Key Areas in Financial Management That Businesses Should Focus on

BY ZAGROS LAM

Financial Management is the process of managing the financial resources, including accounting and financial reporting, budgeting, collecting accounts receivable, risk management, and insurance for a business.

In an organisation, the process of financial management is associated with financial planning and financial control. Financial planning seeks to quantify various financial resources available and plan the size and timing of expenditures. Financial control refers to cash flow monitoring. Inflow is the amount of money coming into a particular entity, while outflow is a record of the expenditure being made by the entity. Managing this movement of funds in relation to the budget is essential for the sustainability of the business.

From an organisation standpoint, the process of managing finances is to achieve the various goals set by the organisation at a given point of time. Businesses also seek to generate substantial amounts of profits, following a particular set of financial processes.

While a well-organised bookkeeping system is vital, it is even more critical on what the organisation does with it to establish its methods for financial management and control. With a good financial management system, the business owners will not only know how the business is doing financially, but why. The business owners will then be able to use it to make decisions to improve the operation of its business.

There are 6 critical areas that are involved in the operating activities of the organisation which forms part of a good financial management process. The ability to master and manage these 6 areas will greatly shape the financial vertical of the organisation:

·        Financial Planning - Identify what financial resources are needed to obtain and develop the resources to achieve the goals. Typically, financial planning results in very relevant and realistic budgets.

·        Financial Accounting - It clarifies records and interprets in monetary terms transactions and events of a financial nature. Financial accounting will involve maintaining records of transactions (book-keeping), preparing balance sheets and profit and loss accounts, preparing value added statements, managing cash, handling depreciation and inflation accounting. The accounts prepared by the organisation will be audited to ensure that they present a 'true and fair view' of its financial performance and position.

·     Budget Management - A budget depicts what the organisation expects to spend (expenses) and earn (revenue) over a time period. Amounts are categorised according to the type of business activities, or accounts (for example, telephone costs, sales of catalogs, etc.). Budgets are useful for planning the finances and then tracking if the organisation is operating according to plan. They are also useful for projecting how much money is required for a major initiative, for example, buying a facility, hiring a new employee, etc. There are yearly operating budgets, project budgets, cash budgets, etc.

·         Managing Cash Flow - The overall purpose of managing the organisation’s cash flow is to ensure that there is sufficient cash to pay current bills. Businesses can manage cash flow by examining a cash flow statement and cash flow projection. Cash flow statement includes total cash received minus total cash spent. It primarily looks at the actual cash transactions. It is a challenging task to be able to track and manage the cash flow of the organisation.

·        Managing Checking Account - The check register is a primary means to record and track cash. It is important to know how to manage the bank account of a business regardless of the organisation’s years of operation.

·      Credit and Collections - One of the biggest challenges in managing cash flow may be decisions about granting credit to customers or clients, and how to collect payment from them.

·     Budget Deviation Analysis - Budget deviation analysis regularly compares what is expected, or planned, to earn and spend with what is actually spent and earned. The budget deviation analysis can help greatly when detecting how well  the organisation is tracking its plans, how much to accurately budget in the future, where there may be upcoming problems in spending, etc. A budget deviation analysis report might include columns with titles:

Planned for Month

Actual for Month

Difference (Planned minus actual)

% Deviation (Difference x 100)

What We Need To Know About Children Cancer

By Patrick Chong

There are several types of cancer that children suffers from; cancer of the blood, lymph glands, nervous system, bone and kidney. The most common is cancer of the blood or Leukaemia. The largest age groups that are afflicted with this disease are children aged 0 to 5 years old. Apart from the suffering brought on by cancer, there are also side effects resulting from treatment that range from hair loss, changes in appetite, susceptibility to infection, nausea and vomiting and pain and burning at injection site (especially for chemotherapy) among others.

Physical pain aside, children patients may also suffer from emotional, social and psychological effects of the disease. Mood swings, confusion, anxiety, behavioural changes and stress are all part and parcel of the traumas that child cancer patient can expect to experience. Cancer also impacts the social environment in which the child lives. Relationships with their siblings, parents and friends can be and are stressful. Their illness may well prevent them from attending classes and thus affecting their education and social development.

Vector Scorecard in collaboration with AIN Society, a voluntary welfare organization affiliated to the National Council of Social Service (a Singapore government agency) has embarked on a campaign called the “Adopt-A-Song” initiative to raise funds in aid of these cancer stricken children. Each donation of SGD80.00 entitles the donor to receive a box set consisting of a 3-track CD entitled “Beyond The Cloudlines” with accompanied by 2 postcards. These box sets make a nice gift.

Channel partners of, visitors to and readers of Asia Business Corridor are encouraged to contribute generously to this cause which will help these stricken children meet their medical costs of treatment. Orders for the box sets stating Name, Company, Designation, Contact Number, Mailing Address and Quantity and enclosing a cheque (payable to Vector Scorecard (Asia-Pacific) Pte Ltd for SDR80.00) may be sent to the following address:

Vector Scorecard (Asia-Pacific) Pte Ltd
18 Kaki Bukit Place
#06-00
Singapore 416196
Tel: 64641786 Fax: 64641389
Attention: Ms. Carmen Pang

How Corporate Social Responsibility could contribute to an organisation’s ROI

by Audrey Teh


Corporate social responsibility (CSR) among businesses have transcended beyond “nice to have” ideologies and have emerged to become a staple in a company’s overall growth strategy. Now synonymous with responsibility, this vital relation demands that companies existing in the current market environment jump on the bandwagon to survive.

Today’s businesses operate with a similar core ideology, long-term. Strategies in formulation focus on sustainability are in its operations, sales or human resource management and at the heart of it, CSR has been found to be an integral component in the success management of these factors.

With increasing globalisation, the world has become a smaller place, and markets are more accessible than ever. Factor in the rising knowledge levels and today’s consumers have become more aware. According to a TIME poll conducted in 2009, 40 per cent of consumers said that they bought products or services because they liked the social values of the company. A typical consumer would now want to know that the product they are supporting comes from a company whose manufacturing processes do not pose any threat to the environment. The new age consumer concerns himself with the company’s track record, if it has fair practices covering fair wages, good working conditions and these relate back to the company’s reputation of which becomes a sure advantage to businesses with good CSR programs.

Aside from the consumer aspect, which is a large element no less, CSR programs also actively seeks to reduce operational costs in the long run. Saving the environment means cutting down on unnecessary wastages, and companies engaged in such practices see great reductions in areas such as utilities in the long run. Aside from being a cost saving venture, CSR also tackles the slippery issue of human capital attraction and retention. Human resource analysts have noticed that the most competent and skilled workers would want to be associated with companies that have good business practices and reputation. It is hardly surprising that companies with a strong overall sustainability performance are also recognised as the best employers in the market. Of course, from an investor standpoint, engaging in CSR has clear advantages in convincing investors who see CSR involvement as an indication of the company’s long –term potentials.

It is absolutely clear that CSR can generate top-line revenues for a company. It can inspire innovation. It can open new markets whilst acquiring new customers. It can recruit and retain employees. It can enhance brand and reputation. It can reduce costs. It can help raise share price. Or it can do none of these. While engaging in CSR undeniably reaps bountiful rewards, it has never been more important to systemise a way or measuring its return on investment (ROI). There is the old saying that what gets measure gets managed. Becoming a socially responsible company requires a significant amount of capital and resources investment and where capital is involved; there are shareholders to be answerable to. Essentially, top management have to shift away from the traditional mindset of thinking that CSR is a form of PR or worse, as philanthropy. A business is after all, a money making entity and it is the core responsibility of the management to generate returns for the shareholders. CSR is not to be dismissed as an optional “add-on” to business core activities but rather a fundamental way in which businesses are to be managed. Just as CSR is important, knowing how it contributes directly to your organisation’s ROI is equally as critical.

Of course measuring ROI proves to be a daunting task, for how do you measure something as intangible as employee engagement, reputation and brand perceptions? There is no exact science in quantifying ROI but there are useful metrics that can shed light to a systematic way of measuring ROI and these include brand reputation, energy efficiency and dollars saved and employee loyalty. The key point is to focus on the company’s core business objectives surrounding the following dimensions of value; monetary, financial, quantitative and qualitative. Monetary relates to accounting base value of cash in cash our, financial referring to translation of in-kind contributions of employee time, quantitative concerns itself with the number of sustainable products added to product line and qualitative could encompass marketing value through media mentions or changes to consumer attitudes.

Measure only what is applicable, for instance if your company’s core objectives is growth, measure progress on chose CSR strategies according to the impact of the initiatives on penetrating new markets or customer segments. With a plethora of metrics out there, it is easy to drown in its overabundance, therefore rather than aiming to measure as many metrics as possible, think of measuring the same thing and articulating its value in several different ways.

A recent PricewaterhouseCoopers study documented that companies that report their sustainability efforts get better returns on their assets than companies that do not, and there is no argument have CSR practices offer positive returns to a company. The pressing issue here is accountability. Managers have to understand how to account for CSR to actually drive the business to success, and these involve looking at CSR beyond just an ad hoc charitable activity and ultimately view it as a proper tool for competitive edge, and not just a burden on their bottom line and conscience.

Youth In Business, Can They Excel

By Mohd Reza

The concept of Youth does not have a unified definition and this is especially so for the age group categorization. Depending on the respective organizations or programmes, Youth age categorization can range from 15 years right up to a maximum of 40 years of age. Taking a few examples, the United Nation defines Youth as people between the ages of 15 to 24 years old whereas certain political parties which have a Youth division/arm categorizes it as people below the age of 40.

Differences arise due to the fact that a high percentage of engagements with youth, apart from the government, has been with the NGO’s and other social development organizations (private sector). Their set definitions of the Youth age group (which would be aligned to their organizational goals) would result in a pre-conceived conformity if not informal agreement within the public sphere. For this article, in relation to youth business and entrepreneurship, youth is commonly defined as persons below 30 years of age.

Youth in business have taken a further significant relevance in the 21^st century. Technology was and still is the primary instigator for entrepreneurships which led to birth of numerous Fortune 500 companies today. Beginning with the shift of manufacturing hegemony of the United States to the technological centric industries led by the Japanese corporations (followed closely by South Korean ‘chaebol’), the birth of Silicon Valley in the 80’s represents the birth of technological entrepreneurship and new forms of funding and investments (venture capitalist). Major world economies have evolved into more saturated interconnected economies where no single country has a clear or significant dominance of a particular industry.

These evolutions have led to a rather favorable environment for increased participation and success of youth in business. They include:

1. Niche Products/Market Conditions – Current market is defined as more susceptible to rapid changes and receptive to new and novel products. Product loyalty is not the dominant feature of consumerism and is replaced with price consciousness and value assessment. The spending power of the youth group has also significantly risen in recent years contributed by the emerging economies ‘young demographic’ (namely China, India and Indonesia) and this creates new market category. From tamagochi (virtual pet device), to simplest form of ‘coloured rubber bracelet. Innovation is the key feature of a high number the companies that excel in the present state of business environment. Most are nimble companies (small companies) that can adjust to the rapid changes of demand in the market. The saying goes that “No one understands the youth better than the youth themselves”. Understanding the market needs and the ability to make sound market predictions and adapting to it quickly represents a huge edge for any business in the present economic climate especially those serving the niche sector
2. Ideology Change/Paradigm Shift – ‘New way of doing business’. That business today are more than just profit seeking entity and that it has evolved to beyond providing quality products and services. For instance, most businesses today have embraced the need to be ‘socially responsible’, that Gen Y consumers are sensitive towards products and services that are harmful to society and the environment. This ‘socially responsible’ concept can sometimes be strategically packaged as a company’s marketing initiative.
3. Technology – Forms as the means for production and distribution or function of product itself (usually related to ICT). Technology could also lead to substantial decrease in operational costs for businesses which in turn enabling better growth potential. Every aspect of a business can benefit from technological innovation and this includes services such as online/web based accounting systems and web transaction platforms (eBay and other online forums), right up to the payment method systems (Paypal).
4. Government initiatives – Several programmes in place are designed to meet certain objectives most commonly to instigate growth in the SME sector and means to ease unemployment. These programmes are mostly in form of provision of funds or grants or mentoring programmes which seeks to increase the competencies of the businesses to remain competitive.

These are the 4 basic fundamental factors that have lead to numerous success stories in youth entrepreneurship. It is evident that these factors are very much relevant today and that budding young entrepreneurs can still succeed through strategic management of these factors. Citing present success stories of youth in business which have benefitted from one or more of the factors above include YouTube (sold for USD 1.65 billion less than 2 years after it was founded), Facebook (exceeding 500 million users as of 2010) and Google (market value of above USD 180 billion)

But it is not always the case of glory and fame for all youth in business. The risk of failure exists in any business ventures and the significant causes include the effect of fast changing market trends or simply flawed business strategies. With the advent of Globalization and Free Trade agreements, the effects of imitation, competition from abroad and fast changing market trends have pose greater challenges to not only the youth entrepreneurs but also to the business eco-system as a whole. Citing an example closer to home, the JooJoo tablet which was slated as a direct competition to the successful Apple iPad had lost its huge potential market share earlier this year due to several delays to its product launch as a result of ‘logistical and manufacturing issues’.

To mitigate these risks, aspiring and existing youth in business can resort to seeking assistance in areas beyond their expertise or competencies especially concerning business operations and management. These assistance takes form government programmes such as mentoring (in areas such as marketing, branding, human resource manage and ICT areas), training and grants, and business operating tools (mostly in a form of software) which is amongst the reason ‘cloud computing’ is gaining in prominence. These tools are not only meant to save costs in terms to capital invested but also in relation to enhanced efficiency and productivity. With a conducive environment in place and proper tools at their disposal, youth have every opportunity to compete and succeed in business.

Do's and Don’ts of Project Management

By Carmen Pang

Do's and Don'ts of Project Management

Project management is a carefully planned and organized effort to accomplish a successful project. Project management includes developing a project plan, which includes defining and confirming the project goals and objectives, identifying tasks and how goals will be achieved, quantifying the resources needed, and determining budgets and timelines for completion. It also includes managing the implementation of the project plan, along with operating regular 'controls' to ensure that there is accurate and objective information on 'performance' relative to the plan, and the mechanisms to implement recovery actions where necessary.

Projects usually follow major phases or stages including feasibility, definition, project planning, implementation, evaluation and support/maintenance.

The Dos of Project Management 

1. Identify critical projects

When it comes to prioritising projects, it is essential for company to know what their business goals are and mapping the projects to these goals will be able to gauge which project could take precedence. 

2. Managing the client's expectations via strong communication plan

The right expectations should be set during the initial planning phase and engaging in good-faith negotiations with managers and clients about what is realistically achievable is necessary. Close communication must be maintained to ensure that both parties understand and agree to the key deliverables of the project. Continuous feedback should be sought on implementation progress and to raise issues/ challenges faced if any. A robust communication will help to eliminate confusion, improve clarity and transparency and win trust and confidence during difficult situations.

3. Getting top management to be actively involved in the project and market the project internally

Ensure that senior management’s views are taken into consideration throughout the project as this will make it easier to overcome any reservations or concerns they have, and ensure the project is what the managers expect. Involving leaders and managers in the development of the project vision help to ensure that all anticipated benefits are clearly understood and agreed upon.

Marketing the project internally will help keep employees at all levels of the organisation especially the ones which will be directly affected by the project  informed and on-side, helping to forestall any potential problems of acceptance when the project is handed over.

4. Use satisfaction metrics to gauge progress

Besides measuring how far along a project is in terms of completion, project managers need to measure if the project is succeeding in terms of satisfaction and delivering results. Implementing quick wins at the start of a project to help boost satisfaction levels while the implementation is ongoing which will help offset any negative impact the project has on satisfaction.

5. Manage and develop the project team via frequent reviews

Project managers should ensure the project team remains productive and cohesive by ensuring team members have opportunities for ongoing growth and development. Motivating the team constantly could be done by creating new learning and growth opportunities through specific training programmes, expanding roles within the team and by rewarding team members suitably. Holding frequent reviews also help to keep the project on track.

The Don’ts of Project Management

1. Avoid underestimating time and effort required to complete the project.

Improper planning will be costly throughout the life of a project. Avoid succumbing to pressure by starting on any project without following basic project management methodologies. It is also essential to track the progress regularly to ensure project is on track. 

2. Avoid getting personal with projects.

It is important to see each member of the team as representing project needs which will eliminate personal feelings and opinions from hindering the projects. Do not let others’ opinion affect the decision. 

3. Avoid being unclear of what is needed/required for the project.

Do not be afraid to ask for help/ advices in times of difficulties and ensure that there are close communication among the project team to solve issues if any arises. Always hear what customer wants and keep an open mind to address these changing needs. 

4. Show appreciation.

Projects are not accomplished by individuals; it require team effort. Show appreciation to project team members for the efforts and hardwork committed and to boost their morale in delivering better results. 

 

5. Avoid having unrealistic expectations.

Be clear about the key project deliverables via open communication among members, customers and management. Ensure all team members share a common goal and feel they are a part of the team.

Recommended Measures to Improve Rating Agencies' Role and Focus

By M Nazri

1.Timeliness and completeness of information in published reports: Management discussion and analysis should require disclosure of off-balance sheet arrangements, contractual obligations and contingent liabilities and commitments. Shortening the time period, between the end of issuers' quarter or fiscal year and the date of submission of the quarterly or annual report, will enable Credit Rating Agencies to obtain information early. These measures will improve the ability of Credit Rating Agencies to rate issuers. If Credit Rating Agencies conclude that important information is unavailable, or an issuer is less than forthcoming, the agency may lower a rating, refuse to issue a rating or even withdraw an existing rating.

b) Competencies of Credit Rating Agencies Analysts: Analysts should not rely solely on the words of the management, but also perform their own due diligence, by scrutinising various public filings, probing opaque disclosures, reviewing proxy statements etc. There should be a minimum basic qualification and experience - or a chartered qualification - required of an analyst. There needs to be a tighter (or broader) qualification to be a rating agency employee.

c) Issue of Barriers to Entry: Increase in the number of players may not completely curtail the oligopolistic powers of the well-entrenched few, but at best it would keep them on their toes, by subjecting them to some level of competition, and allowing market forces to determine which rating truly reflects the financial market best.

d) Transparent rating Process: The agencies must make public the basis for their ratings, including performance measurement statistics, historical downgrades and default rates. This will protect investors and enhance the reliability of credit ratings. The regulators should oblige Credit Rating Agencies to disclose their procedures and methodologies for assigning ratings. The rating agencies should conduct an internal audit of their rating methodologies.

e) Disclosure: Rating agencies should disclose material risks they uncover, during the risk rating process, or any risk that seems to be inadequately addressed in public disclosures, to the concerned regulatory authority for further action. Credit Rating Agencies need to be more proactive and conduct formal audits of issuer information to search for fraud, not just restricting their role to assessing credit-worthiness of issuers. Rating triggers (for instance full loan repayment in the event of a downgrade) should be discouraged wherever possible and should be disclosed if it exists.

These measures, if implemented, can improve market confidence in Credit Rating Agencies, and their ratings may become a key tool for boosting investor confidence, by enhancing the security of the financial markets in the broadest sense.

Ratings Agencies – Roles and Criticisms

By Tey Zhi Ren

Rating agencies, or more specifically credit rating agencies (CRA), are companies that assign credit ratings for certain debt instruments as

well as the issuers of the debt obligations themselves. The process in which their ratings are derived begins with the gathering and analysing of a wide range of financial, industrial, and economic information. This information is then synthesized before being published to offer an independent and credible source of assessment for creditworthiness.

Through the provision of the rating services, CRAs receive rating fees that are g

enerally paid for by the issuers. To a lesser extent,fee-based rating services may also

be received from subscribers of the CRAs. CRAs are considered useful due to their ability to increase a particular security’s pool of potential investors through the mitigation of information asymmetries between the issuers and potential buyers, hence improving their pricing and liquidity. Concurrently, ratings can be considered as a form of

motivational yardstick to oversee the management’s behaviour, as the risks of downgrading will limit their ability to shift risks.

CRAs and their ratings play a key role in the capital markets and are highly relied upon in facilitating contracting by important market participants. Ratings form a starting point for most investors in classifying certain securities and their associated risks.

Institutional investors such as mutual funds, pension funds, and insurance companies often use ratings to aid them in their investment process; and may even use them in entirety over self-analysis. Ratings are considered to be essential to the issuers as they underline the biggest measure of their credibility and affect the interest rates applied to their issued securities. Lastly, ratings can also be used by regulators to ensure compliance on the part of sell-side market participants. An example is the Rule 2a-7 of

the Investment Company Act that limits money market funds to only invest in commercial paper that are of a sufficiently high ratings.

Despite their immensely wide use, CRAs came under intense scrutiny and criticisms during the period following the sub-prime crisis. In light of their

ratings’ values being questioned, CRAs defended themselves by holding onto the stance that their ratings are just a published opinion on the creditworthiness of firms and securities, and should not serve as a strict recommendation in the buying or selling of the rated securities.

CRAs, and especially their credit ratings, are

criticised for not containing information relating to systematic risk exposure. Their ratings are derived based only on the cash flow risk, which measures the probability of default and expected recovery values, and is insufficient to enable accurate pricing of the securities as it does not account for payoff amounts that co-vary with economic states. This had contributed to the existence of distinctly differing yields am

ong classes of securities that may have similar given ratings.

The pronounced judgmental errors in CRAs ratings for structured products – with specific reference to the high default or downgrade ra

tes of AAA-rated structured products, is anoth

er highly debated issue. The proliferation of new AAA-rated securities in the period leading up to the sub-prime crisis was aided by the process of pooling and tranching countless underlying debt agreements. Tranches are prioritized to allow losses from the underlying portfolio be absorbed such that their ca

sh flows and credit ratings can have a significant difference from their underlying portfolio. Efficient pooling and tr

anching of suitable debts of a lower rating, say BBB, can allow for the manufacture of AAA-rated tranches. Such structuring allow for an upward-biased misrepresentation of the underlying debt pools, where

the perceived default probability of rated tranches from high yield CDOs are mistakenly biased downward, gifting a sense of over-confidence to potential investors who seek low-risk securities or products.

The lack of transparency in the ratings process, especially so during the investigation of Enron’s collapse, is another glaring viewpoint against CRAs. It was argued that should transparency in the ratings process be increased, a higher level of public scrutiny of the Enron’s activities can be allowed. That will help in reducing the potential conflicts of interests and continual use of fraudulent accounting. Opponents also pointed out the slow downgrade of Enron’s ratings prior to their bankruptcy, where they managed to maintain an investment grade rating just four days prior to its collapse.

Another ringing criticism is the conflicts of interest CRAs face that arises due the receipt of rating service fees from the issuer, rather than from the investors. By working hand-in-hand with the issuers, rating agencies essentially undertakes an overly prominent role in the creation of securities that leads to huge conflicts and is disadvantageous to the investors. CRAs might thus not be able to provide accurate and honest ratings.

At the same time, vicious cycles may be created through the lowering of ratings by CRAs. In the event that an under-performing firm’s score is downgraded, it will face rising interest rates and expenses as its contracts with other financial institutions are adversely affected as well. Decreases in its credit worthiness may also trigger clauses in certain loan agreements for full repayment of loans, which will contribute to further liquidity problems for the firm and lead to further downgrades of ratings by CRAs in a ‘death spiral’.

In conclusion, even though it appears that the existing market structure have a heavy reliance on rating agencies, they are still plagued with numerous criticisms and perceived structural weaknesses in their roles. It is clear that the reputations of the CRAs took a significant hit following the allegations that culminated during the sub-prime crisis. Thus, the key challenge for rating agencies remains in overcoming these criticisms, where they might have to consider a change their approach to ensure that their credibility can once again be reinstated.

SMEs’ “5 Pots of Gold” for 2011

By Patrick Chong

As 2010 draws to a close, we prepare to bid a welcome to 2011. Each of us has our favourite approach to “crystal-balling” 2011. We, here at ABC, offer our very own “pots of gold” for SMEs in 2011.

1. Rise of the Emerging Economies

Depending on which list (FTSE, MSCI or Dow-Jones) you use, emerging economies range from 21 to 35 different countries. Be that as it may, these economies are where companies will find their major source of growth. In

particular are China and India where the pace of economic growth far outstrip many economies, whether advanced or otherwise. SMEs will readily find opportunities in infrastructure, construction, ICT and similar sectors. These will largely be in the form of tenders put out by the various countries or development banks.

2. Migration to eCommerceIn 1990, the number of internet users stood at 16 million comprising 0.4% of world population. By September 2010 it is estimated that the number of users has grown to 1,971 million accounting for 28.8% of world population. While the brick and mortal companies are still very much evident, not being online is certainly a path that leads to eventual demise. Businesses, whether supplying goods or services, must be online to tap the growing numbers of online transactions. This is one critical point which no SMEs can afford to ignore.

3. The Senior MarketThe percentage of people aged 60 or more is set to rise for the period 2000 to 2050 in every country. For example, in 2009 those aged 60 and above comprise 680 million worldwide. By 2010, it is estimated to increase by almost 3 times to reach 2,000 million (or 2 billion). This will have important macroeconomic implications in a variety of issues. For instance, there will be opportunities to cater for the needs of this segment of society like home healthcare, pharmaceuticals, disabled services and community care facilities, to name only a few. This is also the segment of the population which has accumulated wealth over the period of their working life and thus can well afford to pay for the goods and services they need.

4. Clean technology and the EnvironmentIn the coming years, the environment will be become of increasing importance to businesses. The UN sponsored conference in Cancun, Mexico on climate change in December 2010 bear testimony to this. Renewable energy sources, conservation of water and waste treatment will take on greater importance in our daily lives. This spells opportunities for businesses that endeavour to meet growing needs for such goods and services. On a national level, opportunities are there for such technologies as wind turbines and desalination. In the households, there will be growing demands for products that conserve water, recycle paper, more efficient means of refrigerating foodstuff and energy saving air conditioning. These are only some examples of business opportunities that will be available for businesses with an innovative bend.

5. Health and WellnessIrrespective of countries, medical costs are rising. Increasing number of people is suffering ailments such as heart diseases, diabetes, osteoporosis, obesity and cancer. Researches carried out thus far have pointed to culprits like lifestyles, lack of exercise, and stress. Those in the health and wellness fields will see increasing opportunities for products and services catering to these segments. Witness the growth of spas worldwide, fitness gyms and nutritional supplements. In Singapore, the Health Promotion Board is active in promoting good nutritional and health practices to the general public in an attempt to improve general well being and stem the tide of growing medical costs.

To sum up, these 5 trends are well recognized by businesses. SMEs need to put on their thinking caps and figure out ways to take advantage of these opportunities.

Implications Of A Potential Oil Price Spike in Asia

Business Monitor International (BMI), in a report filed on Dec 14, opined that with oil prices continuing to drive higher on the back of still-strong global economic growth and ample liquidity, the risks to Asian countries' strong trade balances, economic growth, and (to a lesser extent) fiscal positions are growing. BMI assess the likely impact of a surge in oil prices back towards their all-time highs and believe that India is the most heavily exposed in terms of its balance of payments position and econ

omic growth, while the Philippines is also at risk

Emerging Asia's trade accounts have been soaring in recent months but a continued rally in oil prices poses a risk to this trend. Asia's oil import bill came in at an estimated US$42.0bn in September, up from a low of US$19.0bn in February 2009, and a return to the all me high of US$57.4bn seen in July 2008 would create significant pressures on regional trade accounts.

Furthermore, inflationary pressures could tick up, necessitating tighter monetary policy, which could squeeze growth across the region. Indeed, although BMI continue to highlight the strength of Asian consumers, oil prices may begin to weigh on consumer purchasing power. To some extent, the forecasts for 2011 factor in a slowdown in consumption growth, due in part to higher oil prices.

However, there is a risk that crude oil prices spike towards and beyond US$100/bbl. Given that the region has seen steady rolling back oil subsidies in recent years, this is less likely to pose a threat to government budgets compared with a similar period three years ago.

BMI believe that India is most at

risk from an oil price spike in terms of its potential impact on the country's balance of payments position. While the tough decision made in June to scrap petroleum subsidies will mean that the fiscal budget would be somewhat less susceptible, the impact on consumers could be more acute without the aid of subsidies.

Balance Of Payments Impact

BMI recently highlighted the precarious nature of India's balance of payments position, and an oil spike would compound these problems. At present, oil imports account for a worrying 30% of total imports (by far the highest in the region), although this figure is down from the high of 40% seen in July 2008. If crude oil prices were to spike back up towards the US$140/bbl level, BMI conceivably see In

dia's trade deficit surpass the 2008 high, leaving the currency heavily exposed to the downside.

South Korea appears to be another country highly exposed to an oil price shock in terms of its balance of payments. Oil imports represent 17% of total imports, and totalled US$6.4bn in October alone. At the peak in May 2008 this figure hit US$9.7bn, and the additional import cost of further price increases would be enough to push the trade surplus back towards deficit. Together with heightened political risks and the

impact of a slowdown in China, the Korean won could be susceptible to a sell-off. That said, BMI maintain the view that any sell-off would be mild given the cheap valuation that the currency has at present.

The Philippines is also at risk in terms of its trade balance, with the third-largest oil import bill as a share of total imports at 16%. While the trade balance is current in its best shape in 10 years, with a US$740mn surplus in September, this could quickly erode if the oil import bill were to rise back to peak levels. That said, BMI see no risk of any major instability in the balance of payments position in 2011 and expect the Philippines peso to remain well supported.

Inflation/Growth Impact

Inflation could become a more serious across the region should oil prices continue to march higher. While it appears that current inflationary pressures across Asia will be transitory, it is noted that the higher oil prices go, the more pressure this will put on consumer prices going into 2011.

The bigger problem would come in terms economic growth. Indeed, should consumer price pressures tick up as a result of an oil price surge, central banks across the region would likely act swiftly to tighten monetary policy, which would have a negative impact on economic growth and consumer spending. Again, it appears that India would be most exposed in terms of economic growth given its low level of GDP per capita.

The Philippines would also be particularly at risk from such an occurrence. With no subsidies in place to protect consumers and businesses against rising prices, and GDP per capita among the lowest in the region, consumer spending would likely take a sizable setback.

Fiscal Impact

On the fiscal front, Asian governments have increasingly rolled back fuel subsidies since the oil price peak of 2008, which should stand them in reasonably good stead in the event of a recurrence. China cut its fuel subsidies in 2009 and India removed sizable subsides for gasoline in June this year. Indonesia has also made positive steps by hiking fuel prices in the summer and proposing to phase out subsidies entirely over the coming years beginning in January 2011.

As such, and considering the solid fiscal position that Asian governments find themselves in, BMI see no major risks to fiscal credibility from surging oil prices. That said, Indonesia would likely be the most heavily exposed in terms of its fiscal accounts from an oil price surge given the fuel subsidies are the most pervasive in the region. Malaysia, India, and China would also see budget setbacks.

Rich in volumes, poor in margins

By Patrick Chong

The conventional business wisdom for foreign companies in China is: get each Chinese consumer to spend a dollar and “Viola!” $1.3 billion in sales; never mind whether per day or per year. The figures coming in to analysts are, by all counts, soaring so much so that the likes of Goldman Sachs and Nomura to forecast share price increases of 30% and 20+% respectively.

Other reasons cited by China bulls: Chinese companies are cheaper than have been in the past year and cheaper than similar companies in other parts of the world. Additionally, they have performed b

adly this year. Thus the catch-up is imminent.

But do these reasons stand up to scrutiny? Yet another possibility that Chinese stocks are cheap is due to the market noticing the indications of some serious underlying problems. Witness the data collected: sales rose by a staggering 42% year-on-year in the first half of 2010 but margins have been on the decline with no sign of stabilizing.

In some industries conditions are horrible. Exporters' margins are often less than 2%, so says China's minister of commerce. Firms in the southern Chinese manufacturing belt are being painfully squeezed. A shoe exporter who recently returned after a long absence found his old Taiwanese suppliers had all left, having been crushed by rising costs. In their place were tough locals who de

manded the full price for their products regardless of glitches. The shoe exporter has been threatened, and is thinking of hiring a bodyguard. His tale is far from unique.

The Chinese government is phasing out subsidies to industry and relaxing energy-price controls. Workers are demanding higher salaries. Environmental standards, too, are being tightened. All these trends hurt profits, yet the government is happy for them to continue.

The government wants to allow ordinary people to enjoy more of the fruits of growth. How far it will go remains

to be seen, however. Will it allow the (artificially low) interest rates that banks pay depositors to rise? That would reduce the transfer of wealth from savers

to well-connected corporations, which enjoy cheap credit. Will it allow the yuan to appreciate, thus walloping exporters but boosting consumers' spending power?

That is the question that seemingly seeks an ever illusive answer.

Source: Economist Intelligence Unit

Cultures in Perspective

By Patrick Chong

Much has been said and debated about Eastern and Western cultures

and values. Western value system, to make a generalization, advances the notion of the economic man, individualism and liberal values. Eastern culture is generally portrays to represent collectivism, traditions and conservatism. Whatever the differences, let it be said that each has developed in its own way. What seemingly appears as difference may well hide similarities.

Take the Western hand-shake for example. The significance of the hand-shake to show your counterpart that you’ve come in peace and the open hand-shake shows you are unarmed. In similar significance, the Chinese will hold up both hands together in a cupped fashion demonstrating the same unarmed manner in which the guest is greeted.

The Japanese, although not quite the same gestures as demonstrated above, bow to their guests. The bow demonstrates trust in the guest to the extent that the guest would not take advantage of the host's weakened position to be beheaded. The ancient samurai would never bow to anyone, friend or foe, except to his lord and master to whom he owes total royalty and for whom he would die for.

Another example; it has been said that the Vikings celebrate a victory by holding up the skull of his slain enemy which is filled with alcohol and a shout of “Skol!” In the East, where drinking is a socio-cultural norm, both guests and host will raise their cups of alcoholic beverage to celebrate the occasion. Although the former is of more macabre nature than the latter, they both share the same celebratory significance. Universally in practically every culture, people hug each other to express love, friendship and fraternal warmth.

One exception may be the Eskimos who demonstare similar sentiments by rubbing each other’s nose with his or her own nose. Perhaps their cold climate has something to do with it. Covered from head to toes in warm clothing, the only expose body part is their faces. Maybe that’s why they rub noses!

Western Businesses Need to Redesign Their Business Models to include Asian clients

Earnings in Asia and across emerging markets like China have remained solid, underlining good fundamentals and superior growth prospects, compared to the West, according to leading economic development agency, Vector Scorecard (Asia-Pacific) ("VSAPAC"), an entity that is partly equity-funded by the investment arm of the Singapore government agency, Spring SEEDS Capital.

VSAPAC believes that an increasing number of businesses will be looking a bit beyond the domestic market and diversify overseas, particularly given the exciting potential of Asia and the emerging markets. Asia and other emerging markets such as Brazil would continue to offer better returns as the most of the economies in the developed world - the US and Europe - would remain sluggish. Growth rates for China and India, in particular, are showing upward trends, even as countries in the euro zone, such as Greece and Spain, grapple with large debt burdens and budget deficits.

The Asian Development Bank expects developing Asia to grow 7.5 per cent this year, and 7.3 per cent next year, picking up from 5.2 per cent last year.

"Growth is likely to continue for the last quarter in 2010 for most parts of Asia, although next year the growth rates are likely to be not as high as this year because this year you had the benefit of the trade recovery against last year," said M Nazri, Group Managing Director of the VSAPAC Group.

Mr Nazri also said sectors such as consumer discretionary, financials and industrial companies are likely to lead the growth trends.

"Within the financial sector, we are likely to see emerging market banking sectors in Brazil, Russia, India, Indonesia and China to shine. Most banks in these regions are still underbanked, particularly in mortgages and consumer financing and where the banks, with the exception of some banks in China, are in reasonably good shape," he said.

In view of the bullish Asian broad-based, growth story, VSAPAC strongly recommends that businesses in the West should consider designing their business models to include Asian clients. Some of the steps would be:

1. Start researching on B2B and B2C patterns, trends and dynamics in emerging Asian economies
2. Identify potential partners and distributors in Asia
3. Relook into their product offerings and ensure compatibility to the Asian markets
4. Consider franchising their brand for the Asina markets
5. Understand better the Asian culture and ways of doing business

Primer for Credit Guarantee

By Patrick Chong

A credit guarantee is a commitment by a credit guarantee agency to reimburse a lender if the borrower fails to repay a loan. The lender pays a guarantee fee for the use of the credit extended.

An export credit agency’s aim is to benefit the respective economy by helping exporters of goods and services to win business, and for firms to invest overseas, by providing guarantees, insurance and reinsurance against loss.

Typically export credit agencies are required by their respective government to operate on a slightly better than break-even basis, charging exporters premium at levels that match the perceived risks and costs in each case.

The largest part of credit agencies’ activities involve underwriting long term loans to support the sale of capital goods, principally for the export of such goods such as aircrafts, bridges, machinery and services. It helps companies take part in major overseas projects such as the construction of oil and gas pipelines and the upgrading of hospitals, airports and power stations

As part of its risk management process, the credit agency has to make a judgement on the ability of a destination country to meet its debt obligations. The credit agency or department uses a ‘productive expenditure’ test, or some other tests of a similar nature, that makes sure that the countries defined as Heavily Indebted Poor Countries and those exclusively dependent on International Development Association financing only get official export credits from the beneficiary country’s government for projects that help social and economic development without creating a new unsustainable debt burden. The credit agency is obliged to continue checking that the proposed borrowing is sustainable.

Credit guarantee agencies are normally operated by governments. There are instances where private banks, as a group, joined with the government agency to provide such credits. The reluctance of private banks stem from many factors. One such factor is the fact that SMEs are numerous in numbers and have limited skills and capability. Another factor is inability to judge if the companies are up to the task, especially if the projects are large or complex. Yet a third factor may be due to SMEs inability or unwillingness to provide financial accounts making it difficult for banks to assess the solidity of the business.

Vector believes that government agencies have to take up the cudgels to support these SMEs in their efforts to win businesses and contracts. The difficulties encountered in assessing viability of business or projects means that these government agencies have to shoulder what ought to be a vetting and assessment process best suited to commercial banks who are generally in a better position in conduct due diligence as these banks have networks of information sources not typically available to government agencies. This being the case, these credit agencies are fulfilling a social role and are not for profit entities. Such funding can often cause friction between nations as they are seen to be subsidizing exports and not playing on a level field. In this respect, these agencies are unjustifiably seen as the “bad guys”.

In a nutshell, Government credit agencies, for better or worse, are a necessity and play a critical role in keeping their economy, and by extension, the world economy growing.

Global economic recovery means more tender opportunities for private sector: Vector Scorecard

By Patrick Chong

The global economic recovery has been better than expected. The forecast is for the world economy to grow low single digits for 2010 and 2011 . Although the rate of recovery differs from country to country, as a whole, there is a distinct trend that the recovery is much stronger compared to 2009.

Asia is leading the recovery among emerging and developing economies. Among the advanced and developed countries, United States is ahead of the pack that includes Europe and Japan. The laggards in the recovery are the emerging European economies and Commonwealth of Independent States.

The positive recovery coupled with low interest rates translates into millions of tenders that can be expected from institutions like the World Bank, International Monetary Fund and Asian Development Bank, to mention only a few. The two giant economies of China and India are expecting GDP growth of 9.6% and 8.8% respectively.

Vector expects the coming months will see increased tenders for major areas like infrastructure and construction tenders, information and communication technology and services tenders in financial and economic consultancy.

SMEs and Innovation: Top 10 List

Government agencies around Asia are citing innovation as a key driver of growth of SMEs. To this end, several schemes and initiatives are being formulated and launched to encourage SMEs to embrace and adopt innovation for their business. As a start, we put together a list of steps for SMEs to kick off innovation effectively. Here is the list:

Step 1: Know what innovation means

First and foremost, be sure you know what innovation is. Innovation is the implementation of creative ideas in order to add value to the firm, usually through increased income, reduced operational costs or both.

Step 2: Innovation is best embraced in groups
Understand that innovation is not an individual but a group thing. Do remember that an idea is not an innovation. It is only the beginning. In business, ideas need to be evaluated for viability, developed into concepts and turned into reality. A new product idea, for example, will likely involve developing prototypes, seeking feedback, testing functionality, setting up production facilities, seeking suppliers and much more. Each of these steps requires the participation of numerous different people, all of whom contribute to the overall innovation process.

Ideally, new creative thinking will go into the product concept at every step of this process, making it more and more creative all the time!

We must recognise that Risk adverse committees or individuals tend to remove creative elements of new product ideas at every step of the production process, thereby reducing innovation potential. If you company is like this, you either need to get rid of those committees or start with incredibly creative ideas so that by the time the committees finish with the ideas, they still have lots of innovation potential.

Step 3: Define your innovation goals and link to bottomline
You need to have clear innovation goals to aim for. Fortunately, these goals tend to be rather similar to strategy and business goals. So, it is usually a simple matter of reformulating these. Typical innovation goals might be to ensure that 25% of your product line is replaced annually; or to improve process efficiency by 5% per year; or that your firm is the technology leader in your sector; or that your company achieves a billion dollar turnover by 2012.

Step 4: Put your money where your mouth is
You need to set up an innovation process, put a team in charge, invest in innovation tools and invest in training. That all requires money. Moreover, you need to make a pot of money available for implementing highly risky yet potentially highly innovative ideas. After all, the ideas with the greatest innovation potential are by necessity radically different to business as usual. This means they are also risky. If you are going to aim for breakthrough innovation, then you need to provide budget for developing and implementing breakthrough ideas.

Finally, bear in mind that if your innovation budget is zero or has ambiguous commercial direction, the attention your managers will give to innovation will also be zero! On the other hand, if there is budget for innovation or potential for high commercial success, you can be sure your managers will be scrambling to participate in the process!

Step 5: Promote an innovation culture
For creativity and innovation to thrive, you need to have a corporate culture that nurtures creative thinking, sees mistakes as on the job training and embraces every step of the innovation process. Sadly, very few firms actually do this.

For instance, what is the typical response to an intern who announces a wild and crazy idea during a unit meeting? Is it (a) to laugh knowingly and explain that there is no budget, the CEO would never like it and that the intern clearly does not know how things work in your company? Or is it (b) to congratulate her on a clever idea, discuss the challenges that would be faced in implementing that idea and asking her to work out how she could improve the idea so that it can overcome the challenges?

Step 6: Establish diverse teams
Diversity is not only politically correct, it is also innovatively correct! Diversity of membership brings a broader range of knowledge, experience, thinking and creativity to any team. You should therefore ensure that project teams, problem solving teams and all teams that are expected to contribute to your innovation process are as diverse as possible.

Step 7: Collaborative tools
Collaborative tools can help support your innovation process. In smaller firms, Wikis, blogs and shared documents permit a lot of collaboration with little technological investment. In larger firms, innovation process management tools can help ensure cross enterprise collaboration, facilitate collaboration by predefined teams as well as ad hoc virtual teams and provide a detailed record of your innovation results. But be careful to choose tools and use them to achieve your innovation goals. Many tools might be great for generating and sharing ideas, but if those ideas are completely irrelevant to your goals, they will not help your firm become more innovative.

Step 8: Make mistakes and learn from them
Most great innovations are built upon mountains of mistakes. As long as you can identify ideas that will not work relatively early in their implementations, you can kill them before they eat up too much budget. You can then congratulate the team responsible for their efforts, evaluate what went wrong, learn lessons and try again. But as soon as mistakes cost people jobs, no one will dare to try anything very radical – and that will kill all but incremental innovation.

Step 9: Implement
Innovation is not about ideas or creativity or training programmes. It is about implementing creative ideas in order to add value. If your firm is reluctant to implement highly creative ideas, then your entire innovation process will be little more than a creative thinking exercise. Moreover, if employees note that highly creative ideas are routinely not implemented, they will not bother sharing or developing such ideas.

Step 10: Evaluate and improve
Your innovation process can also improve through innovation! That's why you need to review the process and the results on a regular basis. Moreover, use your innovation process for generating, developing and implementing ideas for improving that innovation process!