In recent years, two major financial institutions, Silicon Valley Bank and Credit Suisse, have experienced significant challenges leading to their current downfall. Silicon Valley Bank, a major player in the tech industry, has struggled to maintain its profitability amidst increased competition and changing market dynamics. Meanwhile, Credit Suisse, a Swiss multinational investment bank, has been plagued by a series of scandals and regulatory issues that have eroded its reputation and caused significant financial losses.
These developments along with other economic indicators suggest that we may be headed towards a global recession. With the COVID-19 pandemic causing widespread economic disruption and uncertainty, many experts predict that the global economy will continue to experience a downturn in the coming months and possibly even years.
As we navigate this challenging economic landscape, it is crucial to stay informed and prepared for the potential impacts of a recession. In this featured article we will discuss how your company can provide a salary increase for your employees amidst the oncoming global recession.
Insights from research and case studies conducted during the Great Recession offer valuable guidance in this regard, both affirming and challenging conventional beliefs. Some of the most interesting findings deal with the following three areas:
- Debt management;
- Digital transformation; and
- Workforce management;
We will now take a deeper look into these areas to find out how they all have an impact on salary increases.
Decrease your debt and assess your balance sheet before an economic downturn
wauko’s main tagline is “Think cash flow”. This very same tagline is crucial with regard to ensuring that your company has sufficient cash during economic uncertainty. This is mainly because a recession causes lower sales and thus less cash to fund operations, and surviving a downturn requires deft financial management.
The more debt you have, the more cash you require to make your interest and capital payments. When a recession hits and less cash is coming in the door it creates the risk of businesses defaulting. To keep up with payments, companies with more debts are forced to cut costs more aggressively and this is often done through retrenching staff. These deep cuts can impair a company’s productivity and ability to fund new investments.
In reality, most companies will have some level of debt going into a recession. Nonetheless, companies should consider deleveraging when talks of an oncoming recession start getting louder and louder. In a 2019 study performed by McKinsey & Company, it was noted that firms that emerged in better shape from the Great Recession had reduced their leverage more dramatically from 2007 to 2011. McKinsey & Company’s study further stated that when it comes to decreasing loans, it helps to start early. This means reducing debt levels before it is declared that the economy is in recession.
The entity’s balance sheet should be assessed in deep detail as strategically shedding assets can be a way to reduce leverage without necessarily cutting core aspects of operations. It is always great to have assets on your balance sheet, however, assets which do not contribute directly to the main business operation can be more of a burden than an actual asset. Fortunately, assets can be sold in order to generate cash and increase cash flow in the business.
Wauko founded WauRentals with the sole purpose of improving cash flow, providing operational rental solutions, and eliminating asset redundancy for entities. An example of how this is achieved is to rent computer equipment as opposed to buying computer equipment, this is mainly because computer systems and applications are updated on a regular basis and can cause ageing computers to become slow and redundant which results in decreased efficiency. With renting you receive the benefit of having the right equipment to do the job on a constant basis and release capital outflows for investment in revenue-generating assets, thus increasing profitability.
Save costs by going digital
The digital revolution might be arguably the second biggest revolution since the invention of the wheel. With advancements in AI, the costs of going digital are becoming more and more beneficial as tasks can be performed more efficiently and cost-effectively. Digital transformation can help businesses streamline their operations, reduce costs, and improve cash flow. By leveraging the power of technology, businesses can stay competitive and grow in today’s rapidly changing business environment.
Digital transformation can improve cash flow in the following ways:
1. Automation: Digital tools can automate many tasks that were once done manually including invoicing and payment processing. By reducing the time and effort required to complete these tasks, businesses can accelerate the speed of their cash conversion cycle, which means they can receive payments faster and improve their cash flow,
2. Data Analytics: Digital tools can help businesses analyse their financial data in real time, providing insights into cash flow trends and potential issues. This information can be used to make informed decisions about spending and cash management, which can ultimately improve cash flow.
3. Online Sales: Digital transformation can enable businesses to sell their products and services online and provide them with the option of eliminating rental costs for premises which can increase profit margins and in turn increase cash flow. Chinese smartphone manufacturer, Xiaomi, gained popularity through this method. When the company launched its first smartphone it had no physical store in most of the countries where it was selling its products. A large majority of sales were generated via online platforms such as Amazon, Alibaba, and its website. Xiaomi manufactured smartphones which matched the specifications of its competitors but at a fraction of the price and that’s all down to the fact that it maintained low operational costs.
4. Cloud-Based Accounting: Transforming to cloud-based accounting systems, businesses can access their financial data from anywhere, at any time. This can help entities manage their cash flow more effectively, by monitoring the cash used and received from operations in real-time.WauFM’s main goal is to provide businesses with the necessary controls which allow for automated day-to-day accounting via a cloud-based accounting system in order to provide analytical data in the form of monthly reports. These reports aim to assist the stakeholders to make better informed financial decisions and provide the stakeholders with more accurate figures on which business projections can be created. In addition, these reports also assist with the entity’s compliance matters with revenue services and relevant regulatory bodies. This very same data can also assist businesses in times of recession with the necessary information needed to sustain salary increases for employees.
How do all of these improvements ensure a salary increase for my employees?
The simple answer to the heading is simply workforce management. Some retrenchments are inevitable during an economic downturn. During the Great Recession of 2008, roughly 34 million jobs were lost worldwide of which one million jobs were lost in South Africa alone. However, the companies that emerged from the crisis in a stronger shape relied less on retrenching staff and leaned more towards operational improvements.
Retrenchments aren’t just harmful to workers; they’re costly for companies too. Hiring and training are expensive, so companies prefer not to have to rehire when the economy picks back up. Retrenchments can also hurt morale, dampening productivity at a time when companies can ill afford it.
If you have followed the steps to reduce debt, reduce asset redundancy and implemented better decision-making as per the points noted earlier, you will most likely have extra funds in your reserves to provide your employees with a yearly salary increase. The following methods can be used to efficiently ensure that your employees receive that increase whilst maintaining sustainable cash flow:
1. Conduct a salary review:
Before implementing any salary increase, it is essential to conduct a comprehensive salary review to ensure that the proposed increases are fair and equitable. This review should consider market trends, employee performance, and internal equity. A salary review can also help identify discrepancies in salaries across job roles and departments, enabling companies to address these gaps and ensure that salaries are fair and consistent.
2. Consider alternative forms of compensation:
Salary increases are not the only way to reward employees. Companies can consider alternative forms of compensation, such as performance bonuses, stock options, and profit-sharing schemes. These incentives can motivate employees to work harder and contribute to the company’s success, even during challenging economic times.
3. Prioritize high-performing employees:
In times of financial uncertainty, companies must prioritize their resources and focus on retaining their high-performing employees. Rewarding these employees with salary increases or bonuses can help retain them and motivate them to continue performing at a high level. Additionally, high-performing employees can set an example for others, leading to improved overall performance and productivity.
4. Cut costs elsewhere:
If budget constraints are a concern, companies can consider cutting costs in other areas of the business to free up resources for salary increases. For example, reducing travel and entertainment expenses, cutting back on office space, or renegotiating supplier terms on supplier contracts, can free up funds that can be redirected towards salary increases.
5. Communicate openly and transparently:
Employees appreciate open and transparent communication from their employers, especially during challenging times. Companies should be upfront about the economic challenges they are facing but also communicate their commitment to retaining and rewarding their employees. By keeping employees informed and involved, companies can build trust and maintain employee morale.
After reading the above points it is apparent that increasing salaries during a recession is not impossible. Companies can implement the above strategies to increase compensation for their employees. By taking a thoughtful, strategic approach, companies can create a positive work environment that encourages employee productivity and success even during a recession. While a recession can be a challenging time, it can also be an opportunity for companies to strengthen their relationships with their employees and position themselves for future success.