by Josef Busuttil, FECMA President
The Covid-19 pandemic is not only unprecedented but it is having a huge impact on the global economy, with leading economists predicting more disruptions in the supply chain, remarkable shrinking economies in 2020, high rise in unemployment which would lead to social unrest, and financial future consequences of the unpredictable high budgets allocated to the NHS by every country in order to fight this virus, to name some few.
Inevitably, businesses are currently struggling to manage this recession, especially those that were highly geared and inadequately capitalised before this pandemic outbreak. Nevertheless, it is highly commendable for all businesses to continuously monitor changes in the traditional ‘business norms’ in order to identify any opportunities whilst manage any potential risk as early as possible, maintain a healthy cash flow and avoid unnecessary bad debts in order to survive this extraordinary challenge.
In my opinion, to manage this recession, one has three main options (depending on the industry type):
- Increase capital and cash flow by taking up more credit or loan facilities from a financial institution or from trade suppliers, while continue deploying the current systems, processes and procedures, hoping for the best to come sooner;
- Reduce running expenses and raise more capital by selling some of the organisation’s assets, decrease the departmental budgets, and make employees redundant or make them work on reduced hours;
- Restructure by investing in innovative systems, processes and procedures, that would result in cost effective ‘modus operandi’ in order to survive the recession and also to prepare the business organisation to benefit from the recovery when it comes.
It is not the easiest task to decide which option is best for a business organisation during such a deep economic crisis, especially when demand for products and services decreases significantly or disappears completely, cash flow is at its worse and profit shrinking.
At face value, the first two options may look more feasible as they may both give prompt results, but what about the long-term implications?
For you to ponder!
- Taking up loans and credit facilities at very low interest rates on offer today is tempting. But what would be the effect on cash flow and profit, especially if the business is already highly geared? Loans and credit facilities taken today should be repaid tomorrow!
- What would be the effect on the operation of a business, if the budgets for marketing, sales, operations, training, IT, R&D, and for the credit function had to be reduced?
- What would be the impact on the future performance and possible growth of a business organisation, if one had to divest or sell some of the firm’s assets and resources?
- What would be the effect on the employees’ motivation, if they had to be forced to work on reduced hours and some of them had to be laid off?
- How effective and efficient a firm would be when the recession is over, if the skilled and experienced people had to be laid off and probably they would end up working with the competitors?
These are the questions that one should address before choosing the strategy to manage this recession.
I would personally take the longer, the tougher, and the most laborious route – the third strategic option – as I strongly believe that a recession period is the ideal time to invest for the future, to ensure that the business organisation is in a state of readiness to capitalise fully when the economic and financial recovery begins.
A compendium of business studies contend that improvements in the internal systems, processes and procedures would result in better profit. And this also applies to the credit function. If we had to improve the way we grant and extend credit to our customers, it would probably attract more profitable sales, improve cash flow and ensure long-term profit.
Reichheld and Sasser conducted a study in 1990 and demonstrated that relatively minor improvements in customer defections can generate significant improvements in profit.
Using Reichheld and Sasser’s argument, I ask:
- What would be the result if one had to improve the processes and procedures that are currently being deploy to grant and extend credit?
- What would be the result if one had to improve the invoicing system in order to decrease the number of disputes with customers?
- What would be the result if one had to improve the internal communication system with the senior management team and with the other departments, such as the sales and the distribution units?
- What would be the result on the cash flow of the business if one had to improve the Accounts Receivable/Debtors List monitoring processes?
- What would be the result if one had to improve the communication with customers when asking them for payment and threat them as truly esteemed customers and not as debtors? Understanding and empathising with customers are critical during this pandemic crisis!
- What would be the result if one had to employ effective measuring tools to assess the performance of the credit function?
Nonetheless, businesses recognise that their markets have changed and some economic sectors are completely closed with no revenue streams whatsoever and thus, lack the much needed cash flow to survive.
Some other organisations are going bust and filing for bankruptcies. It is evidently clear that some successful and growing businesses (until January 2020) may now be struggling to survive, laying off employees and will become insolvent if economic measures taken by the health authorities (and rightly so), will not be released soon. Surely, this market adversity aspect needs thorough consideration by the trade creditors, as the financial data on customers has become not only out-of-date and obsolete but also irrelevant for the purpose of credit worthiness analysis. Therefore, Trade creditors should find other avenues, tools and sources of information that assist them in their credit decisions.
Business communication is the only way forward during these challenging times!
- Communication with customers in order to learn about the changing needs of customers and to monitor customers closely has become
- Industry Credit Group Meetings should also assist trade creditors understand the changing environment of their industries and possible strategies may be discussed and
- Sharing of data through Credit Reference Agencies, is another helpful tool. Businesses get factual and daily credit information from the horse’s mouth in order to monitor their customers closely and effectively. Fresh and factual customer data reported by the trade suppliers is most significant and relevant for businesses to base their credit decisions on and to take appropriate actions when collecting money from their
During a recession, the secret lies in investing in what a firm already owns and manages. The recipe for future business success is getting ready for when the weather gets bright and sunny again and not staying indoors complaining about the bad weather. When it is bad weather and you cannot get outside, take the opportunity to put your house in order, so when the right time comes, you will be well prepared to go out and gain competitive advantage in the market!