It’s all about the cashflow, especially in a pandemic

UNLIKE any other recession, the current pandemic-induced recession has caused the most pain across many industries and livelihoods of individuals all over the world.

Like all recessions, businesses have to reset their priorities and strategies going forward.

During the last 12 months, I have met many SMES facing severe cashflow problems due to losses and reduced revenue.

My first advice is always to regularise cashflow sufficiently to cover monthly operating expenses and bank payments.

Most times, for older companies, they have property assets – land or factory warehouse buildings charged against banking facilities.

For the smaller businesses, sometimes they have the house that they stay in being charged to the bank for bank facilities used by the company.

In the old days, every SME’S priority was to own a property when they started making money just because they knew the property would definitely have capital appreciation and they could secure additional banking facilities based on higher revaluation of the property later on.

Our local “kiasu” banking system will insist on collateral with every loan application besides tying up your arms and legs in additional protection via personal guarantees.

Looks like nothing has changed unless the loans are 80% guaranteed by Credit Guarantee Corp. Different banks have different risk appetite for SME loans.

As an SME operator, when do you decide whether you should buy a property?

That will depend on your spare positive cashflow and your intention or purpose of the investment.

If it is for own business use it is ok.

If you are a trading company and you buy houses and apartments for investment using company funds, then the stretch on your cashflow will come back to bite you later when your business is not doing well.

In such cases, it is better to dividend out the profits to shareholders and let the shareholders invest in their personal capacity.

SMES must be disciplined in their financial management of the company.

If you cannot afford it, have a smaller office. No harm in staying humble.

Capex should only be on necessary investments that contribute towards revenue and the bottom line.

In that way, the core business will enjoy sustainable growth. Investment in non-core assets that do not contribute positively to revenue growth of the core business should be avoided.

All these problems will surface when SMES face a recession.

So, what do you do in a very weak property market when your assets have to be sold at a much lower valuation?

Sometimes the final selling price is not sufficient to cover all the multiple loans that you have charged to the banks.

Troubled SMES have a few options available depending on individual company state of affairs.

Reach out to external equity. If your business is still viable but extremely short on cashflow, look for external investors. Be prepared to give up part of your shareholding.

General rule of thumb – the major shareholder looks after financing of working capital. If the external investor takes a majority position, then let him finance the business and you can discharge your property from the bank.

If your business is still viable and the sale of property will provide you with additional cashflow and reduce the payment of bank interest, then do it. I am assuming you want to keep the company to yourself.

If your business is not viable and you are not able to get an external investor, sell your property, clear all bank loans and suppliers’ debt and close the company.

No point using good money to chase after bad money. You will dig a bigger hole than what it is now.

During a crisis, it is critical to think with less emotion and stop being sentimental. Pay attention to the numbers and the cashflow required. Don’t forget this year is going to be another tough year. The pandemic will not go away this year or the next.

It is difficult to see your business which you built over the last 20 years face a difficult crossroads at this moment. But if your business has been facing difficulties pre-pandemic, then you have ignored the earlier stress signals.

No excuse and no way you can blame the pandemic for the difficult situation that you are in now. The pandemic merely accelerated the declining performance of your company.

What I notice to be quite common among matured SME owners is the sentimental attachment they have for the business that they have grown accustomed to.

While the external conditions and the industry have changed, they continue to operate in the same manner that they have been doing for the past 20 years.

With disruptions coming in thick and fast, they simply do not stand a chance in this current market dynamics at play. What they don’t understand they ignore. For the young entrepreneurs, you will travel the same journey as what the old entrepreneurs have gone through.

You will experience rapid growth in the early years and have some good profitable years. Then you start feeling confident to purchase your own property.

Then you start having bigger dreams of investing into more properties, thinking that you can make more money from such investments.

Do be careful with your cashflow planning especially when paying more for interest on higher debt.

Just remember the monthly principal instalments will reduce your cashflow needed for your core business. Rental revenue is never steady nor sufficient in an over supplied property market.

Only invest when you have spare cash not needed by your core business..

It is not foolish to run your business on an asset-light strategy until you have accumulated sufficient profit reserves.

Focus on the core business and do it well. Never count the chickens before they are hatched. You might be disappointed if your dreams remain just a dream.

Learn from the mistakes made by old entrepreneurs like me.

And trust me, we old geezers have made many, many mistakes not because we are not wise.

We are just sentimental, that’s all.

If your business is still viable and the sale of property will provide you with additional cashflow and reduce the payment of bank interest, then do it. If your business is not viable and you are not able to get an external investor, sell your property, clear all bank loans and suppliers’ debt and close the company.