While the economic downturn could have run your business out of steam, there are still some tried and tested ways that can help you stay afloat
You have built your company from scratch but now you are facing rough weather. Cash-flow is drying up, costs are going high, profitability and revenues are sliding, your customers are dumping you and what not.
If the thought of closing down your business has passed your mind, you may want to look at the alternatives that can prevent you from taking the extreme step.
Closing a company in India is not simple. According to the World Bank’s Doing Business Report, India ranks a low 140 among 181 countries on the parameter of ease of closing a company. This reflects the complexity in the country’s laws and stringent procedural bottlenecks in the process. While the US and other developed economies offer bankruptcy protection to businesses, such is not the case in India. Even if you declare that you have no money with you, but you are debt-ridden, the law can catch up with you soon. You will be forced to pay back to your creditors no matter what. “If you have taken a working capital loan from a bank, the bank takes the guarantee. The moment the personal guarantee has been given, you actually have no bankruptcy protection, at least to the extent of your bank liability,” says Jayant K Tewari of Outsourced CFO & Business Advisory Services.
It is important to find out the cause behind the crisis that your business is facing. “The problem is the cash-flow. Unfortunately, people misunderstand the difference between profitability and cash-flow. You may have good profitability in the books but no cash in the bank. It will make it impossible for you to run the shop,” says Pankaj Jain, Director & CEO, Finman Ventures. “You may have good profitability but lack of working capital could make things difficult for you. Your inventory will pile up, you will be unable to pay back loans or pay salary to your employees,” says Jain.
Despite all the gloom, you may still look at the following options to save your business from closing down.
1. Can you redefine the market?
While you consider revival strategies for you business, it could be a good idea to take a close look at the market you are catering to. You may be surprised to notice the changes that may have taken place. One of the possibilities could be that your customer base has been slowly wiped out while you were busy making new products or planning for launch of new services. “If your primary market is, say, high-end luxury goods, then you have a problem. If your target market is BFSI brokerages in the US, then you have a problem,” says Tewari. This means that the customers in these markets have already reduced spending and are unlikely to buy your products or services.
This would mean looking for new markets and could involve changing your focus from urban to rural. Many companies, particularly in the FMCG sector are already focusing heavily on the rural market, as rural customers are increasing their spending on white goods and other products. “If your definition of the market is too broad and you try to be everything to everyone, then you actually don’t focus on anyone. That is the recipe for disaster,” says Tewari. He advises that it is much more important to narrow your definition of the market further.
2 Can selling stake rake in cash?
One of the good ways to stake up cash-flow is to offload some equity of your company to a buyer that could be an individual or a strategic investor. This option could come in handy in case banks decide not to lend you any money. A lot of companies that are facing cash crunch these days are resorting to this method. The slowdown has made banks cautious lenders and many are reluctant to dole out credit.
A strategic investor, which could be an angel, a venture capital firm or a private equity, brings more than just money on the table. It could help you with strategies that could give your business a new lease of life. As investors appoint a member of their own on the company’s board, he could be a valuable asset for you and guide you out through difficult times.
3. Will management change help?
Many a times, as a promoter, you may fail to see the loopholes in your business model. This could be either due to lack of experience or certain biases. In such a case, an outsider can bring in fresh perspective to help you put things in black and white. Getting a professional CEO or rehashing the top management could point towards recovery.
Sometimes investors such as VC firms or PE firms could bring about a change in the management if they deem it to be beneficial for the company. Jain cites one such example. “This is about an auto components company. After scaling their business to a certain level, the promoters were unable to take it further. The company’s growth started to slip. At that stage, a PE player offered the promoters to buy a stake in the company. The investors changed the top management, and soon the company was back on track.” “Several reports cite poor management as one of biggest reasons for business failures,” says Anshul Gupta, Founder and CEO, Salvage Settlers, a salvage management firm. “First generation entrepreneurs sometimes lack expertise in finance, purchasing, production, etc. It therefore becomes important to put a good management in place,” he adds.
4. Reduce manpower
This is what most companies are resorting to now, given that cost of manpower in terms of salaries and benefits is a major chunk of the cost that the company has to bear. Making a prudent decision about how many people to remove so as to ensure that major projects do not get derailed is also an important one. “If you find two of your eight projects going down the tube, you should naturally reduce 25% of the manpower,” says Tewari. “But as an entrepreneur you may think of carrying those 25% for three months in the anticipation of getting a replacement project for them and that is going to burn you even more,” he adds.
But sacking and retaining people could be an emotive issue too. An entrepreneur at a recent event organized by DARE talked of his dilemma when it came to sacking his employees during the current slowdown. He stressed that when his company was in trouble last time, he still retained most of his employees for a long time believing that new projects would pour in. But unfortunately that did not happen and he suffered major financial losses due to this.
5. Move to low-cost premises
At times the high rentals of your office premises could be a major cost to your business. You may save some more cash by relocating to cheaper premises. As slowdown has hit the real estate sector badly, a good deal may be just round the corner. Moving from downtown to a suburb or on the outskirts of the city could work well.
The very basis of outsourcing services and manufacturing operations to low-cost destinations is aimed at saving some extra bucks. In case you are into manufacturing, you might consider outsourcing the operations to a low-cost manufacturer.
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