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.