Liquidity is vital for survival in economic downturn

Liquidity is vital for survival in economic downturn

By Riyadi

JAKARTA (JP): Companies come and go almost every day; but in
an economic recession, many will go rather than come.

And in the current economic and monetary crisis, it is
believed that many corporations will face difficulties,
especially those in unhealthy financial condition.

The Jakarta Post interviewed Subarto Zaini, executive director
of the Center for Corporate Leadership, to get his views on how
to manage a business amid the turbulence.

Subarto outlined four basic principles for corporate managers
to navigate their companies in the current world business
environment.

The first is managing liquidity. With good liquidity, a
company is able to withstand any situation, including the current
tight liquidity and high interest rates. Companies with bad
liquidity will therefore surely be the first to collapse.

In managing liquidity, a company must stick to conservative
financial management principles, like that on debt to equity
ratio which many Indonesian companies seem to neglect.

As most Indonesian firms are currently too highly leveraged,
they are subject to the current high interest rates and
diminishing confidence in Indonesia's economy.

They have to pay more to service their debts due to the higher
rupiah interest rates and higher dollar value against the rupiah.

Therefore, companies should think twice before seeking bank
loans now. Whatever the reasons, it is better to raise equity
financing than bank loans financing.

Liquidity management means also avoiding ambitious expansions
because uncontrolled expansions will only drain liquidity and
leave companies more exposed to insolvency risks.

In this context, Subarto says corporate managers should first
fix their mentality of grabbing everything described as an
opportunity without considering their supporting resource
capability.

"Our businesses are still very selfish and short-term
oriented. They just take whatever opportunity comes to them
without seriously considering future risks," Subarto said.

With this crisis, every company should learn that excessive
expansions will not be sustainable and even punish themselves.
Therefore, they must restrain expansions unless they are backed
by sufficient supporting resources.

Efficiency

The second point is improving productivity. Company resources
must produce added value, be they physical assets, intellectual
assets, financial assets or, more importantly, human resources
assets.

If not, they must be discharged so they will not become a
burden. It also applies to manpower. Companies no longer have the
luxury to leave their resources idle.

A company must adhere to traditional values in terms of assets
turnover or manpower productivity. Efforts must be strengthened
to improve the productivity of resources.

The third is improving efficiency. A company must improve its
cost control. It must count every penny it spends. The emphasis
is again on added value.

All three points are basic management principles, which
managers must adhere to in their daily business activities. Those
wanting to see their companies survive in this turbulent business
climate must look back and adhere to those basic principles in
prudence management.

But, besides all those basic principles, companies must pay
attention to the most important aspect of management which
determines the future of business, that is leadership -- as only
good leadership can lead companies to implement prudence
liquidity management, improve productivity and efficiency.

Then comes the forth point, adopting a new paradigm in
corporate leadership.

Every company should realize that they are facing a new
reality, that is a globalized, borderless world with all of its
consequences. With this new reality, old methods of managing and
leading a company will not work.

The future corporate leadership will focus on collective
leadership. In this unruly world, no single leader can manage
problems alone. Therefore, a company should pursue a collective
leadership to take effective action.

"It is no longer the era of individual leadership."

The future corporate leadership will also emphasize "servant
leadership", which focuses more on the interests of the whole
company, especially the employees, so that it can develop a
corporate ownership feeling among their employees.

Under this kind of leadership, employees will try to perform
their best for the benefit of their company and themselves.

There will be no such feeling among employees who are
exploited by the management or their employers. Leaders know the
secret of servant leadership is to put the interests of employees
before their own.

The future corporate leadership will also highlight the
importance of learning. These leaders will never stop learning
from new changes and new phenomenon.

To acquire this quality, a leader firstly has to dispel his
skilled incompetence, if there is any, which often inhibits a
person from following the learning process.

"In this monetary crisis, short-term solutions for trouble-
ridden companies will be liquidity therapy. It has to liquidate
all of its idle assets to pursue healthy liquidity. Only
companies with strong liquidity will survive the current tight
liquidity and high interest rates situation.

"But improving liquidity is only a short-term solution. In the
long-term, a company must improve productivity and efficiency.
Then, the most strategic move would be to nurture the correct
paradigm of leadership at the company," Subarto said.