Spotting the next financial crisis

Many businesses are currently grappling with the spill over effects of Covid-19 and consequent lockdowns globally. How does one proof their business from the economic effects of Covid-19?
During the 2008 financial crisis, most businesses acted reactively rather than proactively; they waited until their businesses were directly affected by the economic downturn before taking mitigating actions. By comparison, the top performers had not only increased liquidity but also had invested in strategic acquisitions. They applied the pre-emptive philosophy of fix it before it breaks.

In addition to being proactive, they knew that no winning approach lasts long. So, these companies increased their ability to innovate, explore new ideas, and reinvent the business strategies to achieve sustainable long-term growth.
The top performers knew they couldn’t avoid future disruptions, so they built organisations not only to withstand future shocks but also anticipate them. For example, most top performers developed a scenario-planning function that was tasked with watching for emerging trends and potential disruptions. These companies also maintained cash reserves that were two times higher, on average, than the reserves maintained in the past.

Finally, top performers prepared their organisations by streamlining core operations, redesigning processes to capitalise on digitalisation and generation of efficiencies so that they were as lean as possible before tough times hit again. That is a more forward-looking approach than many organisations took as opposed to relying on budget cuts and headcount reductions should a crisis arise.

While cutting costs, which areas of operation should be considered first and why?
Experience from prior economic downturns shows that hardly anyone regrets acting decisively on costs. But as research also shows across the board cost cutting does not help companies emerge stronger after a crisis. In fact, it may make it harder to recover. No company cut its way to greatness. So, what do we do? Here are some tips.
First, gain a good insight into your cash position in the short and medium term. The pandemic and measures taken may cause a significant decline in your income and cash flows. If you are unable to adapt your spending pattern accordingly, your cash position will deteriorate rapidly. It is crucial to take rapid and thorough action. As time passes, you will have few options to prevent a cash deficit.

Be clear on your company’s must-haves but recognise key business accelerators. Your must-haves are the things your company needs to invest in to stay operating within any economic environment. You will need to scale back on or defer planned capital investments and/or other fixed costs amid volatility in demand. Other cost-cutting measures may include hiring freezes, cancelling business travel and events, tighter management of optional costs and reducing use of contractors. You may also consider renegotiating payment terms within supplier and customer contracts.

To cut costs, many businesses are restructuring salaries and retrenching staff. However, in such an environment, people need these jobs to survive. What is your comment about this?
Do not lay off staff instead consider flexible working arrangements at reduced pay. Have an open and honest discussion with your staff. They also see what is happening to the business and they will understand. Ask for their participation to address the challenges and opportunities ahead. You will be surprised how much more people get engaged when you are straight with them as opposed to sugar-coating or holding them incapable of digesting straight talk.
Over the next several weeks, as your staff settle in with changes to their personal lives, that honesty will be critical to help them focus on the recovery process for the business and themselves.

In your estimation, how long will it take for economies to recover from the effects of COVID-19?
Uganda’s economic performance is influenced by developments in the global economic environment. Therefore, a slowdown in the global economy as a result of coronavirus will have a negative impact on Uganda’s economy in many ways.
While short-time work during the lock down was mainly used in the financial services, telecommunications, health and manufacturing industries, other sectors such as transport, tourism, hotels and restaurants, entertainment, trade and retail have been adversely affected. Economic dangers are looming in these sectors and this ought to be closely monitored. In addition, there is a sharp drop in imports and exports due to a lack of demand from major trading partners and disruption in the global supply chain.
The tourism sector will be the hardest hit by coronavirus as a result of the travel bans and total lock down that clamped down on traffic for people travelling within, to and out of Uganda. Currently, tourism is the number one source of foreign exchange in Uganda. It constitutes 7.7 per cent of the country’s GDP and employs close to 700,000 people.

At the beginning of the pandemic, few understood how long it would be before life returned to normal. Many analysts now believe that only a vaccine can allow economic activity to return to the pre-pandemic baseline. Even once the economy starts to reopen, measures will likely be put in place that curtail economic activity to some degree. Travel will be less common, businesses will have to space workers and customers further apart, Restaurants will be serving fewer customers at a time, and sporting events, concerts, and other activities involving large crowds probably will remain off limits for a long time. Even if the rules allow, many people may be reluctant to return to life as it was before the pandemic.

Benchmarking on the 2008–09 economic downturn, are there any benchmarks we can use in the current situation?
The best military leaders study history and for good reason. By understanding the battles of the past, they can better prepare their forces to win in current and future conflicts. That concept applies to the business world as well, particularly right now.
Given the economic adversity, it is valuable to identify which practices companies employed to not only survive the previous 2008 global financial meltdown but also emerge stronger from it. More relevant, though, is understanding the steps these companies took that helped them prevail. These include acting proactively, increasing vitality, sticking to a clear vision, building resilience and streamlining the organisation. These steps make up a playbook for how today’s a leadership team should manage the impending crisis to position their companies for success.

Another key aspect is that these companies took different actions than their competitors did at certain points during and after the crisis. During the first phase of the crisis, top companies focused their efforts on managing the turbulence through hoarding cash and maintaining liquidity. The liquidity served as a cushion during times of extreme volatility, allowing them to ride out periods of slow or non-existent sales and giving them the means to act quickly as soon as the market stabilised. Similarly, when revving up, the best performers capitalised on economic tailwinds and relentlessly sought growth while continuing to accelerate.
They succeeded by tailoring their strategy to the changing macro conditions in each phase.

Mr Adam Sengooba PricewaterhouseCoopers’ associate director.

Cash flow.
Gain a good insight into your cash position in the short and medium term. The pandemic and measures taken may cause a significant decline in your income and cash flows. If you are unable to adapt your spending pattern accordingly, your cash position will deteriorate rapidly. It is crucial to take rapid and thorough action. As time passes, you will have few options to prevent a cash deficit.