The moving goal posts
Look for the champions in the downturn. Are Mauritian businesses well prepared to battle recession? The slowdown is inevitable, but a good preparedness to the tough times would help shorten the duration of the downturn and also dampen its severity. The environment in which businesses operate has changed drastically from what is used to be only a year ago. Consumer spending in the main markets has fallen apart. Credits to finance production and sales are being squeezed. The supply chains and distribution channels are coming under stress as distributors and suppliers seek to cut costs - some even eliminating entire layers of intermediation. Companies that are at pains to keep track of the changes are more likely to see their fundamentals moving rapidly out of tune with earnings targets that were set during the good days.
These rapidly changing conditions impact painfully firms' bottom lines which in turn put jobs and sometimes the very existence of the business at risk. Managing a recession is a painful task and requires firms to make tough choices. But first, entrepreneurs and boardrooms must recognise that the environment has changed and that they should revisit their assumptions in the light of these changes. Understanding the new business dynamics is crucial to having the right responses to the real problems. For inapt actions can make things worse and may precipitate the downfall of otherwise viable companies.
Whilst there is little argument over the need to cut costs when operating conditions are getting tougher, what really matters is where to apply the axe. It would not make sense to adopt a cost-cutting strategy in a cost configuration that is no longer relevant. Firms that realise they can’t afford to make mistakes in a downturn would undertake a value chain audit which would help them identify the new cost-drivers. The cost structure must be readapted to the revamped operations of the business.
Care must be taken not to hurt the core activities. If anything, the cost-cutting exercise should reinforce what the company does best. "Cut the fat, not muscles", argues management expert Dr Joseph Prokopenko, a world-known productivity expert at a high-level lecture during his last visit to Mauritius. He warned against the idea of applying an arbitrary costs cut fraction across all units. This occurs when management fail to spot the right costs and value drivers when business is contracting. Keep investing in the core business, he suggests. Instead of axing jobs, companies can shift people to areas and operations that need additional resources to keep the business moving.
The expert also warned not to rush to cut prices in a recession. Strong margins are needed to sail through the rough waters. Firms should not use all their price ammunitions at the first signs of weakening activity. Price reductions just like job cuts should be viewed as last resort actions.
However, in a slowdown cash flow is more important than profitability. Managing the cash flow should become a priority as many businesses go under because they run out of cash even when new orders are still coming in. Payment collection procedures must be improved and prompt payments must be encouraged. Late payments, which are a common feature in a challenged business environment, can be very disastrous for small companies especially. Arrangements like invoice factoring can prove very handy in keeping liquidity on course.
But more importantly there must be a tighter screening of customers and channel partners before starting a transaction. Many businesses go bust and leave bills unsettled. Firms have to ascertain as far as they can that their clients will still be around to meet their payment commitments. Liquidity gaps must be anticipated in more proactively. Companies must work out their credit requirements early. As bank lending becomes tighter, they must secure borrowing and overdraft facilities well in advance.
The changing consumer behaviour also poses new challenges to the cash outlook of the firm. Last minute orders and bookings change the way stocks are held and consequently on the way cash is being converted.
SMEs, in particular, might not have all the necessary know-how to turnaround their operations in the best possible way. They must be encouraged to bring in specialist knowledge from outside. Expert advice can be extremely vital whilst sailing through the storm.