Serbia is in recession. How to run a business in such conditions?

In economics, the most widely accepted formal tests for a recession are: (1) when a country’s Gross Domestic Product (GDP) falls during two consecutive quarters, and/or (2) when unemployment increases by at least 1.5% within 12 months.

According to above definition, Serbia is even technically in a recession. On one hand, GDP growth in Serbia from quarter to quarter is inexorably declining (3.4% – 2.2% – 0.7%), but for the whole of 2011 it will still remain in a positive territory (forecast is 1.5%). However, on the other hand, the unemployment rate clearly positions Serbia under recession. The National Employment Service announced the fact that in August 2011 746,000 citizens registered as unemployed and, according to survey performed by the State Statistical Office, 650,000 declared as unemployed. According to those sources the unemployment rate in October 2010 was 19.2% and in April 2011 year jumped to 22.2%, an increase of 3% over 6 months, which is far beyond the control figure.

If we add the statement of Mr. Milan Knežević, the Vice President of the Association of Small and Medium Enterprises (SMEs) that in Serbia currently 22,000 SME-s have their bank accounts blocked with 140,000 employees likely to lose their jobs as those companies wait for formal bankruptcy because for a turnaround is already late. Based on that, one can predict without hesitation a further increase of unemployment through 2012 which will hold Serbia in formal recession at least another year!

In economics, a recession is defined as a general reduction of economic activity. During recession, many macroeconomic indicators are moving in the same direction. Production measured by the GDP, employment, investments, utilisation of production capacity, household income, profits and inflation reduce while the number of bankruptcies and unemployment rise. Recession usually goes hand in hand with falling stock and housing markets.

Let me remind you of 2008 when western banks stopped granting of new loans because they were forced to use the capital for absorbing unrecoverable loans to companies, mortgages or investment in securities. When businesses were no longer able to borrow new money from banks, industrial production declined and people lost their jobs.

The loss of jobs has caused a drop in consumption and recession. Above all, when consumption declined, banks found themselves in real trouble. Receivables from customers – from home loans to vehicle finance and credit cards – have started to become uncollectible. Some governments intervened with fresh money, but others were already heavily indebted. When all of these unrecoverable loans mixed and reached critical mass, they caused capital markets to turn against those governments in the belief that they will not be able to repay their debts.

The global recession 2008-2009 drew special attention to risky investment strategies used by many major financial institutions as well as the truly global nature of the financial system. Until then, investors were talking about uncollectible investments in private companies and securities, but the crisis of 2011 has demonstrated that there are unrecoverable investments in countries as well – unfortunately, some of them were Serbian key trade partners from the European Union.

It is no surprise that the global recession badly hit most of European developing countries such as Serbia, although these countries didn’t have large amounts of troubled investments that were in the centre of the crisis inception in 2008-2009. The main reason is that the region is heavily traded with Western Europe, which has already been hit with crisis 2-3 years ago while this year’s sovereign debt crisis over Greece and others have made things even worse. Unfortunately this situation will not be resolved for a long time. Second, Serbia depends highly on inflows of foreign capital to finance internal growth. When the global capital markets (especially in Europe) froze after the collapse of Lehman Brothers, it was reflected into domestic capital market and combined with the chronic budget deficit have slowed down the entire economy. Almost all Serbian foreign income have drastically reduced including capital inflows, remittances from people temporarily working abroad (a figure of 5 billion euros a year was mentioned in local newspapers!) and the volume of foreign trade. This caused further decline in domestic income and demand. The financial system was shaken by the loss of access to foreign lines of credit and domestic economy started to suffocate while both banks and companies quietly experienced growth in unrecoverable receivables.

What to do with the company in such environment? You and your fellow managers must show that you can run a business successfully even in these conditions. Although a recession is tough for everyone, SMEs can stand it much easier. Smaller firms more easily overcome obstacles, recognize business opportunities and are quicker to partner with each other if they find a common ground. The economic crisis brings difficult times but good business opportunities too. Most important during the recession is to be 100% focused on running the business.

Most companies react to crisis by randomly slashing costs including layoffs and strengthening their bank accounts via focusing on cash flow. These companies fail later to catch up with the majority when markets recover. Of course that you have to deal with excessive cost when your sales stagnate or decline, but in the same time one must be careful to recognise a safety limit i.e. what is the minimum size for normal functioning of your company.

On the other hand, successful companies see the crisis as an opportunity to improve own business efficiency and quality of their market offering what usually lead them to achieving market growth in the most difficult business conditions (for example, they produce more with less capacity and transfer cost savings to customers through lower prices what often bring new customers). Don’t ignore internal problems such as low productivity or inefficiency of the business system because these could be the real causes of your trouble. To succeed, you should approach planning and strategy (re)formulation analytically i.e. you should identify your strengths, weaknesses, opportunities and threats (SWOT analysis). During the 360-degree business analysis you may find many assumptions and business practices unsustainable. You must understand the real needs of end users of your products and services as well as your direct customers. You must perform a detail analysis of your supply chain, your suppliers and their suppliers. The best approach is to use the recession as an opportunity to strengthen your relationship with suppliers and to work with them on improving the quality of products and services in order to increase market share.

Banks will hardly and more costly increase your line of credit these days. This applies to everyone. SME’s should rather seek money from friends, family, business angels, strategic partners and professional investors who are in a much better shape. Larger private companies can turn to investment funds and offer equity in exchange for growth capital but it is even better to find a strategic partner for horizontal or vertical integration.

On the other hand, the fastest way to get more cash is to prolong payment to creditors. Another example is if you have assets like trucks that could be sold well. You can do so and then take them back through lease agreement. So you will immediately receive a capital injection.

But, above all, you must carefully track your financial transactions. Run daily, weekly and monthly reports. Track your profitability for every job, every week, every client and every product or service separately. Use this data to focus on those most profitable items. Do not do anything that doesn’t make a profit!

Reduce inventory and unnecessary expenses at all costs. Look for those items in the warehouse that don’t turn often. There is your money captured – in the cost of materials, labour and other things sitting and waiting to be sold and converted into cash.

Also consider which activities could be outsourced to another company or individual to reduce the number of your permanent employees. Consider alternative ways of setting the operation and business processes – reengineer them.

Seriously think about strategy. Chose priorities and strive to those countries and markets that still show economic growth. You can see that Europe is in trouble – unfortunately not for a short period. Even your existing contracts with EU countries are not cast in concrete. I am not telling you to stop counting on trade with the EU, on the contrary. I just want to emphasise that there are other parts of the world that are still showing significant growth in their economies. For example, try to offer your products and services to BRICS countries i.e. to Brazil, Russia, India, China and South Africa. You should know that Brazil has oil discoveries beneath the ocean floor near its shores that will provide long-term economic growth for the country which is already a leader on South American continent. India and South Africa are English-speaking countries and that is the language that many people in Serbia speak. Even China adopted English in business communication. I don’t need to say that many people in Serbia speak Russian as well.

Perform market opportunity analysis by estimating its size, expected growth and business risks that await you there. Use already established business contacts and, for example, privileged position in bilateral trade with Russia and don’t worry about China and India being so far from you, both geographically and culturally. We are all active on the Internet where business contacts are so easily achieved. My advice to you is: “Do it by yourself” i.e. don’t wait for trade shows organised by the state agencies to make a business contact with potential partner – be proactive!

One thing doesn’t change in recession and it is customers’ expectation. Someone who now spends less at a supermarket because less money is available to her/him still doesn’t want to have poor buying experience such as standing in a queue at a till for too long. Maintenance and continuous improvement of service quality is critical. It is far better if you first secure loyalty of existing customers than to start fighting competition to win their market share which is declining anyway. Avoid any “price war” if possible.

In a recession, many companies cut spending on marketing. This is a strategic mistake. During recession marketing is less expensive what allows you to reach potential customers more efficiently. Also encourage your sales people to perform “cold” phone calls because there is no cheaper marketing than this and measure additional profit compared to investment in marketing.

To improve your sales, change names, packaging and pricing of certain products to give your target customers a wider choice when shopping. In this way you will encourage them to choose between your “different” products even without considering competing alternatives. Definitely avoid giving away products cheaply; instead, compete with service, quality and uniqueness. I emphasize again that flexibility and diversity are the main advantages of SMEs.

Look at recession as the right time for innovation, both in products and entire business models. You will probably find that customers’ expectation change as we move through a recession. So visit them at their site and learn about their plans and strategy on weathering the next year and then adjust your own plans. Pay special attention to new customer segments.

At a time when competition is likely to retrench people the best chance for you is to grab much-needed professionals at low cost. They can bring to you new products, markets, and perhaps most importantly, they can secure a rapid growth when the recession ends.

Čitajte ovo srpski.

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