Current Crisis due to COVID : Running your ship during testing times
Few events have shaken the world more than the ongoing Covid crisis of 2020. A global pandemic which has drawn eerie similarities to the Spanish flu pandemic of 1920’s, promises to disrupt global supply chains, affecting demand and supply across numerous countries, risking mass unemployment and an impending global recession. In such uncertain times, it has become increasingly difficult to operate global organizations as well as Small Businesses, both of which have been challenged fundamentally in terms of their ability to handle massive financial shocks, become drivers of employment and growth in an already fragmented geopolitical landscape.
Here are some of the strategies that companies and businesses must take to remain relevant in these uncertain times:
1. Reduce Leverage: This has been a proven strategy for running medium and small business enterprises, but never has this strategy been more relevant than today. Leverage, which is the ratio of the debt levels of a firm to its equity, shows the overall debt or loan levels of the firm as a percentage of its total net worth, which is the difference between total assets and total liabilities. Leverage can be reduced by access to lower cost debt. That would mean having your Loan against Property or Term loan taken over at a lower interest rate. Central Bank of India ( RBI ) has already announced cut in Repo and CRR, with banks following soon to reduce overall MCLR and lending rates, from an average of around 10% to less than 8% in coming months. Also, using Overdraft facilities instead of Term loans can help in interest payment on utilization, thereby reducing overall obligations. Also, injection of subordinated debt or quasi capital from known circles, friends or relatives is an effective way of running your company during these testing times. One thing’s for sure, the lower your leverage, the better your chances to sustainable
2. Use historical data to segment your buyers and suppliers: Your debtors (Customers) and creditors (Suppliers) form an integral part of your value chain. Analyzing them today will give you valuable insights into their financial health and payment behaviours. You will be surprised to find that many of your customers who comprise a very small portion of your overall sales delay payments, unnecessary stretching your debtors cycle. Similarly, there are several suppliers who supply miniscule to our overall raw material pipeline, however demand immediate payment. In times such as this, it is better to have a bit of concentration risk in both suppliers and customers, given new suppliers might be untested in terms of quality, and new customers might be attractive at first but may not have a long term sustainability and timely payment capability. As they say in businesses, sticking to basics is very important. Your stretched debtors days also pushes your banker to re-think about your overdraft limits, thereby pushing you towards more costly debt, like Term Loan, Loan against Property and Unsecured Business Loans. Hence, de-risking your portfolio at this point might be crucial to your long term sustainability.
3. Shift focus on core businesses and move towards logical diversification:
There is no greater recipe for failure than trying multiple things and failing in all. For an SMB, it is crucial to diversify but only in the right segments. Firstly, diversification requires capital and within the first few years, expectation of profitability is also low. While any uncertain time is good for new innovation, it makes sense to do logical diversification which is low in capital investment, and can generate immediately revenue and profitability. For instance, a shoe manufacturer can start a secondary line in shoe polish, while an IT services giant can start an onshore analytics firm as a driver of growth. However, illogical diversification can prove both costly, time consuming and destabilize the firm at this point.
4. Hold on to your people, the right ones are willing to stay :
People can form crucial part of any organization, more so for SMB’s, which are traditionally Family managed and have a long legacy of employees who are willing to support the organization through thick, and thin, both with their intellect, manual labour and intangible affinity towards their employer. While cash flows tighten, it may become difficult to pay salaries to employees, but it’s these kingpin employees who would be willing to accept pay cuts and stick on during these uncertain times, not taking a flight when the good times are back again. Hence, employing low cost and effective skill development techniques along with cut in wages for few subsequent months is the way forward during this crisis, rather than layoffs.