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While the $10.5bn package of cost cutting measures announced by
the Government brings relief and some benefits to Singapore businesses,
it does not address longer-term survival. Businesses that depend
on local demand will face reduced demand as these cost cuts mean
lower purchasing power, while businesses that depend on overseas
demand face fierce competition from our Asian neighbours where costs
are significantly lower. The package of cost cuts does not bridge
this gap significantly enough. The road to survival in both cases
is to continually reassess the way we operate our business and to:
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Create value for our customers, either by
adding value to their businesses or seeking customers who can
find value in what we do. |
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Re-engineer our work processes and businesses,
so that we can more efficiently deliver our products/services |
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Focus on our strengths, in order to seize
opportunities or counter market threats |
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Improve the quality of our offerings |
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Develop our staff to stay relevant with
changes in technology, knowledge and the demands of the marketplace |
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Manage our financial resources prudently |
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Manage our business and organisation so
as to yield an acceptable rate of return for shareholders to
reinvest for the company's future |
Given that there is little we can do to boost demand in this climate,
I'd like to share with you in this issue, 10 immediate action plans
that you could take to survive.
Action Plan 1
Manage your cashflows
Cash is king in uncertain times. Except for the best of their customers,
banks are generally tightening up on facilities. Customers who are
considered weak or as high credit risks or whose collateral value
has dropped are susceptible to a reduction or recall of credit facilities,
as well as more stringent controls on credit limits. At the same
time, your trade cycle (the time it takes to buy, make, sell and
collect your debts) will be lengthened. Payment terms to your suppliers
will become shorter as a result whilst receipts from your customers
will be longer.
You need to spend more time managing your cashflows. A cashflow
forecast will be a good tool to have. Strengthen your cash position
- fortify your cash facilities, internally and externally:
| A) |
Fortify internal sources of cash
Begin by looking internally for sources of cash. These include
debtors, stocks, expenses and creditors.
Debtors
Have in place a sharp credit management system to minimise
high-risk debts. This includes credit screening and monitoring
debt collection or recovery. Review your system to see if
it can be more efficient. For example, instead of billing
your customers one month after shipment, bill on the day of
shipping. On a monthly sales of $1m, this may improve your
cashflow by $1m. For faster cash, try factoring your debts.
Stocks
Review the basis of your stock policies. The EOQ,
re-order point and what items you expect to sell all need
to be revised to reflect current and expected market conditions.
Lower your stock holdings by buying in smaller lots. Stock
clearance of slow moving items is another thing that you can
do. The result can be substantial. Reducing 10% of a $12 million-stock
will save $1.2 million cashflow, while reducing a 3-month
holding period to 2 months will save $4m! Besides stock holding
costs, stock obsolescence could also be minimised.
Expenses
Apply the concept of zero-based budgeting - an expense
in your budget will be zero unless it is necessary expenditure.
With the help of your managers, draw up a budget and impress
upon them it is their responsibility to ensure that expenses
are kept within the set budget. Justify all expenses. Even
if such savings do not amount to much, it will be a good execrise
in communicating to the organisation that times have changed
and everybody needs to be extra vigilant, productive and work
harder.
Creditors
Creditors can be a good source of cashflows, provided
they believe you are a good credit risk. Communicate to them
your credit standing so as to prevent the loss of your credit
limit. If you are an important customer, it is also possible
to negotiate better credit terms.
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| B) |
Fortify external sources of cash:
External sources include:
• Your bankers and their banking facilities
• Asset lenders such as finance companies
• Factoring companies
• Venture capital companies
• Private investors
• Business contacts (customers or suppliers)
• Others - relatives, friends, etc
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To generate cashflow from most of these sources, you would need
to convince them that you have:
| i) |
a good and viable business with strong management
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| ii) |
a clear and achievable business plan
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| iii) |
the cashflow that allows repayment of amounts owing to them
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If you have existing banking facilities, keep your bankers updated
on your company's operations and financial health, so that they
do not REDUCE your facilities. Since trying for new facilities or
increasing your current facilities may be tough, it may be more
workable to restructure your loans to improve cashflow - explore
how you could reduce the principal repayment (for a specific period)
and increase the tenure of repayment.
Action Plan 2
Hedge your currency position
Losses arising from currency fluctuations could be minimised. Talk
to your bankers/accountants to hedge your currency position. To
do this, you will need to forecast your cashflow positions in local
and foreign currencies.
Action Plan 3
Lighten up - Freeze and reduce
Freeze and reduce expenditure where applicable. Freeze equipment
expenditure: rent instead of buy even if it is a little expensive,
as it gives you the option to terminate once you have no need for
it. Unless absolutely necessary, do not hire. The total wage cost
for a staff is more than the salary and the CPF. Free management
from having to manage more people than required and concentrate
on doing things to bring in profits and cashflow. Work overtime,
use part-timers or outsource non-critical functions.
Look at your cost items and judiciously cut fixed overheads, or
convert them into variable overheads. An example is to use courier
services instead of despatch riders. It may cost you slightly more,
but you can reduce these costs to match a lower level of business
activity, anytime. Also reduce your interest costs by managing your
cashflow.
Action Plan 4
Tighten the screws
Inefficiencies, duplication of work and waste tend to be overlooked
in periods of growth. Now is a good time to conduct productivity
improvements since:
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the mood is right; people are more realistic in their expectations,
and more receptive and motivated to change.
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the time is right: slower growth gives you time to plan and
execute productivity programmes
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Apply the ECR principle in your productivity improvements or study
your existing work processes to see how ECR can be applied. ECR
means:
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Eliminate activities that do not add value or improve customer
service
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Combine activities that are similar so as to save costs
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Reduce activities that are add-ons to costs
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Action Plan 5
Stay focused on your business
This is not the time for adventures or experimenting in new projects
or businesses, unless it is absolutely critical to survival, as
you simply cannot afford the capital expenditure and management
attention. Concentrate instead on how you could survive or even
turn the situation to your favour.
Action Plan 6
Keep your eyes on the ball
Do not wait for financial accounts to be produced before reacting.
Produce critical flash reports on a daily or weekly basis. These
include:
| Sales |
Invoiced value, booked
value |
| Debtors |
Collections, recovery
actions/results |
| Cashflows |
Bank balance, actual
collection vs budgeted |
| Production |
Quantities, defects |
Besides flash reports, make sure you have a business plan, a cash
flow, or monthly reports to help you better manage your business.
Information required in your business plan include: forecast and
assumptions, seasonal trends and ratios, historical results, turnover,
gross profits, overheads, profit before interest and tax, balance
sheet, cash flow forecast and monthly cash position.
Action Plan 7
Adjust your capacity to market conditions
If the market cannot absorb your volume of output, trim your capacity
accordingly - "mothball" part of the plant, reduce your staffing
requirements (through natural attrition, reduced overtime, sub-contracting)
and even number of operating hours. All these will reduce your costs.
Action Plan 8
Seek new markets for your service/products
Perform a stocktake of your existing customers - who will survive
and who will not. To determine the impact on your business, conduct
an analysis on volume of sales by customers. Find replacement for
those dying or dead accounts, and seek new sources of customers.
Action Plan 9
Find new/additional suppliers
Talk to current suppliers or find new ones to offer a cheaper or
more cost effective deal. Compare your cost on a per unit basis
rather than total costs, as the latter is misleading in measuring
cost of goods. New suppliers may also be able to provide additional
credit.
Action Plan 10
Check if you are ready to cope
Use the Stone Forest Corporate Checklist 50 to check how ready you
are to cope with the slow growth and uncertainties. This 50-question
checklist will also serve you well in good times - to do a self-check
on your management system.
(Note: The Stone Forest Corporate Checklist 50 is to be administered
with the help of a Stone Forest consultant. A self-assessment based
Basic
Corporate Financial Health Check is available for internet visitors.)
Year published : 1998
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