How SMEs can beat the Euro Crisis
2012-06-01 01:15 - 558 reads
“There can be fewer times in the history of the UK when uncertainty has been greater,” begins a gem of a press release currently causing derision amongst journalists.
“The economy is faltering; the euro is in tatters and Wayne Rooney will miss the first two matches of England’s Euro 2012 campaign.”
Britain’s small and mid-sized businesses might feel similarly about the never-ending Euro crisis, the pundits pontificating about whether Greece will default on its debts and what that will mean for the eurozone.
However, for glass-half-full entrepreneurs, the question quickly turns to how to make the most of a bad situation. Recessions and crises provide opportunities for the swift and the brave, so how can SME’s avoid being crushed by a euro-crash and even find ways of benefiting from the turbulence?
This may seem a daunting question but, like all conduct in all crises the way SMEs manage themselves through the current euro tremors will define them for the future. So how should they go about it? These eight rules of thumb should help
1: Remember cash is king
Companies frequently fail in recessions not because they are unprofitable but because they can’t cope with cash shortages when shocks hit their markets they operate in.
Because the direction and rate of progress of Europe’s crisis are so uncertain, volatility in foreign exchange and commodity pricing is a given, making SMEs with exposure to trade and manufacturing particularly vulnerable to liquidity problems.
Changes in payment terms imposed on you by other businesses also hit by euro developments also have the ability to cause a cash crunch so make sure your business has enough liquidity, including access to debt and relief options such as invoice factoring to ensure continuity of operations.
Ensure you have a buffer of sufficient working capital to deal with shocks in both your supply and demand chains
2: Manage your currency risk
With foreign currency interest rates and commodity prices so volatile, it’s crucial for SMEs to constantly analyse their exposures and assess the best risk mitigation options.
These can include foreign exchange forwards, interest rates and currency swaps as well as vanilla options and commodity hedging solutions to help mitigate some uncertainties in your operating costs.
3: Check your credit risk
Constantly assess the credit worthiness of clients, suppliers and partners, as well as financiers and financial services providers with significant European exposure.
Insurance policies can be bought to mitigate credit risk on receivables from counterparties, while bank facilities need to be negotiated before a crisis hits, not in the middle of one.
4: Take risk out of your investments
Businesses with cash, whether from past earnings, customer funds or monies needed to pay suppliers, need to be vigilant about the risk profile of where they invest it.
London insurance market Lloyd’s recently admitted it has taken out as much risk as it believes is possible from its £58.9bn investment portfolio of its member firms.
It now ensures that one third of the funds is held in cash, another third in corporate bonds and the remainder in government debt, mostly in the UK, US, Australia and Canada.
Pay attention to the grade of bonds, investing any monies you can’t afford to lose in high investment-grade bonds or principle protected deposit notes – investment products that offer the protection of principal investment capital at maturity and returns linked to underlying assets including equities, fixed income, commodities and mutual funds.
5: Analyse your real exporting risks
Less than a quarter of Britain’s 10,000 mid-sized businesses with turnover between £25m and £500m currently export, according to the Department for Business Innovation and Skills, while at 40% of those that do, overseas sales account for less than 10% of turnover.
Only 14%of MSBs export more than 75% of their turnover, foreign investment activity by MSBs has been flat for more than a decade and Britain is particularly weak outside Europe and America, accounting for 3.4pc of the imports of Organisation for Economic Development and Co-operation counties but only 1.2pc of the imports of UKTI’s 19 designated growth markets.
One reason is that Europe has been deemed a better risk than Asian and Latin American nations in recent years. How much is that position changed for your business by the current events in Europe?
6: Make the most of Government help
The Government is putting £45m over three years into a British exports drive, including the extension to mid-sized businesses of the Gateway to Global Growth programme it launched to SMEs in 2009, providing international trade advisers who work with companies to conduct international business reviews and help develop a strategic action plan.
The mid-sized business support also offers specifically-tailored services including advice on partnerships and joint ventures, subsidised access to a business school programme geared to help companies build international strategies and support in protecting intellectual property overseas and a trade missions programme.
7: Stay nimble
While larger companies can use their size and weight to negotiate better terms from governments, suppliers and partners, the nimbleness of SMEs gives a flexibility and speed of response that large organisations find it difficult to replicate. Don’t let your risk management initiatives jettison the flexibility that gives you your edge.
8: Expect the unexpected
Analysts expect a Greek default, more bearish City scribes think that will lead to the nation abandoning the euro and the most pessimistic believe that other countries, maybe Portugal, Ireland or even Spain could follow.
That would place the entire eurozone in jeopardy but you should also be alert to unpredictable events, such as major European bankruptcies, political turbulence and natural catastrophes, which all have the ability to affect cashflows, pricing and risk.
Also, plan for after the crisis. However long it lasts, one day it will no longer be an issue. Make sure your business has the funds, the expertise and the support it needs to be part of the future once the storms have passed.
By Andrew Cave – A Business Interview Writer for The Sunday Telegraph