Managing Through The Downturn: Practical steps to accompany our 10 Fundamental Priorities

Leading the Way is a column written by PricewaterhouseCoopers professional staff. It appears in the Business section of the Bangkok Post twice each month. The column provides specialised advice to corporate decision-makers in Thailand on global and local business trends.

This article appeared in the January 20, 2009 issue of the Bangkok Post.

By Vilaiporn Taweelappontong

In our previous two-part article based on how to work through the current financial crisis, we looked at 10 Fundamental Priorities which will help businesses deal with the new challenges they are now facing. Equally, we looked at how to take advantage of the market conditions, which are providing unique opportunities to revitalise organisations. As a conclusion to this series we present the following seven practical steps to help identify and manage risks in the current climate, in order to survive and compete effectively in the future.

1. Develop and maintain a robust financial forecast
Failing to produce timely and accurate earnings and cash forecasts may result in liquidity problems, restricted access to capital, covenant violations, earnings volatility and lower returns. In a worst case scenario, it could drive a company into insolvency. To avoid these pitfalls include regular, robust and integrated forecasting as part of your business strategy.

2. Identify key forecast risks and develop appropriate responses
Identify risks that may pressure your company’s performance. Evaluate their impact on forecasted earnings and cash flow so that proactive steps can be taken to manage them. Apply forecasting techniques to help you manage your human resources. Consider which areas of your business make a significant contribution and are most efficient, then tailor any reductions in the workforce to target less efficient and less important areas rather than adopting a “one-size-fits-all” approach.

3. Ensure adequate sources of liquidity
During a downturn, having available and adequate sources of liquidity to finance operations is vital. Cash is the “cheapest’’ and most flexible source of liquidity; therefore, repatriating cash from subsidiaries in other countries in a tax-efficient manner might be considered. Additional sources of liquidity include bank lines of credit, commercial paper programmes, securitisation or other forms of asset-based lending.

Deciding which financing and liquidity sources to access and when, should be part of an integrated financing strategy that takes into account your company’s optimal capital structure, overall financing costs and exposure to interest rate and liquidity risks. There are ‘non-traditional’ alternatives such as private equity firms, sovereign wealth funds and hedge funds to finance liquidity. Liquidity is only one part, in this environment a company must be able to take advantage of its liquidity and be sufficiently agile and flexible to deal with the volatility.

4. Drive efficiency in working capital processes
The best source of liquidity and the cheapest financing comes from reducing the need to finance working capital. Small changes in days-working-capital outstanding can have a remarkable impact on cash flow generation, while improvements in receivables and inventory turnover result in lower operating costs as well as enhanced forecasting accuracy. Driving efficiency also extends to the people area through these measures: renegotiating terms with independent contractors and consultants, deferring hiring dates, accelerating retirements, reducing international assignments, eliminating management tiers, adjusting critical staffing ratios and eliminating redundant roles.

5. Aggressively manage costs
Work on cutting costs by taking advantage of enhancements in centralised procurement and business process outsourcing. Another strategy is optimisation (doing more with less) by leveraging your existing infrastructure more effectively i.e. IT optimisation and control optimisation. In the human capital area, some cost containment measures to consider are: using distance or computer-based learning and electronic recruitment processes; outsourcing to third parties; and moving to a shorter work week.

6. Exercise discipline in capital investments
A rigorous process for determining overall capital spending, allocating it among business lines, evaluating individual projects and monitoring the efficiency of capital expenditure should be in place. In particular, review your company’s existing capital plan to identify and consider delaying or abandoning any investments that may no longer be capable of delivering the returns expected. Other critical success factors include concentrating on your company’s core strengths, focusing on effective cross selling and increasing market share, weeding out any cultural misfits, and retaining key employees.

7. Assess and monitor credit exposures throughout the value chain
The credit crisis increases a company’s credit exposure through normal commercial transactions and financial counterparties. Consequently, many companies have begun to reduce the liquidity offered to customers, demand additional collateral and step up their debt monitoring and debt collection efforts. Furthermore, companies have started to monitor the credit quality of derivative counterparties, insurance carriers and other financial partners more strictly to reduce their exposure and diversify their banking relationship. These precautions should be taken throughout your supply chain including reviewing vital financial service providers like insurers and evaluating the reliabilities of the links in their industry value chains.

These seven steps are critical in managing the risks, avoiding the pitfalls and capitalising on the opportunities that emerge in any period of financial and economic turmoil. In addition, these steps will enable you to gain a better understanding of your cash needs, enhance your decision making and allow you to monitor your company’s performance more efficiently. They will also increase your liquidity, reduce your credit exposure and financing costs, and mitigate the risk of supply chain disruptions. In addition, by adopting a disciplined approach to capital investment, your company’s return on investment can be maximised.

Vilaiporn Taweelappontong is a Partner of Advisory Services of PricewaterhouseCoopers in the Southeast Asia Peninsula region, which comprises Malaysia, Thailand, Vietnam, Cambodia and Laos.

For a more in-depth discussion about how to implement these seven measures in your business, please contact us at leadingtheway@th.pwc.com