Author Archives: TimLuscombe

Economic Update January 2015

There are an awful lot of moving parts influencing the world’s major economies at the moment.

Major disruptive influences are the recent sharp decline in oil prices, driven partly by the collapse of a speculative “bubble” but more fundamentally by the increase in production (the US is now a larger producer than Saudi by some measures.)

The second influence is the Euro instability – again – which has been a recurring theme for the last few years. The two shocks that are approaching are the introduction of quantitative easing by the European Central Bank and the likely election of the anti-austerity party, Syriza, in Greece. The fear is that such a result will lead to Grexit – or Greece leaving the Euro. If that were to happen, speculators would return to attacking the other peripheral economies with a view to profiting from their exit.

Adding to pressure on the Euro is the decision of the Swiss National Bank to remove its ill-advised support for the Euro last week, leading to one of the biggest swings in currency trading in the last few years. The SNB is now left nursing large losses on all the Euros it purchased since 2007, and may well need bailing out by the Swiss government.

The third level of pressure on the Euro comes from the speculation of a possible Brexit – Britain leaving the European Union – arising from the popularity of UKIP and the conservative decision to hold a referendum.

The fall in oil prices is good news for most economies, but bad news for those economies which are reliant upon oil (and gas) exports, such as Russia, Venezuela, Nigeria and many of the Middle Eastern countries. With the exception of Saudi Arabia and Norway, these economies do not have significant cash reserves to buffer them against the decline in exports. For Russia, the decline in the value of the Rouble has a minor counterbalancing effect as oil exports are priced in USD.

UK prospects are positive, with lower oil prices driving down inflation and reasonable growth in 2015/6. The potential negatives on the horizon are political – the failure of any party to gain a majority in the upcoming election, and the possibility of a further election in 2015 if a stable coalition cannot be created. It looks as though interest rates will remain at the current level throughout 2015 with a first increase in the second quarter of 2016. The big drag on the economy will be the failure of Europe to show any real growth, but any EU exit will be long drawn out. Growth rates of 3 to 3.5%.

European prospects are poor.  The only economy showing any signs of improvement is Germany, but the markets to the west are feeble and those to the east are in varying states of turmoil.

The Russian economy is a danger zone. Low value to the Rouble, declining oil earnings and sanctions suggest that the prices of food and necessities will continue to increase. Domestic unrest is possible, but unlikely to be effective given the authoritarian nature of the regime. Recession looks set to continue for the next 18-24 months.

China continues to grow, with some signs of consolidation slowing from the previous break-neck pace. Reform of the financial system and some reduction in the level of corruption suggest a very positive outcome over the next 3-5 years and growth rates of 5-7%.

The US looks to continue an a mini-boom as the full benefits of shale oil and gas feed through, but the pace of growth is likely to slow from the 5% recently recorded to around 4% in 2015.

Asia seems set for reasonable growth, supplying China with no major shocks foreseen. Different countries will move at different speeds, but Singapore, Vietnam, Malaysia and Indonesia all seem well set for growth in line with that in China. Thailand is at risk from the health of the elderly monarch and a succession – but if that transition is smooth or does not happen expect similar growth.








Adapt or die

Recent news is that BT is buying a mobile phone company – it looks like they will chose EE over O2

Those of us with enough grey hairs will remember that BT used to have a mobile phone business, and unless I am mistaken it was the business that formed the basis of what is now O2.

Elsewhere, there have been stories of BHP Billiton, the mining giant, splitting off those assets that are now not considered “core” to the remainder of the business. It so happens that BHP Billiton was created from the merger of BHP and Billiton, and the demerged companies will look very like the originals.

None of these changes or reversals necessarily means that the original strategy was wrong. When BT sold off its mobile phone business, the core business of providing telecom services was in a mess. They had pension fund problems, labour relation problems and were still struggling with the transition from a publicly owned business to a private company.

Merging BHP and Billiton created a mining giant that was able to dominate the markets and created great value.

The Times said
“BHP merged with Billiton in 2001 in a $58 billion deal. At the time, the rationale of adding Billiton’s assets was to create a fully diversified mining group with roughly equal earnings from aluminium, base metals, coal and iron ore. However, Billiton’s assets barely contribute to the group’s profits today, having been overshadowed by a decade of soaring growth in its iron ore, copper and coal businesses driven by China’s rapid economic expansion.”

The market has changed, so these businesses have changed their strategy. Your market has changed – have you changed your strategy?

If you don’t adapt, you may be following the dinosaurs to extinction


Hiring a professional can be money well spent

Last week I was introduced to a team of three directors who have fallen out with the 4^th director, who is also the largest shareholder in the business.

This team of 3 merged their business with the larger business owned by the 4^th director some time ago, and things have not worked out as they would wish.

I’m helping them unravel the situation, but in establishing the true position it has become apparent that some of the advice they were given was not what I would have recommended, and seems to be unduly favourable to the larger shareholder.

I know the legal firm they used for this transaction – indeed they acted for me when I sold my house – but I would not recommend them for a corporate finance transaction. I am sure they do a few transactions a year but this is dangerous territory best left to the experts.

One item in particular jumped out at me. There is provision in the shareholders agreement for a “bad” leaver to have his/her shares bought out by the other shareholders. The valuation of the shareholding uses the same mechanism for a “good” leaver as for a “bad” leaver.

In this case, the largest shareholder appears to have breached employment law, the shareholders agreement and his statutory duties as a director!

It seems likely he will be a “bad” leaver.

I have not seen the valuations but I am sure the value of his shares will be quite substantial – even though he will be a bad leaver – so that my clients will have to find substantial resources to buy him out.

A provision for a bad leaver might well have saved my clients several hundred thousand pounds. I think the investment in the appropriate expert – a few thousand pounds – at the time of the merger might well have been worthwhile.

“If you think it’s expensive to hire a professional to do the job, wait until you hire an amateur.”
Red Adair


Try and Try again – or maybe not? Persistence pays.

When I was a child, my parents often exhorted me to “Try & Try again” if I failed at something.

In business, all too often I meet companies who, when something is suggested, respond with “Oh that doesn’t work – we tried it some time ago and it failed”

If you dig into that & get them to recall the details, it’s amazing what you can find.

A direct mail campaign didn’t work for us

Well, in fact you only sent one piece of mail, to a small selection of your past customers

We tried using a different system

This is one of my favourites. In general people are resistant to change and prefer to do things the familiar way. If they aren’t convinced of the need to change, your team will prefer to see the new system fail.

It was too complicated

Well, it might be, but it is more likely that the proposal wasn’t broken down into its component parts. You can eat an elephant, one mouthful at a time, but if you start with the whole elephant on the plate it can be a bit intimidating.

Most of the time, business don’t try often enough or hard enough. They are not convinced of the strategy, and go into it half-heartedly, then withdraw at the first obstacle. That’s a recipe for failure.

If you are going to try something new, research it, plan the steps, and then execute it whole heartedly, with real commitment from the leaders of the business.

You could still fail because your strategy was incorrect, but most of the time Initiatives fail for poor execution, not faulty strategy.


Quarterly Economic Update – Q4 2014

This commentary seeks to provide guidance over a 3 -5 year timescale.


Overall, Europe is in poor economic health. The European central bank is now providing QE and still lower interest rates in an effort to stave off deflation. The chances are slim….it seems very likely that growth in Europe will be very limited over this period.

Pressures are both internal with the Latin economies yet to resolve their recessionary problems and external, with the southern economies hampered by events in North Africa whist to the East the Ukrainian crisis and Russian ambitions are a real cause for concern.

The bright spots are Scandinavia and Germany, but even in these economies there are significant headwinds. Their main markets (the rest of Europe) are showing no signs of growth and may still be in recession.


The recovery seems to be well established across many fronts and the outlook is very positive. House prices, which were such a concern for some commentators earlier in the year, seemed to be cooling off or stabilising a little, and the Scottish referendum has removed a vast set of uncertainties.

There are still some puzzles in the statistics, most notably over productivity and output levels.

Public expenditure is still on a downward path and is likely to remain so – whichever flavour of government we have from 2015.

Inflation is at a low point, so there is little pressure on interest rates to rise. I expect to see the first moves to increase interest rates in the summer of 2015, although the Bank of England could choose to move rates up as early at Q1 2015.

The weak economies of Europe on our doorstep and our relatively poor performance as an exporter remain as constraints on growth so a rate of 3 to 3.5% will be an exceptionally good performance.


Once again, the US Republican party seems to be swinging to the right, with news that Ted Cruz is a favoured candidate. It seems unlikely that the republicans will mount a sensible challenge to Hillary Clinton at the next election in 2016. In the business world, the lack of political meddling is good news. The shale gas story continues to drive the US economy, with business “re-shoring” manufacturing on the back of cheaper energy. Unlike Europe, the US demographic profile is favourable with a younger, educated, upwardly mobile population, many of whom are of Latino origin. Growth rates of 3% in 2014 and possibly 3.5% from 2015-2016.


The Wold Cup and the Olympics may give a temporary boost to the economy, but it will be minor.

This is very much a story of unfulfilled potential, but until the infrastructure is in place and the social divides are narrowed it seems very likely to remain unfulfilled. Growth rates seem likely to be in the 2-3% range.


Putin’s antics in the Ukraine have resulted in economic sanctions and made a recession in 2014 almost certain.  The heavy reliance upon selling oil and gas to the west is hampered both by the political upheaval and the transformation of the US from a net consumer to a net exporter. Russia is seeking to replace the western oil markets by looking south and east to China. It is difficult to see much growth in Russia in the next few years.


Narendra Modi of the BJP party has been elected on a platform of economic reform, and has approved a numbers of defence related infrastructure projects. That’s a decent start but many problems remain in the civilian world.

Growth rates of 4-6% in the forecast period.


The disturbances in Hong Kong aside, the big question over China remains the size of the shadow banking sector. Unregulated or lightly regulated lending has the potential to create instability in the mainstream financial services sector, with consequences that we in the western economies know only too well.

It’s my view that the Chinese authorities will manage the reduction in the shadow sector, and although there will be some casualties they will be relatively minor.

Hong Kong’s political disturbances are likely to come to a pragmatic soloution.

Overall, very positive with growth in the 7-9% ranges.

 “Greater China”

I’m loosely defining this area as the countries surrounding China & supplying Chinese demand, from Vietnam and Thailand /Malaysia /Singapore right though to South Korea. These countries have generally good prospects, decent infrastructure and well educated populations. They cannot but benefit from rising demand in China and most have the political stability to take advantage of it.

The big risk country is Thailand, following the army coup, but there is a history of the army taking power for a few years and then reverting to democracy. In the past, the king has proven to be a stabilising influence but on this occasion he has been very quiet – perhaps through old age and / or ill health.

Myanmar, the former Burma seems more stable in this quarter than last, but it remains only a few months ago that it was a state ruled by the army.

Growth rates could be exceptional at 7 – 10%


Some territorial disputes in the South China Sea have raised their heads again. China, Japan and Vietnam all lay claim to some islands, but of course it is the natural resources surrounding ( and beneath) the islands that is of interest. That’s most likely just a side show.

Sclerotic corporate structures continue to inhibit growth.  The worlds’ 3rd largest economy will continue to grow slowly.


The main stories in this region remain political turmoil and civil insurrection in Syria, Iraq and Egypt.

The Gulf States have significant natural resources, but Middle East oil & gas is becoming less important to the world economy as Shale Gas, improved efficiency and new discoveries reduce the world’s reliance on the region.

It is difficult to be optimistic for prospects in this region.


The Aussies had a good run up until the end of 2012, but I think they have more reasons to be optimistic about the cricket than about their economy for the next few years.

© Tim Luscombe Oct 2014

Am I the only person that can do this?

Before you start on a task, ask yourself the question “Am I the only person who can do this?”

If you answer that question with a yes, you can then apply Eisenhower’s model to prioritise your workload. If you answer no, delegate the task to someone else.

“What is important is seldom urgent, and what is urgent is seldom important.” – Dwight Eisenhower

If you classify your workload into the boxes below:


Then you can apply this set of rules to manage your time.

Box C should be done immediately

Box A should be scheduled for a time that suits you. Friday afternoon is when I write my  newsletters, for example.

Box D If it is not important why are you doing it? Outsource it or delegate it.

Box B Don’t do it unless you really want to. That’s an indulgence, in the business world.

It’s worth considering these rules every six months or so. Tasks that are not important have a sneaky way of finding themselves back on your desk every few months.

Spend your time in boxes A and C to have the most impact on your business – and actually an easier life.

What shape is your revenue?

When I ask a business leader

“What was your revenue last year?”

I’ll get a number as the answer. That tells me a little about the business, but from a business value perspective I want to know a lot more.

The next question is

“How many active customers do you have?”

This often leads to a debate about the definition of an active customer, but usually gets an answer fairly quickly. I think an active customer bought from you within the last 12 months.

There are two more elements that go to make up the revenue profile, how often does your customer buy (f) and what is the average order value (AOV)

The formula looks like this

rev shape

Where T is your turnover and n is your number of customers.

From the business buyers perspective, once n has reached a minimum level what matters next is the frequency with which the customer buys.

It is important not to become too reliant upon one customer and prospective acquirers will be worried if one customer exceeds more than 20% of your revenues.

A customer who buys from you once a year is typically worth less to an acquirer than one who buys 3 or 4 times a year.

There are exceptions. It might be that the once a year purchase is from a “Marquee” customer; someone you are proud to do business with and usually someone who commands instant name recognition.  If you are able to state “We supply John Lewis” that will count as a marquee customer, but other examples might be government business or the NHS.

The most valuable customers are those who are on long term contracts, where you are providing goods or more likely services.  These are very common as support services, for example in IT or building maintenance.

Within these contracts there are a few things to look out for to ensure you maximise the value.

A real “Red flag” for the buyer is if the contract contains a “change of control” clause, allowing your customer to break the contract if the ownership of your business changes.

It’s good to have contracts set up as “evergreen” where the contract automatically renews unless one party (or the other) gives notice, but within these there will need to be some form of pricing mechanism.  You don’t want to be trapped in a contract where your costs have dramatically increased, but you are unable to adjust your sale price.

If your business doesn’t lend itself to long term contracts, aim to move as far down that road as you can. Become an approved supplier or a preferred supplier or enter into some form of framework agreement – anything you can do to evidence a strong relationship with your customer.

If you want the best value for your business, you need to show that your revenues (and your profits) are growing, year on year.

That does not necessarily mean that you should keep adding new customers. If you can increase the frequency with which your customers buy, your revenues will grow. If you can increase the average order value, your revenues will grow.



Keeping your customer for longer

Most business leaders focus on the revenue line of the p&l and  are targeting increased revenues month on month and year on year.

What I often find is that the business only focuses on one element of revenue growth, that which comes from new customers.

Existing customers are “taken for granted” in the revenue plan. They bought from you last month / quarter, so they will probably buy again – and we know what they will buy, probably.

Your revenues are made up of several elements:

(Existing customers x existing quantities x existing prices) + (new customers x new quantities x new prices)

Most small businesses undercharge for their goods and services, but that is for another time.

Almost every business can improve its performance by reducing customer losses or “churn” as it is known in some industries.

Often businesses with large quantities of subscribers, like TV subscription businesses or mobile phone providers have dedicated teams known externally as cancellation departments but internally as retention teams. They are often empowered to offer the subscriber a discount or special deal as long as they stay a subscriber. My broadband provider gave me a deal when I threatened to leave just a couple of months ago.

Having a dedicated team like these is better than nothing, but it is a bit like bolting the stable door after the horse has bolted. These teams don’t go into action until after the customer has complained.

If you can, it has to be better to pre-empt the complaint.

One way to do that is to implement a customer care system.

A simple system can also help with your cash flows.

More business failures are caused by lack of cash flow than anything else, but even the most successful businesses can find themselves hampered or restrained by lack of cash flow.

There are many places where cash “gets stuck” in a business but one of the most obvious is in your debtor book, when people don’t pay you on time. That’s a big part of what is called the “order to cash” cycle, and if you can make that cycle shorter it will dramatically improve your cash flow.

Payment terms are one of the most overlooked conditions when business are negotiating supply deals, but even when the terms are reasonable getting paid according to those terms can be a challenge.

Most businesses don’t help themselves.

A typical scenario is this:

Day 1: Invoice date
Day 30: Due date
Day 45: First chasing letter
Day 52: Second chasing letter
Day 60: Payment arrives

Take a step back & ask yourself why we don’t do anything until 15 days after the invoice is due?

If there is an unresolved issue, you might not learn about it until 45 days after you thought you were done! That could be enough to put you in a deep dark hole!

As an alternative, try a “customer care” call on day 6. The call is to the person who ordered the goods or services:

“I’m just calling to make sure everything was OK with your recent order, and to see if there’s anything else we can help with?”

You might get an add-on sale, or an upsell at this point, and when you’ve dealt with that you can continue:

“That’s great, thank you. Now we sent off the invoice last week – I just want to make sure that’s all ok as well? Can you tell me who has to approve it – I don’t want to miss your payment run?”

At this point, you’ve had confirmation that the invoice has arrived and there aren’t any queries on it.

You also know who has to sign it off – if it’s not the person placing the order.

Take away all the excuses – “We don’t have that invoice/ there’s an error on the invoice/ it hasn’t been approved yet / there’s something wrong with the goods or service” and you will get paid faster.

Even better, you are now getting to the customer before they complain. You have a much better chance of keeping that customer for longer.


Buy versus lease? What’s the best strategy?

Many business leaders have to choose between buying and leasing when investing in capital equipment, whether that is plant and machinery, a building or vehicles.

In the early stages of a business, the decision is often made for you,. You can’t afford the cash commitment to complete the outright purchase so you have no choice but to take on the lease.

That might also be the case later in the business when the investment is really substantial.

However, when the choice is not obvious, it is worth considering the strategic, non-financial implications of your decisions.

Very often when I am helping an owner manager plan for the sale of his/her business I find that at some point the business has purchased the building from which it operates. That purchase may well have been an appropriate decision when it was made, but from the buyer’s perspective it is just a restriction. The buyer might want to consolidate operations, or perhaps significantly expand the business – yet they are constrained by the premises.

The buyer also has to fund the purchase of the property, at a time when it is possible their finances are already stretched to the limit to fund the purchase of the business.

I’ll usually suggest that the vending owner puts the property into their pension fund, which will then lease it to the business. The buyer has a problem or barrier removed.

It’s a similar story with plant and equipment. If it has been leased rather than bought, the barrier for you as the business leader to keeping up to date with the latest kit is much, much lower. If you buy a piece of machinery, that’s a significant capital investment. You will run it for several years to make sure you get full return for your money, but then you know it is time to replace it or more likely upgrade it. That may come at a time when business is not so good, when there are other demands on your resources….

Typically, if you lease over a 3 or a 5 year term, you can extend that lease (should you chose to do so) for a much smaller monthly lease amount. Upgrading the kit is not so painful, you just keep on paying the lease.

From the business buyer’s perspective, they don’t want to have to invest in capital equipment the day after they buy the business. You will be much more attractive if your plant and machinery is up to date.

It’s a similar story with vehicles. It’s tempting to buy the fleet, knowing that you can get an extra year or so from the vehicles, but there nothing worse than having your company name on a battered and tired fleet in 5 years time.

Buy versus lease? It is not a tactical decision, but a part of your strategy.



The right kind of customer?

In many businesses there no real selection or filtering of customers.

The focus of the business is on attracting prospects through marketing, and then converting those prospects into customers through the sales process.

Good marketing will (of course) be targeted or aimed at a particular customer type or group (and if your marketing is not focused, it will be less effective) but that doesn’t mean you won’t have prospects that don’t meet the criteria for that target group.

Some of those “wrong” prospects will become customers.

Some of those customers may be the wrong kind of customer.

Some time ago, I ran a business that operated a support desk. We had some customers who were so troublesome and took so much time to support that we actually didn’t make any money from selling to them.

The Pareto rule will probably apply; 20% of your customers are either low profit or unprofitable.

Your customers will fall into one of the 4 categories:

Before you analyse your profitability by customer, you might want to draw up the profile of your ideal customer, the one you believe will fit in the top right quadrant.

In the top left quadrant, you may well find that you are doing business with an ideal customer, but not enough business to make it worth-while.  Your focus should be on increasing the business you do with that customer.

In the lower left quadrant, you can change the way you handle the low profit customers. In the business I ran, we changed the support offering – limited the amount of free telephone support we offered, and backed that up with an extensive knowledge base to facilitate self support.  You may need to change your pricing model to drive those customers away, or at least improve their profitability.  We increased delivery charges on small orders for just this reason.

In the lower right quadrant, look to automate as much as possible. If you can automate dealings with a customer, from the order through to the cash, your costs of servicing the customer for that order will be very low. You will still need to review after sales support.

The customer in the top right quadrant are your stars, the ones you want to hang on to, the ones who are the most important to your business. You need a spread of customers here – Ideally no one customer should be worth more than 20% of your business.

Retaining your star customers is about building and sustaining a relationship with them. find ways to show your appreciation for their business, listen to their needs and wants and adjust your business to meet those needs.

Try to discover why your star customer buy from you, not the competition. We had one customer who bought from us because we were on his way home, but more seriously another showed great loyalty because one of our engineers met him at his customer’s site with the part he needed, enabling him to provide fantastic service to his customer.

Compare the profile of your real star customers to the profile you drew up before you started. Use that comparison (and the reasons why your customers buy from you) to inform and adjust your marketing.