Category Archives: Finance

You Need to Get a Handle on Your Global Trade Risks – FAST!

Because, if you don’t, in three months, one in every five shipments you make is going to result in a large fine! By the end of May, the United States Customs and Border Protection (CBP) is expected to issue a proposed rule that would make various changes to increase the accuracy and reliability of the advance information submitted under the Importer Security Filing (ISF or 10+2). No big deal, right? Wrong! It is further expected that the final ISF rule will follow later this year and that the CBP will, upon release of the new rule, begin to enforce (the full extent of) the penalties associated with the ISF.

This is a major risk for most organizations as the most recent statistic that is publicly available where 10+2 compliance is concerned is a compliance rate of 80%. In other words, 20% of shipments are not compliant! It’s hard to say why. It could be because, up until now, the CBP has not issued much (if anything) in the way of penalties for violations and failures, and many importers, (customers) brokers, and forwarders are taking advantage of the situation and not doing anything to improve their processes and procedures when they (regularly) make late and inaccurate filings. And if this is the case, this is a dangerous game — for you!

We have to remember that the CBP has the right to enforce a minimum fine of $5,000 for EACH 10+2 violation. If you do a lot of importing, this will add up fast if you are in violation with every fifth shipment. Even if you only did 10 inbound shipments a month, you could expect to lose at least 120K a year to fines! And that’s (significantly) more* than what an average mid-size organization can expect to pay for an annual license to a basic SaaS e-Trade Document management system these days. So they should get one, and begin to get a grip on their global trade risks, fast, before they burn money needlessly.

* A good (end-to-end) global trade management system will still run you six figures, but it goes way beyond e-Document management and provides multiple ROI in terms of process improvement, tactical man-hour reduction, global supply chain visibility, compliance monitoring, etc. (But if you’re small, or just getting started, you can start with just the e-Document management and ease your way into a bigger system.)

I Hope You’re Not Paying a Wealth Investment Advisor!

Because if you are, the only person getting wealthy out of the deal is the investment advisor on your money! Especially when your LOLCat can do a better job, and will work for temptations and catnip!

As per this recent article in the The Observer, a ginger tabby named Orlando beat a team of professionals and a group of students in a year-long stock-picking experiment summarized in a recent article on how Orlando is the cat’s whiskers of stock picking. The cat, who selected stocks by throwing his favourite toy mouse on a grid of numbers allocated to different companies, beat Justin Urquhart Stewart of Seven Investment Management, Paul Kavanagh of Killick & Co, and Andy Brough of Schroders who had decdes of investment knowledge.

So if you really want to beat the market, replace your stock analysts with cats who are just as accurate (and don’t put much faith into predictive analytics no matter how much big data you have).

The Essence of Good Working Capital Management

In yesterday’s post we noted that playing games with working capital only costs the organization in the end; specifically, for every 10% of working capital an organization messes with, it loses 1% of total working capital (or 10% of the working capital messed with). Not a good deal, any way one wants to look at it.

Working Capital doesn’t have to be hard to manage. While an expert can get quite sophisticated about it, all one really has to do is:

  1. Get a good grip on receivables
    What is the organization expecting from sales and when; what reimbursements is the organization entitled to and when; what tax rebates is the organization expecting and when.
  2. Get a clear picture on fixed payables
    What is the average monthly payroll, the average monthly overhead (rent, utilities, etc), and regular non-monthly expenses that are projected over the next year.
  3. Get a good estimate of average disruption costs
    When a receivables disruption has occurred — regardless of if it was due to a late payment, lost customer, lost sales from a competitive product, or market delay due to a supply chain disruption — how much has it cost on average and how long has it persisted. This is the contingency fund that is required (and can be amortized monthly over the next twelve months).

Once this is known, the organization knows how much cash it has to work with every month. Only then can it truly begin working capital management and determine when it should pay early to take advantage of an early payment discount, borrow to pay on time to prevent costs from rising (as the supplier’s cost of capital is much higher than the organization’s), pay late and pay the penalty (as the organization’s cost of capital is higher and/or the supplier is able to bear the burden of payment late more than the organization is able to bear the burden of paying on time), or get innovative and work with the supplier to reduce costs across the supply chain. Without a solid understanding of cash flow, working capital management can’t even begin. And good working capital management definitely doesn’t involve booking revenue early, paying suppliers late, or other quarter and year end games to present a rosier picture than reality, because these games always get discovered and the organization always loses, in hard dollars, in the end.

You Can’t Buy Anything for a Quarter, So Why Do We Still Care About Them?

And more importantly, besides the fact that quarterly reporting pretty much became mandatory in North America with the Securities Exchange Act of 1934, why did we ever?

For those of you that are lost, I’m referring to the fact that when you focus on a quarterly number, you often screw up the year, or, as demonstrated in some recent research by the REL Consultancy, a Hackett Group Company, the next year. As summarized in this recent Industry Week article on how It’s All in the Game When It Comes to Year-End Cash Management (among others), attempts to game the system and post good fourth quarter results by delaying payment, manipulating receivables, or offering deep customer discounts just to book last-minute sales always lead to first quarter losses in the subsequent year that exceed the gains in the fourth quarter.

Specifically, the research indicated that while working-capital performance improved by 10% in 2011 Q4, it dropped by 11% in 2012 Q1. In other words, the loss exceeded the gain by 1%!

We’ve become way too focussed on the short term and the year end. What’s important is the long term. Given the choice between a 5% gain today and a 15% gain in a year and a 10% gain today with a guaranteed loss of 5% in a year, a company should always choose the first option as it gives the greatest combined gain over two years. But today, most public companies will choose the 10% gain today, turn a blind eye to the impending loss, and, if pressured, mumble that “we’ll figure it out later”. The problem is, if the gain comes at the expense of a deep discount on maintenance and labour rates are skyrocketing, at the expense of putting off needed upgrades to energy hogging equipment when energy costs are skyrocketing or delaying payables when interest costs are mounting, there’s no way to figure it out later. Cost are going to go up and losses are going to mount.

Not only do companies have to start managing working capital on a year-round basis, as the article notes, but they have to start managing growth on a long-term basis and re-instate the five and ten year plans as one to two year plans just aren’t enough. If this means they have to f*ck Wall Street and go private, so be it. Until we abandon this success today at all costs mindset, we’re never going to take supply chains to the next level.