How to navigate through tough economic times and survive

By Ingrid Floissac

COVID-19 is a significant risk to the growth of the Saint Lucian local economy. The substantial reduction in economic activity resulting in the loss of cash inflow is like an avalanche burying the economic aspirations of government, as well as many of our corporate, micro, small and medium enterprises.  The International Monetary Fund indicated that the sudden reduction in tourism within the Caribbean is quickly slowing economic activity and further cited contraction of growth by 6.2 percent in 2020. This scenario could be devastating, and the Caribbean would experience the deepest recession in more than half a century. (https://blogs.imf.org)

Given this uncertainty, many businesses will need to closely monitor all developments within their business to ensure accurate reporting and decision-making. From the point of financial management, businesses must understand that profits cannot finance the cost of operation; the success of any business is dependent on the efficient management of cash flow cycles. Without the availability of cash, many companies will experience considerable pain, quickly becoming unsustainable.

Understanding the financial health of your business requires analysis of your financial statements, and this entails a thorough assessment of financial ratios: liquidity, solvency, profitability, management, and return on investment ratios. There must be an understanding of the daily sales intake and how quickly you can turn sales into cash.

Our reality is that the increased levels of unemployment created by the COVID-19 resulted in a significant reduction in our population’s spending power and contributed to liquidity constraints. As a result, many businesses will be competing for fewer dollars in an extremely challenging time. Micro Small Medium Enterprises are a significant contributor to the island’s Gross Domestic Product and are financially fragile, with minimum resources and limited cash reserves. While Saint Lucia’s annualized GDP for 2020 is not available, noting increases in expenditure, decreases in income and production brought about by COVID-19, we are likely to experience the worst depression in our lifetime. The tourism industry, the rock of our economy, has completely shut down, with layoffs across various industries. This extraordinary uncertainty requires that we all come together to survive this crisis.
 Most MSME’s do not have sufficient hard money to cover their expenses for two months, and without a credit lifebelt, many of these businesses may fold.

The Eastern Caribbean Central Bank has stepped in to support the banking sector by facilitating a loan repayment moratorium for enterprises and citizens over an initial six-month period, along with a waiver of late fees/charges to eligible customers. This will ensure that credit passes through the system allowing businesses to remain afloat for an extended period while supporting the banking sector in classifying these loans as “restructured assets,” without negatively impacting the banks’ Non-Performing Loan ratio. The banking sector must ensure they employ an efficient end-to-end system where the funds quickly get to those who need them. While moratoriums allow for delayed loan payments, it is essential to note that banks will continue to apply interest under the loan agreement. It is financially prudent for businesses and individuals who have accepted the moratorium offer to continue making loan payments once cash reserves are available to offset accrued interest.

Bank clients must bear in mind that this extraordinary situation caused by COVID-19 does not mean that the banking sector will discontinue adhering to sound financial assessment of loan proposals. The ability of borrowers to repay their loan obligations will continue to be a crucial consideration when providing loan approvals. The National Insurance Corporation is making an unprecedented move to provide income/cash to contributors who lost their jobs due to the COVID-19). This policy is in place for three months and has provided some degree of spending power to thousands of contributors. Beyond these arrangements, businesses must take on the posture of the Buffalo Soldier as defined by brother Bob Marley and fight to survive the possibility of bankruptcy.

It is about finding the courage and discipline to invest in cash management strategies that are generous in dealing with customers, while simultaneously and aggressively managing expenses. These ideas, although seemingly at odds, will persuade customers to support your business, ensuring a positive economic outcome. To achieve this balance, companies can focus on the following:

Focus on Cash Management 
While there are no miracles amid this economic storm, you can’t allow your business to be broken without fighting to win this savage battle called COVID-19.

The need for improved cash forecasting is a concern shared by the Banking Sector for ages. The effects of the financial disruption from COVID-19 have significantly highlighted the liquidity management challenges encountered by many businesses; it is, therefore, a matter of urgency for companies to review current practices; this includes but is not limited to:

-The need to minimize the risk of bad debts and optimize collections strategy.
-A comprehensive review of your accounts receivable portfolio.
-Account Receivables should be classified as follows:
-Accounts in a reasonably strong position and not severely impacted by COVID-19
-Accounts where there is a negative impact, but where, clients can pay.
-Customers who could be facing possible insolvency.
-Consider re-negotiating options with debtors.
-Regular meetings with the financial team to review cash flow position (recommended daily/Weekly).
-Manage inventory and stock levels and dispose of obsolete stock.
-Effective cash management is critical in understanding the business’ cash flow. It involves knowing the timing of cash receipts in comparison to sales made, as well as the timing of cash disbursements relative to when expenses are incurred. If the company waits until it is in a desperate position to come up with ideas to cover the shortfall, it may not find adequate cash to keep it from encountering a disaster.
-You may want to review your list of assets to evaluate and sell those not critical to the operation of the business.
-It is essential to discuss your plan to cover the shortfall with your Banking Relationship Manager at your respective financial institution. Whether this means securing additional equity capital, seeking moratorium or any other option, it will allow the business to take appropriate and swift actions within a timeframe safe enough to protect the company.
-Each employee must be trained and aware of his/her responsibility to maximize income, reduce expenses, comply with all practices, procedures and guidelines to achieve optimal results.
-Review your marketing plan and focus on sales with a high margin and quick cash inflow. 
-Re-access the possibility of internal and external risk exposure, which can threaten the sustainability of your business; this includes but is not limited to, credit sales, relying on one customer segment or supplier, and increased fraud risk.

In addition to focussing on cash management strategies, companies can look to capture demand by:

– Focusing on creating new market space. By breaking away from the conventional “targeted customer” approach and including complementary products and services that create value for both customers and non-customers, across various groups/category of customers. (Chan Kim and Renée Mauborgne,2015)

– Businesses can accelerate relevant customer value through business innovation while simultaneously driving down operational cost. Companies can achieve this outcome by creating a new classification of customer-base, thereby increasing profitability and expanding market share. (Chan Kim and Renée Mauborgne, 2015)

-Many companies are looking towards digital transformation: implementation of E-Commerce Platform, contactless payments, digital currency, online banking and digital marketing. To succeed companies must ensure strategies are cost-effective and meet their business objectives.

-Hiring and attracting the right talent is paramount to the success of any business. Get the right person on the right seat of the bus and the wrong person off. (Jim Collins 2001). Business success is measured by the quality of talent, which includes investing in the development of the team. Organizations that encourage debates among team members in an atmosphere that promotes candour, where leaders are humble and willing to listen, will see an increase in productivity and revenue, contributing to sustainable business growth. How often do businesses allow great talent to walk through the door?

-Re-examine company policies that reflect discounts, warranties, and fees offering a more generous package to close the sale. Evaluate the possibility of providing gift cards and rewarding points for purchases. This plan will assist in maintaining customer loyalty.

 -Chief Executive Officers, Executive Managers, Managers and staff must return to the classroom, creating and supporting a brainstorming environment that energizes creative thinking; where team members can challenge and propose activities and ideas designed to add value for customers.

When we look back in history, the survivors of this era will be those businesses that, while walking a tightrope, exhibited agility, embraced change, demonstrated humanity and created value innovation for all clients.

Ingrid Floissac Is the director of Floissac Receivables Management & Consultancy Services Inc.