IN the past month, the markets have yielded some encouraging news. While we hope this points to economic recovery, the lessons of the downturn should not be easily forgotten.
To crystallise these lessons, we spoke to some top Enterprise 50 (E50) companies to get a sense of what they have been doing to ride out the downturn. We found three common focus areas: containing costs, seizing opportunities and managing cash.
Keeping an eye on costs
In good times, businesses tend to focus on growth rather than keeping an eye on costs. Many businesses therefore veer between periods of unrestrained growth and brutal cost-cutting while riding the economic cycles.
A consistent long-term approach to cost-cutting forestalls impulsive, top-down and arbitrary measures that can have unanticipated and perverse effects.
Goh Kai Kui, chief operating officer of Goh Joo Hin, advises enterprises to 'create a list of realistic and effective cost-cutting measures before an economic downturn. This will help them understand the broader impact, risk and sustainability of cost reduction measures and execute the ones that make strategic sense'.
It is important for enterprises to develop a strong corporate culture that 'cares about costs'. Managers need to have a clear understanding of how their business model drives costs.
During sharp downturns, these enterprises are better able to respond quickly with cost-containment measures that do not damage the business in the long run. They understand what level of costs can be eliminated without compromising quality.
In good times and bad, these enterprises keep an eye open for ways to reduce the cost of doing business.
Having a nose for opportunity
Continually seeking markets can lessen the blow if one sector is badly hit by a recession. In a downturn, enterprises that have diversified their product range and penetrated markets early are more likely to survive.
'Always prepare for a recession,' says Ang De Yu, executive director of Super Steel. 'Be able to quickly identify which areas of your business are making money and have the potential to grow in a recession.'
Enterprises should be able to make changes quickly, adapt to the prevailing economic situation and execute their plans faster than their competitors, he says.
Recessions are often 'the best time to look for a new pot of gold', he reckons. Winning enterprises understand that even though the economy may be shrinking, there are still new areas to pursue. They take calculated risks and come up with innovative ways to enhance existing products, build new strategic relationships and seek new markets.
High-performing E50 companies take a longer-term view of expansion plans, with a preference not to pull back in bad times, while carefully managing costs. As Valerie Tan, CEO of Pinnacle International, puts it: 'Even as the world economy bottoms out, we will continue to look out for new growth sectors in emerging markets.'
New markets are not confined to new geographic locales and new industry vectors. Delivering good customer service, for example, can help create niche markets. Some E50 companies have made customer service their lifeblood and have rigorously upheld service standards, even in downturns.
For example, Super Steel has developed an online quotation system that has helped the company expand its reach to new customers through 24/7 online portal services. As a result, time and geographic distance are no barrier to business opportunities.
At Franklin Offshore Holdings, director of corporate services Fong Chee Kiang says: 'Good service gives customers a reason to come to you instead of the competition. If we neglect your customers during recession, they will neglect us when the economy turns around.'
Keeping a finger on the pulse of cash
Much has been written in this downturn about the need for businesses to manage their cash flow. But while the concept is understood, many SMEs do not have their cash flow information readily available. When the threat of insolvency looms, these enterprises scramble to hit the books and seek urgent funding.
There seems to be a lack of focus on timely, financial reporting and relevant information for decision-making. Many businesses simply do not track their cash flow tightly, and can end up in a situation where they are unable to match their cash inflow with payment obligations.
Enterprises with thorough and updated records understand in minute detail how cash moves around their entire business, where the bottlenecks are and how to react before things get out of hand.
This is more than just stretching creditors and chasing revenue. Rather, financial reporting must help enterprises gain greater visibility and control over cash flow, and should be made available on a regular basis.
Manage your working capital judiciously by regularly speaking to your accountant, director of finance or CFO, asking them:
Does our business have a formalised budget with a cashflow forecast? If we do, how accurate is the forecast and do we monitor and understand the variances?
Do we have good visibility of our cash requirements?
Do we have enough cash reserves to carry our enterprise through natural downturn cycles?
Do we know our cash cycle well and how long it takes for the cash to flow through our business?
What is our strategy for keeping our accounts receivable balance low, or are we in fact funding our customers?
Are we managing our suppliers optimally? What is the best strategy for managing our accounts payable?
Cash management must be a discipline - not a short-term fix for companies at risk. Businesses that are good at cash management have a 'cash culture'. They achieve clear alignment of cash management goals across functions within the business, and drive these down to individual level.
Walk the talk
While none of the areas above are new, the proof of the pudding comes from enterprises that walk the talk. Many of the top-performing E50 companies have made these fundamentals an integral part of their everyday operations.
So before thinking of plans to ride out the recession, re-examine your business fundamentals and consider adopting sound business practices relevant to your company.
Nominations for the E50 awards close on June 15, 2009. For more information, please visit www.enterprise50.org
The writer is a partner at KPMG LLP.
The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG in Singapore
