Opinion| Weathering the storm of economic shocks: Three precautions you need to know

Ahmed Bahaa Araby
9 Min Read

Imagine the economic crisis as a blowing storm coming towards your sailboat on which you are the master who takes daily decisions and gives instructions. The sailboat can be an entity you manage, a family you head, or even your individual life.

This analogy stems from the fact that in both situations you need to pay attention, keep watch, try to specify strength and direction, and eventually put a plan composed of several flexible tactics to survive.

The world witnessed some significant economic impacts during the COVID-19 pandemic; severe fluctuations in demand and supply resulted in a disorder in global logistics, inflation, and a general case of uncertainty surrounding decision-makers all over the world.

To make matters worse, the pandemic was followed by the Russian-Ukrainian war, which has been significantly affecting the global supply of strategic goods including metals, fuels, and foods in addition to other participations in maximising the economic disorder.

Consequently, it is not unforeseen to see the burdens of the adventurous strategy of the targeted development in Egypt multiplied.

Nevertheless, you have the chance to convert risks into chances to serve your survival and maximise your gains if you have an observant mentality and the willingness to overcome obstacles.

The following are three suggested precautions along with some additions you can tailor according to your particular circumstances — payment on credit basis while collecting on a cash basis, flexibility that boosts contraction versus expansion strategies, and re-assessing the mix of the targeted values.

Payment on a credit basis while collecting on a cash basis

The first devaluation of the EGP in 2016 caused a significant drop in its value, negatively affecting the purchasing power of all business chains — starting from the main producers and all intermediaries to the final consumer — which has continued decreasing to this moment due to many consecutive complicated factors.

This might make one consider reducing consumption, thereby reducing demand, and eventually leading to a decrease in prices. Unfortunately, that is not viable; shocks instantly push towards the same consumption volume on a credit basis, mostly with higher cost for not paying in cash, which leads to more price increases.

The suggested precaution is to focus efforts to collect on cash and pay on credit, but how?

When it is possible, we may focus on starting to give priority to selling on cash and gradually decrease the volume of credit-based selling, maybe by decreasing the portfolio of customers who request long allowance periods after an attempt of negotiating to shorten the allowance period. Yes, this

may seem to require contraction plans — which are explained later — but this is expected eventually to participate in mitigating the risk.

Meanwhile, we are converting our collection from others to focus on cash; performing payments to others on a credit basis whenever possible may be an effective attempt to relax your cash treasury to absorb the shocks of a consecutive cash squeeze. Also, this seems reasonable in the context of expectations regarding increasing interest rates — an additional reason that may let you think more about payment to others on credit and obtaining credit facilities with fixed rates, even if you have cash, and this is to invest your money instantly on short term assets, which are expected to increase in value with percentage exceeding the cost of credit facilities.

However, credit payments to others would be helpful mostly when they are of short-term tenures and under control as a preparation to reduce liabilities back to normal limits in the long run.

In other words, we may need to consider credit facilities as a painkiller and a quick short-term solution to avoid radical impacts, because the extreme usage of credit facilities and allowance periods can lead to a loop. High prices push the market towards credit facilities without the power of real enough money, which brings additional costs because of using credit facilities that participate in keeping prices higher, which again leads to more credit facilities, and this continues to lead to one end — an inability to buy more due to reaching the maximum credit limit and inability to repay and fulfil the commitment.

This reveals the importance of putting a condition on applying this precaution, which is preparing a plan to get out of the loop of an extremely credit-based economy to avoid bubbles and severe drops, even if a contraction plan is needed.

Flexibility and readiness for contraction or expansion whenever needed

After we absorbed the cash squeeze pressure by using credit facilities, our next step is to get out of the loop, and the keyword is ‘gradualism.’

Preparing alternatives of contraction to be applied smoothly in a short time when needed may be an inevitable survival strategy in the event of excessive inability to collect receivables, or if we decided intentionally to minimise volume as a precaution of a possible continuation of a supply shortage, or a sudden drop in demand due to consecutive drops in the purchasing power.

Contraction may include reducing and replacing some customers of the portfolio, reducing the list of services and products, decreasing the targeted growth percentage, and many other implementations according to each case.

Nevertheless, you may need to do the exact opposite, expanding by adding new promising products or services like inelastic products or embracing the ultimate limit of efficiency by adopting certain technology to provide a newly needed value based on the concept of the mix of targeted values explained in the following precaution, especially if you have a certain distinctive feature like ready eligible production tools or fleet or inventory or others.

So, our precaution here is two opposite plans ready to be applied quickly and smoothly when needed.

Re-assessing the mix of the targeted values

Products or services you purchase or sell avail certain values expected to be gained by seekers; values can vary from one case to another, but most of the time, you find the consumer aims to save money, effort, security, trust, time, ego, and self-esteem, or a mix of all.

Consumer behaviour most of the time is directed by emotions, desires, and reasoning that convinces one to lose money in exchange for a certain mix of the above-mentioned values.

What I expect is that all mixes of values will be changed at all levels, the final consumer will be overwhelmed by the gap between their usual expenses and their decreasing purchasing power and pushed to reprioritising their targeted values from each transaction they make.

Hence, suppliers may have to understand their targeted segments of consumers and deeply realise their priorities before and during the crisis, only then, would applying a transformation that suits the new economic environment be possible and easier.

All the above mentioned may be considered as reasonable emphasis on the necessity of adopting a different mentality that suits the current circumstances and could be also a few illustrations of how we can tailor precautions and act accordingly.

About the Author:

Ahmed Bahaa Araby enjoys more than seven years of business experience.

Araby has worked for numerous multinational financial corporations.

He also holds a Bachelor of Economics and Political Science from Cairo University and a certificate of Business Administration from the American University in Cairo (AUC).

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