THERE is no question that the current economic downturn presents a challenging operating environment, but there are business opportunities for those who know where to look. The headlines may be doom and gloom, but we have seen again and again that SMEs which are quick to react, adapt and find creative ways to manage a downturn, have a very good chance of not only surviving the crisis, but thriving in the long run.
One of our long-standing commercial banking customers, an apparel retailer, has turned the adversity of the downturn to his advantage by capitalising on the weak economy to secure retail space for his outlets at very competitive rates. As rentals constitute a huge proportion of the operating expenses, this move will help his company reduce business costs considerably and enable it to generate higher retail sales per square foot, going forward.
Understand customer needs
During economically trying times, businesses are not the only ones taking a beating. We must realise that consumers too are also trying hard to tide over the difficult times. As such, a business that really knows what its customers need and understands its customers' behaviour will be able serve them better and manage their business more effectively even as demand shrinks.
I'm aware of an IT services company that is continuing to expand its suite of solutions despite the downturn. The owners foresee growth in demand for certain types of IT solutions, as many companies are seeking new ways to leverage on technology to enhance operational efficiency so as to stay competitive as the going gets tougher.
The IT services company has shown that, by understanding the potential customer base and the changes to their purchasing behaviour, it can, more responsively and accurately, cater to their buying preferences, strengthening the relationships in the process. This gives the company a better chance to sustain its business - even as the economic climate worsens - and continue to grow in the long term.
Manage your cashflow
As the economic crisis deepens, SMEs should head back to basics by addressing the fundamentals such as cashflow management. Indeed, through our ongoing dialogue and interaction with SME businesses, many are telling us that they are seeing the impact of the downturn on their cashflow position.
Working capital is the lifeblood of any business, and its viability can be seriously eroded by having cash tied up in generous payment terms or high inventory levels. A customer of ours, a provider of IT solutions and components, manages its capital prudently by ensuring that incoming payments are promptly received and shortening its working capital cycles to allow for quicker cash inflow.
We have also seen an increase in the take-up of trade credit insurance among businesses in view of the difficult business climate. In recognising that the financial positions of their buyers in key overseas markets have weakened, many SMEs are now taking out insurance protection against the risk of payment default by customers. In doing so, they are also able to offer better credit terms to their buyers - which in turn helps to enhance their competitiveness in this challenging market environment.
Don't stop marketing
When the economy goes south, businesses naturally rush to cut expenses, but do think twice if you are considering cutting back on your marketing initiatives. It is comparatively more cost effective to draw attention from customers in a quieter market as competition withdraws.
A furniture manufacturer and exporter we know is a case in point. Underlining the importance of maintaining marketing in bad times, the company, while working out ways to reduce business costs in general, has maintained its advertising and marketing communications budget to capture a greater mind share at a significantly lower cost during this downturn.
Businesses that work on keeping their brands alive in the minds of consumers during such times are also more likely to be perceived as successful and resilient.
Diversification
In a recession, declining revenues often lead some SMEs into thinking that they are too dependent on one customer or a single supplier. But exploring unfamiliar industries or business models in this climate is not necessarily a wiser choice either. Rather than trying to master an entirely new business during a recession, a safer strategy would be to expand the customer base of the existing business.
The same principle applies to being overly dependent on one market. While SMEs may be averse to exploring new markets during a downturn, those that lay the ground work for internationalisation will do well when the economy eventually turns around.
Take the example of a customer in the garment manufacturing business whom I spoke to recently. Faced with declining business volume from its key markets, the company is already seeking out buyers from other foreign markets and retail segments to broaden their customer base and create new sources of revenue.
An economic downturn is also a good opportunity for businesses that are cashed up and have strong balance sheets to swoop in and take advantage of their competitors' misfortunes. We know of a marketing and distribution services company that is seeking out inorganic growth opportunities that complements its existing business to grow market share. The company is making full use of its healthy balance sheet to position itself to emerge from the downturn stronger and more competitive.
Streamline operations
SMEs should use the downturn as an opportunity to eliminate 'excess fat' without losing their 'muscles' by focusing on strengthening core business through streamlining operations for improved efficiency and generating much needed cash without hurting future viability.
A customer in the very competitive IT industry shared that the downturn has made consolidating their business functions a priority. The company has also outsourced its inventory storage functions to a third-party firm to focus their resources on its core business.
Seek the opportunities
Economic downturn is part of a cycle, and tough times don't last forever. View the downturn as a positive transition, rather than the end of opportunities, and make the effort to understand and adapt to the new reality of the market and customer needs. From this perspective, an economic downturn is a good opportunity to move ahead of competitors who fail to adjust to shifting market conditions - SMEs which do so usually emerge stronger to take advantage of the next economic upturn.
The writer is the head of commercial banking at HSBC Singapore
