Surviving a recessionary challenge
By Jerome Mutumba
DBN Head of Marketing & Corporate Communications.
The consoling news is that bad economic times do not last forever. Although it calls for cautious optimism given the marginal improvement shown in the quarterly economic performance as indicated by NSA recently, potentially, better macroeconomic conditions lie ahead. However, the fact that recession is cyclical means that it will reoccur, and enterprises must be prepared.
A large number of borrowers have emerged in good condition, due to their sound business administration and accumulation of savings in their enterprises, however some experienced difficulties.
Those that have experienced difficulties are entrepreneurs who withdrew earnings from their enterprises for immediate personal gratification, rather than using their earnings to save, acquire productive assets and diversify.
The money spent on a luxury car for personal use comes at a cost to the enterprise. In the first case, money spent on personal luxury reduces savings which could be used to sustain the enterprise during lean periods.
Secondly, those enterprises that did not acquire productive assets now have to rent equipment or outsource processes, eroding vital income streams. Thirdly, lack of revenue applied to diversification makes entrepreneurs dependent on activity in a single sector, rather than being able to spread risk.
Once the number of tenders was reduced, those contractors who had no other sources of income ran into difficulty. Those that diversified had second sources of income with which to sustain themselves and their activities in form of cross subsidization.
The starting point has to be critical examination of the budget and the cash flow projection. Although the immediate reaction of enterprises may be to cut back rapidly, this should be considered in light of medium to long-term loss of capacity and competitive capability.
Instead, spending cuts should preserve the ability to compete by reducing non-essential expenditure. Meaningful reductions might include reducing equipment rental, and overtime as well as placing restrictions on non-essential expenditure such as travel and entertainment.
Enterprises negotiate with suppliers and customers to ensure win-win outcomes that are informed by the need for all to be sustainable in challenging situations.
However, there are opportunities for enterprises to lay the ground for growth during recession. Those businesses that maintain their market share and competitiveness will benefit from plans laid during the recession.
It is an unfortunate fact that some enterprises will lose ground or even close, and that creates opportunities for others to grow once the recessionary period lifts. The enterprise which emerges from recession is inevitably leaner and better suited to its purpose, and so can be expected to be more competitive.
The Development Bank seeks to ensure the sustainability of its borrowers. Subject to the Bank’s risk guidelines, the Bank will attempt to be accommodate and allow its borrowers to recover and attain financial health.
Where enterprises show a strong measure of development impact, as well as the clear prospect of returning to financial health, the Bank may at its own discretion restructure debt.
In addition, the Bank also provides support in the form of mentorship through independent experts, in order to ensure capacity. In the past, the Bank has also provided capacity for strategic interventions to ensure the operability of enterprises with a high development impact.
The lessons of lean times may be difficult to absorb, but with good business administration and a long-term approach to business growth, enterprises can proceed with confidence.