Bangkok--3 Dec--Grant Thornton
Year 2008 has been a rough ride for the economy and the financial sector. The “credit crunch” issues in the US and Europe have led to slowing growth, weakening demand and declining lending by financial institutions. The financial crisis has dramatically changed the plans and outlook for businesses the world over. In Thailand, political instability has compounded the issues to make these very challenging times for business leaders.
As Peter Walker, Partner of Grant Thornton’s Business Consulting unit opined, “Around the world we see governments taking a more pro-active approach to resolving business issues, helping both local and global economies by injecting public funds into supporting financial institutions, stimulating domestic spending and launching infrastructure projects. Unfortunately in Thailand, the government is hampered by the ongoing political instability.” Mr. Walker commented, “This is a really bad time for a country to be focused on questions of political ideology, rather than cooperating across public and private sectors to stimulate and manage the economy.”
Recession guide for businesses
Grant Thornton advice to businesses is to take proactive steps to prepare for the challenging period. In the current environment, businesses need to make fundamental changes to their strategies and approaches to assess risks and opportunities. With careful planning, foresight and a touch of innovation, businesses that are well-capitalized, well-positioned, and well-managed should be able to turn the crisis to their advantage. Sitting still and waiting for the recession to go away could be a recipe for disaster.
Focus on core business
This is a good time to review the business portfolio and focus on core businesses that will generate higher return. More than ever, the old adage of “focus on what you are good at, and do it very well” is valuable advice. Produce the products that the customers want, not necessarily the product that the company likes to produce.
Strengthen liquidity
Cash is extremely important in a slowing economy, as it is the lifeblood of any business. Manage cash intensely and strengthen the companies’ liquidity as much as possible.
Stress-test your business plan and understand the resulting impact on liquidity. Based on your financial projections, forecast your cash flow, including near to medium term receipts and payments, identify peaks in demand for cash, manage your receivable balances and improve your cash conversion cycle.
With your suppliers, bargain with them for the most favourable credit terms and balance the benefit of early payment discount against your need for credit. For inventory, sell-down aged inventory, reduce inventory levels, decrease investment in stock, improve stock management and employ just-in-time stock management.
Steadily control cost
During the economic downturn, most companies try to cut costs to ease margin compression and improve on liquidity. Intelligent cost control across the board is recommended. Understand the company’s fixed and variable costs and do not overlook any outstanding liabilities that are not reflected on the balance sheet. Institute policies that encourage and reward cost savings and cash conservation.
Do not automatically cut marketing costs or employees as it might affect the business operations and competitive position when the market conditions pick up. A cost database is important, enabling multi-dimensional analysis to improve cost-related decision making. Build a cost database and keep it updated.
Focus on key customers
In times of slowing sales, competitors will be more aggressive in their efforts to win over your best customers. It is recommended for companies to strengthen the relationship with all key customers. Understand their needs and try to improve the quality of services or help them reduce costs. Customer relationship management and customer experience enhancement initiatives are recommended to keep them loyal.
But don’t forget to keep a weather eye on the upstream of your value chain. Ensure that your suppliers are robust and in good shape.
Carefully consider your investment plan
Don’t automatically stop investing. Consider investments in core-business assets with the potential to generate higher income in the short-term. Re-focus away from longer-term innovation but encourage innovation that may achieve shorter-term revenue increases or improve cash flow. Do not cancel an investment if it is vital to keep the business operating properly. To further preserve cash, management teams may consider the use of asset-financing or debt to acquire assets.
Get close to your Bank
Proactively manage your relationship with your lenders. Treat them as a partner in the business. Keep them informed and help them understand your business. If your company needs additional borrowing, have a plan in hand and give them prior notice. It is always better off if the management is the one to tell the bank about any issues, rather than have the bank discover it themselves. Stay current on your company’s debts and ensure the company has the finance available to operate the business effectively.
Be strategic in workforce management
Focus on productivity and manage excess resource. Look after top performing and loyal employees. If companies must retain excess workforce, try to agree reduced or flexible hours and compensation. Consider using training programs to build their skills to make them more efficient and productive, preparing the team for the eventual upturn.
Retention is vital in the downturn period. The CEO has to demonstrate that the company believes that people are the greatest asset of the company. Don’t just pay lip service to people issue. Take it seriously, and do it right away. Avoid excessive micro-management of people. It is tempting to start micro-managing, to be seen to be ‘doing something’ about the crisis. Focus on the critical issues, give clear direction and let the management and people get on with their tasks.
Keep an eye out for bargains
As lending markets contract and demand weakens, a number of the companies that have liquidity problems will consider a sale transaction as a viable option due to a need to realise cash, a lack of confidence in a recovery or just to focus on their core business. These situations create buying opportunities at attractive prices. Best buys are often made in a down market.
The limited access to capital may force other potential buyers onto the sidelines. The result will be less competition for attractive acquisition targets and thus, reduced pricing multiples on acquisitions. Working with a good professional advisor can increase awareness of such opportunities, while ensuring transactions are priced and executed in an effective, cost-efficient manner.
Protect personal wealth
Business owners should think hard about financing options before they agree to become more personally exposed for the sake of business. They should ask themselves the following questions; can the business survive a long-term recession? What will they do the next time the business needs cash? Debt is not the only source of cash. Consider other options. Equity financing may be a safer alternative. If you choose debt financing, try to avoid personal guarantees and pledges of personal assets to secure business debt.
Summary
Businesses must take measures to help cope with the effects of easing demand. It is important that management truly understand the business, competitors, industry dynamics and cash flows. Understand the value drivers. Be prepared to take tough decisions. Businesses adopting a strong, strategic approach into and out of the downturn will be the stars of the future.
Peter Walker concluded, “No one enjoys a recession. After the recession is over, the playing field will be changed forever, with new players arriving, some venerable older players exiting and a different relationship between the public and private sectors. However, if you keep a cool head, think strategically, manage with a firm hand and act with confidence, you may not only survive, but may even emerge as a stronger player.”
A full copy of the Recession Guide report can be read at www.grantthornton.co.th
About Grant Thornton in Thailand:
Grant Thornton in Thailand is well recognized by the business community as one of the leading professional service firms in Thailand and has been in Thailand since 1991. We helped many clients successfully navigate the Asian economic crisis of the late 1990s, applying a mixture of techniques, including debt restructuring, cost cutting and business plan revision. We have also helped many clients realise acquisition and expansion opportunities.
Our services include business consulting, external and internal auditing service, domestic and international tax planning, corporate finance advisory, restructuring and reorganization, merger and acquisition, executive recruitment, succession planning and remuneration planning. To learn more about our firm, please visit our web site: www.grantthornton.co.th
Further enquiries, please contact:
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