Last Updated on Thursday, 20 October, 2022 at 3:13 pm by Andre Camilleri
One of the main roles of business leadership is making sure that the business is prepared to survive whatever the external business environment throws at it. The recent IMF Economic Outlook does not carry good news. In a nutshell the report outlines that the global economy continues to face steep challenges, shaped by the lingering effects of three powerful forces: the Russian invasion of Ukraine, a cost-of-living crisis caused by persistent and broadening inflation pressures and the slowdown in China. On the other hand, the tightening of monetary policies that delivered unprecedented support in the past, will obviously effect demand, as policymakers aim to lower inflation back to target. The global economy’s future health rests critically on the successful calibration of monetary policy, the course of the war in Ukraine and the possibility of further pandemic-related supply-side disruptions, for example, in China. All this is resulting in having a growing share of global economies that are in a growth slowdown or outright contraction.
If we take a closer look at home, with regards the GDP growth projections for Malta we can see that like all other Euro Area countries, our economic growth for next year is projected to fall significantly. Notwithstanding this drop in economic growth the Maltese economy is forecast to perform better than most other Euro Area economies in 2023.
If one were to have a look at the GDP Growth Projections for Malta, issued by the IMF over the past year, one would see that the projections for 2023 and 2024 have been worsening from one forecast to another, as the headwinds outlined above developed further.
So as the growth of Malta’s economy is very likely to slow down, like the rest of the world’s economies, business leaders would do well to prepare their businesses accordingly. Below are some pointers in this direction:
- Take the tough decisions: Management’s decisiveness is a critical success factor in any organisation’s ability to deal with challenges, giving employees a sense of purpose and safety. Management that fails to make tough decisions, hoping the problem will go away on its own and instead opt for a process that could best be described as a “death of a thousand cuts”. It is simply a recipe for disaster.
- Manage risk and create contingencies: Managing risk requires increased attention to financial planning so a business can continue to exploit its opportunities and strengthen its competitive position. Effective financial management, especially in challenging times requires a very disciplined approach and a shift in focus from growth in turnover and profits to the balance sheet and cash, debt, inventories and receivables. This financial focus demands considering the impact of different performance scenarios on long-term liquidity and debt. You need to survive before you can grow!
- Get data, analyse it and communicate: Communication during challenging times provides two valuable purposes, first to inform and second to motivate. Engaged and well-informed employees are more willing to make sacrifices that contribute to the business’ future success. Listening to people’s concerns and fears and allowing them to contribute ideas to creating a new vision for the family business is an important tool for strengthening long-term relationships and building commitment.
- Make sure you have an effective business governance setup: If there is one certainty is that businesses need stronger governance processes that focus on leadership, accountability and performance. Effective governance is critical because a business cannot survive if there isn’t a sense of accountability whereby non-performing management is put on the spot. If governance is not effective, then there are no forces to counterbalance management and the business can suffer from the owners’ complacency.
- Focus on building relationships: During challenging times business leaders, including family business leaders and employees, need to come together like never before and believe in the values on which this business should be built upon.
- Have a strong and healthy business culture: Businesses, including family businesses, are many times driven by values, perceptions and behaviours which many times are formed and set from the top. This overall business culture needs to be an enabler not a hindrance. It needs to give the business an advantage over the competition, being a powerful tool for motivating individuals and organisational performance and creating behavioural norms that support the firm’s strategy. The advantage of a strong and positive culture is that it empowers employees and replaces management’s dependence on administrative controls or sanctions such as policies, procedures, budgets and employee performance reviews.
- Have effective leadership: Critical to a leader’s success is their ability to use themselves as a tool to influence and motivate others to learn new behaviours and perform at higher levels. Leadership skills are not innate in everyone and training would be needed. Leadership is what makes a difference when businesses need to be directed in challenging times. As Napoleon Bonaparte once said: “A leader is a dealer in hope.” If business leaders can practise this simple idea in their interactions with employees, family members and stakeholders they will emerge from challenging times with stronger organisations.
- Improve productivity. The best way for a business to survive is to improve its productivity. Consider investing in software or machinery that can automate processes and reduce human input to produce the same amount of product or service. New software or machinery may be able to produce items faster, with fewer defects and less waste.
- Cut costs. Look for ways to cut costs to offset rising prices for materials and wages. Can business operations use less energy? Are there ways to improve the supply chain and reduce shipping expenses? Can the business receive discounts by ordering in bulk or by being flexible about delivery dates? It’s important to find ways to cut costs and offset inflationary pressures.
- Evaluate prices. Inflation is an opportunity to reassess pricing policies. Observe whether other companies, particularly those in your industry, are raising prices. If they are, consider raising prices as well to offset increasing costs. Consider offering products or services in a bundle or change packaging in a way that increases price per unit sold. Doing so may allow you to offset rising costs and remain profitable without alienating customers by a blatant price increase. It may also be the time to consider a new pricing model, perhaps selling your product as a service.
- Strengthen your balance sheet. In any economic downturn or a period of stagflation, revenue may not grow while costs keep increasing. Prepare for tough times by building a cushion. That means keeping debt at a minimum. If interest rates are rising, consider replacing any debt carrying floating interest rates with debt that has fixed interest payments.
- Preserve your cashflow: Tighten up accounts receivable and payable. Try to improve cash flow by reducing late accounts receivables and ask your own vendors for the longest terms to make payments. Keep track of inventories, accounts payables and receivables on a very frequent basis.
Over the past summer I offered a serious of free training sessions for family businesses to improve the way they run their business and be better prepared for whatever the economy will be going through, thanks to a collaboration between the Malta Chamber of Commerce, the Family Business Office and Malta Enterprise. These sessions can all be viewed on: https://silvansbusinessinsights.com/family-business-training/