Writuparna Kakati | 21 Nov, 2008
These days, looking out the window is not pleasant. There's such a heavy storm and thunder outside. Bailouts, bankruptcies, equity market volatility, job cuts, cash flow pressure.... the speed of recent movements in the world economy has ebbed the confidence of everyone.
The world economy is in turmoil and its impact is being witnessed by all countries around globe with varying degree. In India, the situation is not so much awful till now. India has taken an array of monetary and fiscal measures, in quick succession, to contain inflationary pressures and, more importantly, to make available adequate domestic resources to maintain growth in the face of an unprecedented international financial crisis and global economy drifting into recession.
But still, all is not well in Indian industry. The impact of global economic crisis has now slowly started impacting the Indian businesses as well, especially those which are either internationally exposed for raw materials (steel, oil) or whose revenue is in dollars. Along with these biggies, Indian SMEs (Small and Medium Businesses) engaged in export business are also facing the hit mainly because their sales are shrinking in the overseas markets (India's export growth rate slipped to 15 percent in October, the lowest in five years).
Despite depreciation of Indian rupee by about 20% in the current year, Indian SMEs are facing challenges mainly due to general slow down in world economy. Many of their buyers are either canceling the order or postponing them to a future date. Buyers are also demanding longer period of credit to tide over the present financial crunch. There has been a general decline in the export orders from the US and European markets particularly in sectors such as garment, textile, leather, marine, handicrafts & life style products, etc. The trend is towards the low priced goods even in Europe and US and Indian exporters are thus facing the challenge to modify its production line to target this segment.
As a whole, the confidence is not high enough despite multiple coordinated policy actions undertaken in the past two months by the government. But confidence rarely remains stuck in the basement. A recent survey by 'Kadence Research India' shows that a large number of India SMEs are confident that their business will grow over the coming year despite a slowing Indian economy and tight credit markets. While economic downturns are admittedly difficult, this kind of confidence is necessary to overcome the current obstacles and even to turn the economic downturn into great opportunities.
But confidence alone cannot change one's destiny. SMEs must understand that the current situation demands cowering in the bunker and fight back as well. They have to wait the storm out while searching for creative paths through the storm at the same time. The challenge of successfully navigating a business through an economic downturn lies in the realignment of a business with current economic realities. Business owners should focus on expanding their client base, reducing the operating expenses, conserving cash and protecting assets. Confidence as well as a well planned strategy is the utmost necessity at this moment to beat the back of the beast.
History shows that economic downturns do not last forever. You cannot control the condition of the economy and therefore you should not worry much about it. Your focus should be upon what you can control - your relevant business activities. Neither take too much stress to do too much on your own. Communicate effectively with your employees, suppliers, lenders, customers, and advisers and try to find a way out. Also try to negotiate better deals and contracts keeping in mind the fact that you want a favorable outcome for yourself, every time. Practice the following activities:
- Monitor your cash flow carefully. It is advisable to forecast your cash flow monthly and ensure that your expenses do not exceed them. Also project your cash requirements a few months in advance. Try to collect your accounts receivable as soon as possible. You can offer prompt payment, change in the terms of sale for slow paying customers discounts, make efficient invoicing and minimize billing errors as much as possible to ensure efficient collection system that generates timely payments.
- Make the best of your existing inventories. Evaluate how much raw materials, unfinished goods in production process in progress, finished goods ready to be sold etc. you have and convert excess, obsolete, and slow-moving inventory items into cash. Resize your inventory, reduce it without losing sales. Also try to increase your market share selling more to your existing customers, increasing the value of every transaction after a customer chooses to buy from you and expanding the customer base targeting which groups of customers are not yet targeted. Also focus upon increasing customer satisfaction and emphasize to sign long-term contracts with your core clients which will add to your security.
- If your business depends on products or services from suppliers, you should try to negotiate with them and obtain cost reduction. Convince your suppliers that you value the relationship you have developed but you need a cost reduction immediately as your company has reviewed its cost structure and has determined that it needs to lower supplier costs. Also ask for a longer payment cycle. When it comes to your lenders and banks, show them your action plan that includes your cost-savings initiatives and point out to them why it would be in their best interest to agree to a new arrangement.
- The first thing businesses usually do when they face financial crunch is to cut their advertising cost. It is a negative approach. In contrast, it is better to evaluate the possibility of increasing the advertising expenditures when the competitors are down and out. Businesses should realize the advantage of the reduced "noise" and congestion (fewer advertisers) in the marketplace. The downturn period is the best time to promote your brand.
- Needless to say, when you have less pennies in your pocket, it is most important to review your expenses. Attempt to eliminate unnecessary expenses. Tighten your belt and target an across-the-board cost-cutting initiative. Try everything - consider revising your insurance coverage to reduce premium costs, stop recruiting new employees and seek the help of a professional business consultant.
- Beware of the pitfall of jumping into the decision of down-sizing your staff or job cuts. While it is a sure and certain way to reduce business cost, downsizing your staff to a level may force you to skimp on customer service and quality. In addition, it leaves a bad impression in the market, among the customers and share holders. Most companies ramp up hiring new employees in the good times, only to find later that they are overstaffed due to slow sales. So, stop recruiting new employees if experts are suggesting that better weather is still a long way off. Instead, it is better to consider outsourcing certain functions to independent contractors.
The bottom line is that through well-planned initiatives, businesses can overcome the obstacles and horripilation inspired by the global financial crisis. They have to search for creative paths through the storm. Some experts have viewed that the weather might hit 2009 hardest. If it really happens, industrial countries in Europe and growing economics like India will have to bear most of the brunt of the storm. And needless to say, SMEs will be the worse hit. That is why it is the right time for businesses, both small and big, to implement some smart business practices that make their future recession proof.
