Dark clouds

The year is coming to a close as Christmas is round the corner. However, the global pandemic is far from over and for many, the year end of 2020 will not a joyous season for celebration. What is even more worrisome for many business owners and employees alike, is what’s going to be like comes 2021.

Government policy responses in many places do appear adequate and timely. Many companies and businesses are left to fend for themselves because of limited funding, complexities of the pandemic situation and politicking among government leaders. Therefore depending on assistance from the government will be waiting for rain in the desert.

At the end of it, the self-reliance and resourcefulness of the business owners must carry the day, come what may. While many of us have not been through the 1920s depression, the educated among us have  some good idea of what to expect and perhaps, prepare to lessen the negative effects on our businesses and the lives of our employees and families, as best as we can.

Abort or continue

This is a tough question and even tougher decision to make for the present generation of business owners and investors in the face of the uncertainty that they have never seen before. To continue is to accept more risks, which are unfathomable at this stage, and a need to commit even more financial resources.  Even the friendliest of bank managers are not likely to be more helpful, beyond some encouraging words, if any. Many of the bankers too, are uncertainty about their own survival come early 2021.

Option 1 – to abort

The choice to abort must be weigh with the opportunity to save some financial resources for a more certain alternative. We all know and have seen that businesses must adapt to new circumstances now – lower revenue levels, at least for a while, new regulatory constraints such as on health requirements and travel restrictions, use of online platform for many businesses and changing rules of business such those for as tax on digital transactions. Limited funding and market uncertainty may just well encourage a more conservative, or cautious approach.  Hopefully, the saved resources can be deployed more efficiently for new opportunities brought about by this pandemic.

Option 2 – to continue and face the risk

We don’t need heroes to put up a brave front, but it is a real heartache to see efforts and sweat of the past 10 or 20 years going down the drain. It is terribly devastating to the business owners and investors who see their fortune and future going up in smoke.

 

What shall we do

Sure. Then we don’t give up like that, and so we put up our effort, get some funds as much as we can muster, and go face the situation. Perhaps we try to think as rationally as we can and make it a good fight, and perhaps some of the steps outlined below might be helpful. So if the shareholders, the business owners, partners and management executives all are willing to stay for the battle, then we shall do the following before discussing with the bankers.

 

1. Scan and analyse the economic and industry environment
2. Assess the customers of the new environment
3. Review the business and do a SWOT analysis
4. Re-engineer the business cost structure
5. Manage the balance sheet
6. Develop a new business model
7. Develop a realistic revenue and cash forecast
8. Formulate an implementation strategy and plan
9. Build a new team for the new business model

 

1. Economic and industry environment

The economic scenario must be assessed although it is anyone’s guess at this moment. So the analyse should be broaden to include – the worst, the best and the likely. Each type of business is unique and has its own peculiarities and features. The business owners and their management teams are best to know their businesses and their environment. Even the best management consultants will come back to ask the management team for their outlook.

If the economic outlook is justifiable to take the risk of continuing then business, then the next may be an assessment of the industry. Perhaps we can label the industry as a sunrise, sunshine or a sunset one. A sunset industry is one which is over the horizon and not likely to recover. Continuing business that belongs to a sunset industry is not a profitable idea at all.

 

2. Customers of the new environment

The current pandemic has changed the lives of millions round the world. That means millions of consumers of many products and services are changed forever by a change of lifestyle, especially with lower income and unemployment, restrictions on travel, and adapting to online transactions for shopping, education, financial services and health care services, all brought about by artificial intelligence.

 

Education, financial services, restaurant services, holiday and travel, and retailing, are undergoing tremendous transformation and the markets that used to be may have totally changed for some time to come. The company’s goods and services must be re-evaluated in terms of their relevance to the new consumers, as well as the methods of reaching and serving them. Retaining the old traditional ways of making products and serving the customers would be outdated by now, except for some types businesses.

 

 

3. SWOT analysis

During normal times, management inefficiencies and less than desirable quality of work may be tolerated. But as we can now feel, competition will be even more severe now that all competitors are trying to catch the falling consumption spending.

 

The SWOT analysis will highlight and force the business managers and their owners, to recognise the shortcomings of the organization and the employees, as well as any hidden advantages that have not be exploited during normal times. A well-conducted SWOT analysis may also bring out the opportunities and risks that the company can expect, and to prepare for them, before they happen.

 

It is noteworthy that frankness or honesty will help the organization to overcome the challenge. We can expect some challenges in this SWOT analysis as people do want protect their ego as well as jobs. Without proper and unbiased handling by the senior management, the exercise of the SWOT analysis may not serve its purpose.

 

4. The operating cost structure

The cost structure of a business, particularly the one that has been built over the years, tend to have lots of ‘fats’, or padding with inefficiencies. Lower productivity, slower pace of work, ‘normal error’ rates, and ‘inflationary’ costs are part of normal operations, because the business environment with better revenues and profit margins can absorb them with ease.

 

Looking at the new leaner and meaner environment ahead in the 2020s, this luxury of cost padding is gone. Employees are expected to work harder with less head counts, work faster to compete, and lower error rates, all of these would contribute to cost efficiency. Accountants would focus on fixed and variable costs and discretionary costs as well. But without addressing the efficiency of the employees and managers in the organization, the fixed – variable cost dichotomy would yield little value to the company and its business.

 

It is also noted that pricing of goods and services during normal times have been quite simplistic. Very often, the basis of proper costing, which must be the basis of good pricing, appears arguable and weak, if not misleading sometimes. This will be an occasion to institute a cost audit to re-establish the cost structure and a more competitive pricing.

 

During this process the business and its management can re-discover its level of operational effectiveness and economic wastage in the recent past. Perhaps with a lower cost structure, the business may improve its competitiveness further.

 

5. Manage the balance sheet

Its time too, to cut off some ‘fats’ in the balance sheet. That is, if some of the ‘fats’ still remain after the several months of devastating revenue collapse in 2020. The surplus assets that are not contributing to the business operations may be prime target for disposal to bring back some urgent cash. Assets of ‘convenience’ such as the Chairman’s car, or staff holiday villa, or even an extra photocopying machine, should go off very quickly before market prices slump further.

More importantly perhaps are the assets of low margin businesses which yet carrying a large amount of company investment. The return on investment should give a clue as to their real value to the company. An early disposal will bring in some cash, cutting off significant risks and reducing running expenses.

 

Another major area that must be worked on almost immediately, is the working capital asset composition. Large inventories are at risk in these testing times, but more so are the uncollected trade receivables. The average corporate customers are falling behind in their scheduled payments to suppliers. Some of them are victims of the supply chain disruption caused by the pandemic during the early months of 2020. Others are stressed by lower sales and shrinking cash flow.

 

Clever negotiations and creative problem-solving would be stretched to the brim for some additional cash as well as to preserve the balance sheet health, and lower risk.

 

6. New business model

As the business would be redesigned given the new market conditions, a new business model would be appropriate. The model should address the company’s new market segment, method or channel of sales delivery, cost of operations and asset requirements.

 

Some businesses will switch to the online business model, other remain in conventional mode, where it is justifiable. In others, markets are expanded beyond current boundaries to international frontiers, incorporating new products and services or in business partnerships for capital input and sales networks.

 

Educational institutions are one such type of business undergoing dramatic changes and many will undoubtedly switched to online educational offerings. Food services businesses may now expand more rapidly through branches, franchising and online ordering with outsourced logistic support.

 

7. New cash flow forecast

A new cash flow model will also be required basing on new methods of doing business, assumptions and under a variety of possible conditions. Given the possibilities of multivariate risks and the range of fluctuation, thorough scenario and sensitivity testing will be needed to develop a range of realistic outcome for decision and planning.

 

This final forecast needs the support and commitment of both the business owners or shareholders, and their management team, and perhaps the employees, to collective make this come-back mission successful. Any shortage of commitment from these three key stakeholders will render the come-back efforts a futile one.

 

This final cash flow forecast and model will be instrument to convince new investors, shareholders and bankers to stay one to give the business another chance of recovering. The bankers are a worried lot, and therefore they are going to be resistant, so do prepare well ahead.

 

 

8. Implementation strategy and plan

The new business model, or even the continuation of the existing one under the pandemic fall out, will require a strategy to reconnect with the markets, customers – new and existing, suppliers and other crucial parties. Their confidence must be maintained and service level assured.

 

Keeping the customers and suppliers informed and stay confident is very important in the market upheaval as we witness currently. Poor communication with the markets, customers and suppliers will create untold damage.

 

Similarly, employees and managers should also be well informed and coordinated with a strategy and an execution plan. Since everyone is undergoing massive change in the environment, the need for a careful strategy to make the transition cannot be under – estimated. Haste does not pay.

 

Employees and other assets also play a part. These resources have to be planned, coordinated and supervised to be effective and efficient to compete.

 

9. The new team and new leadership

Nothing works without clear and sensible leadership, and someone must provide that leadership to lead the company into a recovery. Mere giving instructions to staff and suppliers is not leadership. Also management is not the same as leadership. They are different.

The leadership may be provided by the business owner, or the CEO or one of the directors as the case maybe. The key issue is for the leader to lead, motivate and supervise the team to get things done, and provide vision and direction.

Perhaps the current leadership is tired or not effective for the new environment. Whether or not to change the leadership is a matter for internal discussion between the business owners and the management team. Pride and ego has no place in a tough environment like the one we are in now. This even goes for family run organization. What matters most now is the survival of the company and its business, and ensuring its sustainability. Without effective leadership and a functioning team, the efforts to revive the business may not go to full fruition.

 

Finally, with the above, it is time to speak with the bankers and the shareholders or new investors. Hopefully they share the confidence of the team and the current shareholders or business owner.

 

Wishing our readers good luck.

 

Kenny Tay

Finet Associates

September 2020