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React quickly to turn the crisis on its head

Bernard Wan

The global credit crunch has begun to squeeze businesses - conglomerates and small and medium-sized enterprises (SME).

Every company is feeling the pinch of the financial crisis. Slowing growth, grim consumer sentiment, weakening demand and reduced lending by banks have pushed companies to the edge of a breakdown. The uncertainties in the economic outlook mean it is imperative that companies review their business practices and conserve their financial resources to brave the financial storm.

'The coming months should be [about] instilling the right discipline in the business and, by doing the right things quickly and decisively, companies might even turn the crisis on its head,' said Andrew Lam, assurance partner at Grant Thornton, an international accounting and consulting firm.

During an economic downturn, where creditors are slow to pay and banks less inclined to lend, businesses suffer a tight cash flow problem. Mr Lam said companies should establish short-term cash requirements and forecast longer-term cash flows based on credible realistic financial information. He advised companies to negotiate credit terms with suppliers that were as long as possible and with customers that were as short as possible to make the cash flow more fluid. In preserving the cash in a downturn, it was equally important for companies to carefully reconsider their investment plans and steer away from investing in new assets, Mr Lam said.

Banks have become more concerned about loan recoverability and have adopted a conservative attitude towards approving new lending to avoid bad debt, so companies need to take a more proactive role in managing the relationship with the bank if refinancing is necessary. Involving them in the business decision-making process is a good strategy and will win their trust in a company.

'Don't fall into the trap of thinking that it is up to the bank to guide you through any issue or problem. If you talk to your bank early enough, they may work through the problem with you,' Mr Lam said.

Cost management is another area that companies need to investigate in tough economic conditions. According to Mr Lam, it is essential that all variable costs including raw material and consumables be carefully reviewed in their value to the business.

'Look hard at discretionary expenses and pick off the easy wins in areas such as travel, general expenses, hospitality and entertainment.' However, he warned companies against cutting marketing expenses as an easy way out because this could undermine the company's competitive position when market conditions started to improve.

The cost of keeping staff in good times is easier than in turbulent times, when headcount is slashed. Mr Lam said if retrenchment was unavoidable it was important to do it quickly and deeply to avoid later cuts that would dampen morale further.

'Lock in your key talent using incentives and personal development plans, but don't throw away talent unnecessarily,' said Mr Lam, adding that the decisions needed to be based on reasonable and objective criteria to ensure they were made for the benefit of the business.

When market conditions become grim and gloomy, companies need to revisit their product and marketing strategies and review business performance by identifying their core business capabilities and strengths to focus resources more effectively.

Mr Lam said: 'Determine which product lines, sectors and customers are likely to put pressure on your profitability and which present better tactical opportunities in the short term.'

This may require relinquishing non-core assets and business streams. Tax is an extra financial burden on SMEs that operate with thinly stretched resources in tough times. Businesses must have the means to reduce tax liabilities and improve their cash flow. The Hong Kong government allows companies to request a holdover of all or part of their provisional tax if their profits are, or are expected to be, less than 90 per cent of the profits assessed. Mr Lam said though facing difficulties companies should not evade tax payments because a flat surcharge of 5 per cent would be imposed on the unpaid amount. So a tax loan at a lower rate could be a cheaper and better option.

SME owners often inject their personal wealth into their company and mix it with the finances of their business. Mr Lam said it was also important that owners separated their personal wealth from the finances of the business because banks sometimes made a lending decision based not only on the assets of the business and on the owner's personal wealth portfolio.

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