it would seem the traditional practices of operating fairly, accepting the value of discipline, working with the best stakeholders and never stop trying or learning, provides the best hope for survival and success.

2019 THE YEAR THAT MAY BE

The best thing you can say about 2019 is that it will be a year of turmoil for the majority of the global community. Unlike other years, volatility will be the order of the day.

In every likelihood, the recession we are not due to have, will happen. I say the recession we are not due to have, because many people refuse to admit one might be imminent. Only the naïve and those with vested interests will say that all was well in 2018 and there were no signs of the possibility of another recession occurring in the near future.

If you look at life of business and land cycles, there is every likelihood the next recession will arrive in 2019. The severity of the next recession will not be known for some time.

As always, there will be casualties. On the other hand, good profits will be made by those who prepared for the possibility of the recession and will have access to CASH.

Globally – there were signs of growth in a small number of countries in 2018. However, there were increasing numbers of countries which showed they had slipped backwards.

The effects of Brexit will continue to affect the UK and other European economies. Overall, business is unlikely to grow within the EU especially if problems occur in Italy and Greece.

The trade issues between Trump and China may escalate and negatively affect business growth between the two countries. However, people being what they are, there are likely to interesting business growth between the two countries aided by third parties.

The US economy improved in 2018 and yet there are people who say this improvement was built on unsustainable factors. It will be interesting to see what develops in 2019.

The number of countries involved in conflicts, insolvent, or suffering political turmoil, doesn’t seem to get any better. It is difficult to see how these countries can contribute to world growth in a meaningful way until they resolve these issues and start growing their economies again.

Governments in every country continue to live in the vain hope business can be conducted in a fair manner and tax avoidance can be minimised. Therefore, the growth in red tape, regulation and legislations grows unabated. The result of these interventions have been highlighted previously and will probably get even worse in 2019.

Creditor rights continue to be stripped away by government regulations and customer belief they are entitled to credit without paying it back. When you add the increasing costs to defend their rights, creditors may reduce extending B2B credit and then, only to the best customers which pay promptly. At the end of the day, if extending credit does not lead to more profitable sales, then what is the point of offering credit?

The great conundrum for governments and bureaucrats is that if they continue to create legislation and regulations which enable debtors to avoid their responsibilities, then creditors are likely to start cutting back on extending credit.

The other great blight on growth is of course, the sheer size of outstanding global debt. Much of this debt remains hidden and out of sight. The most important aspect of this debt, which is rarely mentioned, is the “Great Race” between cashflow and profits verses debt. Until profits and wages are great enough to start making substantial inroads to the outstanding debt, the economy will remain fragile.

Last year, we were reminded the last GFC occurred 10 years ago and there are signs that the next recession is not far away. We should see signs in 2019 of the next recession. Irrespective of whether it commences in 2019 or later, it would seem sensible to start getting your business and home affairs in order sooner rather than later.

Australia - is not looking so good for 2019.

Despite the positive noise of new businesses being created in the Australia, there are major problems ahead for 2019. Consumers are losing spending power to the increased costs of living, their current indebtedness and the loss of value in their homes. The loss of value in housing will also impact negatively on government revenue.

In addition, the falling incomes of investors and pensioners with access to safe investments with a reasonable return are disappearing. As a consequence, these people are also losing their capacity to spend.

There are still large numbers of underemployed, people without good dollar earning jobs or the semi-literate who continue to lack employment opportunities. The continued focus on reducing employee numbers with the indiscriminate use of technology and AI is not helping.

The mining industry has enjoyed price rises and increased profits in 2018. Whether this situation will continue into 2019 is another issue.

As this newsletter is being written, we note the housing market in Australia appears to be cooling off in almost every state of Australia. Whether consumers will have the funds to continue propping up the retail market, without increasing their debt, is questionable.

The China-US relationship with its political and economic relationships could cause further anxiety for the Australian community, with two questions to be answered.

What happens if the US-China relationship sours beyond the point of economic and verbal hostility and the Chinese economy slows down in a material way?

As a confirmed “friend” to both the US and China, Australia could well feel the effects of any dispute, and not in a good way.

If we are honest, the strength of the Australian economy is unknown. Realistically however, the negative factors seem to outweigh the positive factors and leave many people concerned.

Banks and other major financial institutions – will continue to send mixed messages about their willingness and ability to support micro and small businesses. As the Banking Royal Commission winds up and its report becomes available, what effect this will have on bank lending is unknown.

It is realistic to expect there will be some negativity and less lending to micro and small business plus a tightening up on home lending.

As a result of new bank lending practices, business owners are seeking other finance providers via brokers or other forms of finance. Unfortunately, this often means borrowers face the risk of increased costs, unconscionable business practices and fraudsters.

In Australia over the last few years we have seen the establishment of The Australian Small Business and Family Enterprise Ombudsman. There are expectations they will continue to assist micro and small business operators interact with the banks (and big business) to achieve more positive outcomes.

Business payment options – are continually being developed and the take up of these options to suit “customers” is increasingly costly for business. Alongside the call to eliminate cash there are any number of issues for business to consider.

Amongst the issues for all businesses, what happens when there is (i) no power or (ii) when there are service provider outages, (iii) security of digital devices are compromised hacked?

With the collapse in the value of cryptocurrencies again we must question their suitability as a value proposition. There is no question on their viability as a methodology for the future. Currently however, when values decrease or rise on an unregulated action or suspect event, then cryptocurrencies have some way to go before becoming a mainstream payment option.

Legislators and Regulators – will continue to try and protect consumers from their lack of fiscal and business discipline. Unfortunately, the fraudsters and other criminals will just be provided with new strategies to rip off the regular business person and creditors.

Meanwhile these changes will create another expensive liability for those business organisations which prefer to operate within the law. As a result, there are likely to be negative consequences for both consumer and business customers. These consequences will lead to many problems which the government will deny are their responsibility.

Business owners and managers – will continue to be hounded about using technology in their business based on the premise it saves money.

As the reach of technology increases in business, the perceived value of human interactions will continue to be minimised. Over the long term however, it will be found that technology solutions did not solve all problems, brand new problems never before conceived, will appear and affect the business negatively.

As their employees are being dumbed down by the use of technology and so it appears are their senior managers, other business advisers who are all becoming less astute. We will see this effect as major corporate businesses continue to implement technology systems, outsource their payables and receivables, and retrench their experienced and professional employees.

Furthermore, based on my front-line work experiences, a number of major corporate businesses have little idea of the extent of their financial and operational liabilities. Therefore, it will not be surprising to see a number of corporate businesses with problems in 2019.

Creditworthiness – will be of increasing importance in 2019 as suppliers start to realise they are being ripped off by their customers both criminally and via organisational inefficiencies. Your business creditworthiness, integrity and supplier friendliness will be the key factors in (i) obtaining credit, (ii) being granted a credit extension, and (iii) seeking profitable business deals.

The old management view therefore that risk management impedes the business’s ability to sell and market its product will increasingly be viewed as obsolete. Consequently, completing due diligence will become the norm. The fact is, a positive risk management focus is an essential factor in doing profitable business.

Organisational and Personal Integrity - will always be one of the key reasons your main stakeholders are willing to work with your business or provide the best terms of trade. It is as simple as that in the coming years.

Social Media - is the elephant in the room. It can be a powerful friend or your worst enemy. As a result, it would be wise to become more aware of how to deal with the consequences of being exposed negatively alongside the marketing of your business and products.

In Summary

The year of 2019 will probably see the signs of the next recession, if not an actual recession.

Whether you like it or not, recessions occur periodically as part of normal business cycles. The 10^th anniversary of the GFC occurred in 2018.  In addition, property downturn cycles operate to a time frame of 14 years, and the next property downturn is due in 2019.

In addition, much of the last GFC debt is still with us, plus new debt continues to increase.

When the next actual recession is declared cannot be predicted. Governments, their economic advisers and Central Banks will do all they can to avoid declaring the arrival of the next recession, until they have no option. The main thing we can all do in the meantime is to look for the signs it is coming and try to protect ourselves.

I respectively suggest again, you should now be getting your personal affairs and business house in order. Getting ready will take time, it is not something that happens overnight. Waiting for the next recession to be called will be too late.

Now is the time to remember the following.

“Cash is King". Cash is not a lazy asset sitting in your bank account. Cash is just resting before helping you to pounce on the opportunities which always appear in turbulent times.

Therefore, be wary of the people who call cash lazy money. They either don’t know the power of cash or they want yours!

Debt is a killer, especially in troubled times. Debt, if used wisely, can be a useful short-term survival or growth tool. Unfortunately, many people forget that debt (plus interest) has to be paid.

Debt also affects your ability to buy the things you need.

If your business is in debt and your financier sniffs any trouble or needs the money, they usually panic and demand to be repaid.

On the other hand, if your customer owes you a debt and becomes insolvent, the cash you had anticipated getting, will be gone.

Doing Business

Everywhere you look in the world today, doing business is increasingly difficult, particularly when dealing with consumers. In fact, irrespective of what country you are operating in, businesses that deal with consumers are increasingly losing their rights.

In the business to business environment, we are starting to see the same issues which affected businesses dealing with consumers. Increasingly, business creditors are also losing their rights.

In Australia, the Banking Royal Commission adds another level of complexity for those offering and seeking finance. As the traditional sources of funds are drying up, new finance providers are coming forward. However, all these finance providers come with additional costs to the borrower.

Those businesses which offer credit to other businesses are the financial providers that offer the cheapest finance facilities. After all, they do not charge fees or interest. Furthermore, they are often sitting targets to fraudsters and unscrupulous business people because of poor business disciplines and a lack of due diligence.

The ultimate outcome if business creditors cannot protect their assets is they may not extend credit except to the best quality customers.

It cannot happen to me – is a false statement and whatever couldn’t happen, usually happens anyway.

In 2019 it would seem wise to start protecting and growing your cash resources, clear all debt owed and reduce the amount of debt owed to you.

At the end of the day, you are in business to make money. Business and making money are not without risk. To allow risk to dominate your decision making is not a good long-term business strategy. It is only by managing risk properly which provides an opportunity to achieve the best results.

Moving forward, if you have the cash, be very careful of how you use it, who you deal with and looking for the right opportunities. Despite there being the strong possibility of a recession in 2019, you can still make a lot money with the right strategies.

See you at the end of 2019 and all the best in between.