The business climate goes a long way to affect its performance through multiple channels such as government regulations and policies, institutional quality, variations in the macroeconomic environment, infrastructure availability, market composition. The current unfavourable signs of the business climate in Sri Lanka significantly impede its local business prospects for survival within the country. With the recent IMF conditions, the Government was compelled to follow the strict tax policy which is a huge hit not only for the startup companies but also for the giants.
The unexpected utility expanses are another burden for the companies which have been operating to meet even the break-even margins. Due to the import restrictions and rapid exchange rate fluctuations, the Sri Lankan businesses are gradually closing down or rather moving their operations to other Asian countries such as Bangladesh and India.
We should first understand the fact that there are several crises a business can come across in its lifespan. The typical crises in business include unexpected economic conditions, natural disasters, management disputes, terrorism and market competition. Some of these crises are internally controllable and others can only be mitigated but cannot be controlled by the company.
For example, a crisis of an internal management dispute caused by the sudden death of the company’s founder could be resolved internally with no external influence. Whereas an economic crisis in a country cannot be controlled by a company as it is not under the control of the company’s management but can be dealt with to mitigate the negative effects.
The current economic crisis in Sri Lanka has hit small and medium sized enterprises heavily compared to well-established corporations. For a company to deal with this current economic crisis in Sri Lanka, it should first understand what an economic crisis is. An economic crisis can be observed specially when a country experiences factors such as ‘a sharp increase in commodity prices to an unaffordable level for the public, depleting foreign reserves and non-availability of foreign reserves to pay for essential imports, depreciating the local currency constantly against the reserve currency, imposing import controls, shortage of commodities, food and essential medicines in the market, increasing unemployment, closing down the startup businesses and political instability’.
There will be many specific challenges for small companies during the economic crisis. Each challenge has to be dealt with differently. At this time of strain, the primary purpose of all the companies is to survive until economic recovery without bankruptcy. Unfortunately, now the statistics reveal that the tendency of the Sri Lankan companies is to shift to other countries not for the sake of expansion but to continue their operations without closing down.
The way forward
The Government should immediately provide the strategic solutions to retain the local companies during this economic crisis. On the other hand, the companies should also find the alternatives for these enterprise risks and implement suitable risk treatment action plans to continue the businesses in Sri Lanka since they remain as the engine of the country.
Due to the hyperinflation, the raw material and packing material prices will go up regularly along with other inputs for company’s operations. This will make working capital management for the company a difficult task. Since the company has to find a way to bring the extra working capital to manage the price increase, the company will have to proactively revise its finished goods product pricing in line with other product price increases to avoid working capital shortages. That could result in the event of selling finished goods at a price that fails to take the price hike in raw material and packing material prices into account.
Sri Lankan startup companies have a challenge since they cannot increase the price as high as big companies do due to stiff competition. Therefore, small companies have to make product costing and pricing decisions based on market response while continuing an optimum capacity operation without increasing their production capacity during the crisis period.
The cost of living in Sri Lanka reaches an unaffordable level. Sri Lankan customers will spend their money mostly on essential commodities with the hope of survival and postpone all non-essential expenses. They will also seek the lowest-priced products rather than the highest-quality products in these circumstances. As a result, the demand for elastic commodities will drop, whereas demand for inelastic essential items will remain the same. However, there will be price competition among suppliers of inelastic essential supplies.
Under these circumstances retaining the customers and running the business will be a definite challenge for small companies. They should sell elastic products and services which must devise a strategy to survive the crisis since income may fall while costs remain constant. In this situation, the company has to cut all unnecessary costs and spendings to retain the core of the business running. In contrast, small companies that do business in inelastic product and service sectors formulate the right pricing strategy to retain their customers and to succeed in competition and survive. The profit margin will be thin for these companies.
For example, small companies and startups in the retail sector in Sri Lanka are suffering due to very thin profit margins caused by double digit inflation and utility price increase. Consequently, they are supposed to pay twice the price to purchase the same quantity of products as before.
Challenges
For a small company or a startup, continuing its business operation is a challenge due to the shortages of raw materials, packing materials and fuel created by this economic crisis. Like big companies, small companies do not have access to large warehouse facilities to store raw materials and packing materials. It has to purchase material when it is needed. Transport and distribution will be another challenge due to fuel shortages. Therefore, material supplies for production could be delayed which could affect the production operation. Not only these factors but also the electricity expense, water cost, telecommunication charges and all other utility payments are increasing considerably.
With these challenges the small companies cannot afford to stop the operations due to shortages as it will affect the entire business of the company from sales to working capital management to production at the end. Therefore, small companies should proactively arrange adequate warehouse facilities to store raw materials and packed materials while arranging a proper logistics channel for inward and outward supply. Hence, the company should find extra financing facilities to manage the increasing costs to ensure a sustainable operation during the economic crisis.
Retaining skilled and experienced employees will be another great challenge as employees will demand a salary hike to match with the increasing cost of living. This will be a challenge as the company will formulate strategies to reduce the cost to ensure that the company survives during the period of the crisis. On the other hand, employees are looking for opportunities to increase their income to cope with the increasing cost of living.
Experienced employees have already started to migrate to other countries, hoping for a better life. This will set a trend and many executives will quit their current jobs to look for new employment opportunities. It creates a challenging environment for startups which are already struggling, as their employees will often find jobs in big companies for higher salaries or join the migration force. At this time, the company should come up with short-term measures to mitigate these issues by offering a temporary relief package to employees so that they can focus on company’s development while having a loyalty. When the company takes care of the employees’ needs in a difficult time, the employee will stay with the company to fight the crisis. Some small companies do layoffs to ensure their survival during the economic crisis. If a company goes for a layoff strategy to cut costs for its survival in a difficult economic crisis, then it should be done carefully without affecting the employees.
There is no hesitation that the disgraceful state of the business climate in Sri Lanka has hampered businesses in several ways. Predictability of market trends will be a difficult task for small companies during the present Sri Lankan unbalanced economic conditions. The business operations are hindered by the constraints such as infrastructural deficit, corruption, unfavourable tax policies and excessive regulations from the Government. All prices, from the product price to the raw material price will be extremely volatile due to the aforesaid circumstances. Thus, there are reasonable grounds where the companies are thinking to move to other countries while discontinuing their local operations.
The current situation of Sri Lanka can change at any time. Thus, small companies should further cut their yearly plans into very short-term plans such as one month to three months. Also, the government should immediately change its policies and more concessions should be awarded to the entrepreneurs while increasing Government investment in critical infrastructure, eliminating destructive tax policies and preserve a healthy macroeconomic environment by ensuring the business longevity.
The writer is a senior Chartered Accountant
