China General Interest
China Now welcomes Dezan Shira & Associates as contributors. In this article from the November issue of China Briefing News they evaluate the potential impact of the global financial crisis on businesses operating in China.
Much has occurred over the past few weeks, with stock markets plunging, banks in crisis and governments worldwide having to step in to rescue their ailing financial institutions. Although an international government bailout of taxpayer money appears to have stopped a complete meltdown of the global economic system, there remains no doubt that the consumer boom in the West over the past couple of decades is going to slow down. With many businesses in China geared towards supplying that boom, now is the time to look at practical considerations when managing your business in China.
On the ground in China
What to look out for:
- receivables increasing
- pressure on cash flow
- project work time slippage and cancellations
- banks requesting loans and overdraft reductions
Make no doubt about it, if you are supplying customers in the United States or Europe, they will be looking to change the balance of their relationship with you. In short, to remain their supplier, they will want you to fund more of their business. That means they will delay paying their invoices, and will extend credit terms, even without asking. You need to ensure that your contracts with them are tight, define credit terms and also define late payment penalties if they fall beyond say, 60 days.
In today’s interconnected world, payment should not really fall much beyond 45 days—six and a half weeks. If it does, they are simply using your money to fund their cash flow. You need to be strict about it and insist on payment according to contractual terms. This may mean making a nuisance of yourself until they get the message. This may prove difficult if you have a good relationship with them, but if they start to abuse that relationship it’s time to start calling the shots.
To deal with this you must pay attention to your own business cash flow and start to plan it out. This means looking at all of your overheads, working out when these are due, (not when you can pay them) and looking at what money you can realistically expect in to cover these amounts. Be honest, and be tough. If you’re not sure if someone will pay on time, don’t rely on it. These are not blue sky times we are talking about, and you need to get a large dose of reality into your cash flow to work out the true extent of any problems and what you need to do about them.
Worst case scenario
You haven’t paid your staff. You delay paying creditors. In China, you can expect immediate and unpleasant problems. Creditors may attempt to seize assets in your building, factory or warehouse—it’s illegal and they should have court orders to do so, but this will not deter some. In fact, if you haven’t paid your staff, you’ve lost much of their trust and they will start to work against you. Far better to be open and honest with them, hold a staff meeting and tell them exactly the situation. The first people you should pay in China are your Chinese personnel; without them, you have no business. So, whatever you do, whatever money you have, make sure it gets to them first and shows them that you are fighting for them to be paid as well. You’re much more likely to find them cooperative and motivated to help you than if not.
Disgruntled staff may well collude with unpaid suppliers and help equipment and supplies be seized. If you are worried about this, employ security guards or dogs on the premises. Off duty Public Security Bureau officers can be hired to watch over your premises to help prevent theft.
But remember, your staff, if left unpaid, are in the front line, and they may tell your suppliers about it if you do not deal with it. If your supplier finds out you haven’t paid your staff, he is likely to take immediate action to reclaim back his property from you and to be very aggressive in doing so.
When dealing with sales projections, again, this is a time to get accuracy into projections. Sales staff / managers tend to be optimistic, so interview them about their projections, and ask why you can expect to get paid. They will need to be convincing and have answers to back up their case. If they do not, painful as it may appear, do not put it into your business income pipeline. In cases I have seen in the 1997 Asian Financial Crisis, an average of 50 percent of the initial sales projections, when properly analyzed, turned out to be “blue skies” and not dependable. Staff maybe appalled at the rejection of their estimations of incoming work, but if they cannot properly back it up, it needs to be cut out. The point is to get to a viable cash flow projection and not listen to their optimism, because if they are indeed too optimistic, a 50 percent variable on actual income will potentially put your cash flow projections out by 100 percent. If staff cannot support their sales income projections with a reasonable understanding about why it will fall in as a deal, don’t count it in.
In terms of closing deals, it’s also time to get to the bottom line of getting that money in. When negotiating with a client, now is the time to be asking, when you’ve covered all the bases and they seem to be hesitating; “What do I need to do to get you to agree to hire my firm or buy my product?” Make sure you get an answer. Fifty percent of the time it will be unattainable; but 50 percent of the time you will be able to close. Then you can either cross it off cash flow, or add it in. Either way, you get to find out exactly where you stand.
Negative cash flow
If you uncover a situation when your projected cash flow income is close to or less than your business expenses, you need to act fast. You must look at expenses that can be immediately cut out of your business: marketing, advertising, hiring of new personnel, and so on. These will differ from business to business. You need to get down to a sustainable cash flow level where you can match income and expenditure.
If that means you can’t pay suppliers, then you need to prioritize suppliers by importance. For those suppliers you need to extend your payment terms with, you must contact them and discuss the issue, and if necessary, re-negotiate payment. They won’t be happy of course, but at least you have shown them respect for their own business and been able to help them fine tune their own receivables position.
It helps to have at least part of the payment immediately available and to commit to paying the rest on a regular monthly basis until. Far better, as long as you have cash flow income, to spread non-essential debts over a period of three to six months and pay it off monthly over that time than to give yourself additional pressure by either paying the bill and not paying staff, or by just ignoring the debt and having your supplier get angry with you.
Banks can be very difficult to deal with during a downturn, especially during this time when many of them are under pressure themselves. They may seek to reduce your overdraft facility, or call it in, or even request immediate repayment of loans. Before you acquiesce, study your contract carefully to ensure they have the rights to do so. Take note of any clawbacks you can claim from them in the event they do call loans in. Usually, they are in the driving seat, but at least study what agreements you have and fight for them to stick to it. At the same time, start making cash flow plans to see what you need to do about it if they do call debt in.
You’ll need to properly assess these. That means looking at rental contracts for expiry dates when you can renegotiate your rental, or moving to cheaper premises. Expatriate staff too can perhaps be localized to take pressure off the China accounts and the business managed by domestic staff for awhile. If you do this, make sure you get in a professional firm to help as it may take some time to assess your outsourced business management costs in this regard.
Most overheads that can be cut out are a combination of small expenses; insignificant individually, but collectively a burden. These need to be identified, prioritized into categories of importance, and the ones that can be jettisoned, struck off as an expense for the time being.
Surviving a recession is all about managing your cash flow. You must sit down and try and get a reasonable cash flow projection together. Do not rely on blue skies or maybes, even though the situation may be bad, it’s better to assume the worst, and then work up from there. It’ll actually make your job of recovering your business much easier. If you understand your cash flow, the measures you need to take to secure the business will be far more apparent.
Chris Devonshire-Ellis is the senior partner of Dezan Shira & Associates. If you need advice in China over business financial or management issues during the global downturn, please email him at email@example.com for an assessment of your situation and solutions in dealing with recessionary problems. The firm has a national presence in China and over 170 experienced legal, accounting and audit staff; all speak English.
Nov 4, 2008