Many people think that risk management is only for large corporations. This is not correct! Risk management is a NECESSITY FOR EVERY BUSINESS. The hard part is to properly align risk management processes to each unique individual organisation.
The world is undeniably riskier. Change was increasingly ever more rapidly, and this is accelerated by COVID. Increasing digitisation of business processes will inevitably increase cybersecurity risk. The world is still highly connected, and McKinsey estimate that supply chain shocks will reduce profits by 42% of annual EBITDA profits every 10 years. Increasing compliance and legislative requirements, climate change, increased stakeholder scrutiny, geopolitical risk, border closures and business disruptors (new business models, social media etc) etc etc…
SMEs need robust simple processes appropriate for the business.
Don’t let risk slip off the radar. Be aware of possible issues. Talk to people in your industry. Ensure you are not sucked into day to day operations with no time to think about strategy and risks. When thinking about strategies ensure that related risks are also considered. Monitor and analyse your business and industry trends. Talk to an FD Centre Principal, who with a wealth of experience from his clients and colleagues’ clients, and a fresh pair of eyes, may give you new perspectives and insight!
Decide how much risk you are willing to accept. This depends on the operational and financial resiliency of the organisation, business strategy and your risk versus return profile. Take away ….risk is part of doing business, but make sure it is within your limits, and you are in control.
Understand how to mitigate risk, e.g. insurance, experts, financial tools or internal controls. Work on simple scenario modelling to understand implications and remedial plans for critical business interruptions. Simple cyber security audits can be useful. Curtail activities that exceed your risk limits. Restructure staffing so that owners/managers have some time to think about risks and strategy. Ensure risk management is embedded in the organisation. Ensure internal controls are in place so you have confidence that risks are controlled and reported.
Risk management is a must do. To be successful it needs to be correctly sized and use appropriate techniques. Too small / not done and risks can damage or destroy the business. Too complex and it will detract from the real world task of running the business (and probably won’t get done anyway!).
Written by Gary Campbell – Principal (Melbourne) – The CFO Centre
A business is often a significant asset in an Entrepreneur’s life, and its value can be the culmination of a life’s work. For this reason, when considering selling your business, planning your future exit strategy, bringing on board a strategic partner/investor, or even raising finance it is essential to have a realistic understanding of your business’s value to make the deal work optimally. This is best achieved through getting an independent valuation.
The downside to getting your valuation wrong is underselling your business or more likely, in our experience, building unrealistically high expectations that could slow down or compromise your ability to carry out a potential transaction. This will be significantly more expensive than getting an independent valuation.
The upside to having an independent professional valuation is that it will go a long way to convince the counterparty that the valuation is realistic, and will also help manage your own expectations. With an independent professional valuation, you will be able to leave the professional valuer to defend the valuation, allowing you to focus on extracting maximum value from the deal.
Doing a valuation of your business requires a high level of skill. It is a technical piece of work that requires a thorough financial knowledge. Valuations require a detailed understanding of a company’s cash flow, income statement and balance sheet as well as deep insight into the company’s business model and growth strategy. A realistic valuation requires a good understanding of the specific markets and sectors within which the company operates, as well as broader macro-economic factors. There are also a number of factors outside of the company’s traditional numerical parameters that influence what a strategic buyer would be willing to pay for a company. Moreover, there are numerous different valuation methods that can be applied and a good valuation never uses one approach only.
Valuation work has elements of science and elements of art. It is possible to generate a theoretical valuation of a business but, as we have seen on numerous occasions, there can be a stark difference between a valuation prepared on an academic basis and the true value that a company would sell for in the market. A reasonable valuation requires both technical skill and a deep understanding of the commercial reality of running and selling a business.
When assessing your valuation expert make sure they have the technical skills but more importantly make sure they have successfully run, bought and sold businesses. This combination will cover both the science and art of valuation, and ensure the final answer is reasonable and defendable.
As a final thought, even if you aren’t planning to sell your business, the process of valuing your business will allow you, as a business owner, to identify the specific areas and variables in your business that create or destroy value and its twin sister cash flow. This will allow you to put in place a targeted strategy to build cash flow, and in turn build value. Many business owners run their business based on variables that, whilst important for operational purposes, are not necessarily value-driving. A firm and comprehensive understanding of what creates value may inform strategic and tactical decision-making.
The FD Centre’s Corporate Finance department is skilled in the art and science of valuations and if you would like to discuss your valuation needs please feel free to contact Andrew Meerburg on 082 829 5173 or [email protected] for a no obligation chat.
There can be no doubt the Covid 19 pandemic has led to unprecedented change for most businesses. Revenue levels have plunged for some firms while others are experiencing unexpected increases in new customers and unforecasted demand levels. Supply Chains have been disrupted. Optimising employee productivity and satisfaction have become more art than science. Short-term cash availability and longer term capital requirements are highly uncertain. Even the most confident experts are reluctant to make a call on the economic climate we are likely to experience a year from now or even six months from now.
Success in this uncharted New World requires business owners to make effective decisions to address today’s challenges and to establish a strong market position in an uncertain future. We call this future proofing your business. The path forward will be unique for every enterprise. For most businesses, the contribution of an integrated senior financial leader may be the critical success factor in making the best decisions for steering the business towards a successful future.
Most small to medium size organisations will be best served by incorporating their own foresight into targeted, most probable future scenarios developed by highly engaged stakeholders directly linked to the success of the business.
Owner operators will particularly benefit by injecting their full time or part time CFO into idea generation and implementation planning to future proof their business using the following four-step process.
Developing Most Probable Future Scenarios
The insight of the CEO, alongside other leaders within the business, will be essential to develop and select three or four most likely market scenarios. Important dimensions for assessing your business’s future would include: revenue outlook, new revenue sources, changes in access to customers or preferences of customers, competitive forces, regulatory factors and assessment of staff effectiveness. Identifying these factors specific to your business and your industry should be considered in conjunction with the team’s projections of potential future operating environments.
Involving a holistic professional with the ability to stretch the team’s future thinking to include the full spectrum of potential obstacles often leads to more robust future scenarios. Team members should expect the organisation’s financial leader to embrace the uncertainties inherent in guessing at potential futures while also expecting them to act as a catalyst to describe the leading scenarios with sufficient clarity to facilitate resiliency testing and implementation planning.
Leveraging Emerging Technology
The pace of change over the past five to ten years combined with the recent accelerated societal and economic changes linked to the pandemic, forces all business to adapt and respond more quickly and more intensively than ever before. Adapting and responding effectively requires timely and appropriate application of emerging technology solutions to uncover new connections to customers and to unlock methods to streamline and enhance business processes.
A few of the more pervasive and perhaps highest potential technology trends destined to shape the future are Artificial Intelligence, Blockchain Technology and Internet of Things. Finance leaders bring essential analytical skills, as well as opportunity and risk assessment expertise. These attributes will help the business select the most advantageous solutions and deploy these applications to deliver favourable returns.
Stress Testing Scenarios and Strategies
Once the business has collaboratively generated their high probability future scenarios and articulated corresponding strategies to maximize results; a critical need emerges for disciplined evaluation to ensure the selected paths forward can stand up to expected obstacles and deviations.
The CFO’s involvement in scenario testing is likely to be most accepted and welcomed by the business owner and the future-proofing team. A New World CFO is one that passionately embraces uncertainties and optimism while maintaining their proven ability to rigorously apply a check and balance approach to the team’s chosen future scenarios and strategies.
Commitment to Highest Impact Initiatives
The hardest decision for many organisations undertaking future proofing activities during today’s tumultuous environment will be to commit the necessary financial and human resources to those chosen few initiatives expected to best position the business over the next six months to five years.
Creating the internal and external confidence to take action now often hinges on the development of concise, compelling business cases to define the initiative, its costs and expected profits. The involvement of your financial leader in the entire future proofing process will significantly enhance the quality and effectiveness of these strategic business cases. In situations where the organization is seeking external financing or participation from partnering organisations; the voice of an informed, engaged, credible CFO will be a significant factor in securing the desired external support.
Business owners and their management teams have the responsibility to navigate the firm through today’s urgent challenges and opportunities. They also bear the greater responsibility to establish direction and take action to prepare the organisation to succeed for many years ahead. A New World CFO welcomes this responsibility and possesses the knowledge and dedication needed to deliver results today and in the future.
Written by David King – The CFO Centre, Eastern Australia & New Zealand
I bet you noticed a renewed surge of South Africans looking to emigrate, just as Covid hit. It was early 2020. In response, the hashtag #Iamstaying started trending but it would be another five months before Jarette Petzer saw the need to change the slogan and start the Move1Million movement. As it happened #everyonewasstaying, whether they wanted to or not.
It’s ironic then, that with all the disruption and loss caused by the virus, one unintended positive consequence of lock down would be the stemming of the brain-drain tide, the staunching of the exodus of skills and investment abroad. Who knows if the next wave of ‘Perth Packings’ has been averted for good or merely delayed. What we do know is that the uncertainty surrounding the easing of restrictions or the opening of borders, has not abated. Most have discarded their hopes for 2020 as a productive year and are aiming their expectant but weary sights toward 2021.
So! Green shoots and silver linings. In another optimistic development born out of the chaos, it has dawned on some of us, with gradual awareness, that Covid has given South Africans innovative new tools and fresh motivation to expand their horizons, develop multi-jurisdictional strategies to manage risk, protect existing revenue streams and develop sustainable new markets abroad. Who would have thought – out of quarantine comes emancipation – sans frontiers.
Back in the present, The FD Centre continues to field a steady stream of enquiries around exit strategies for mid-sized businesses. The reasons for these divestments are many and varied – several owners are feeling the liquidity crunch caused by Covid and are bending under a heavy debt burden. Selling has become the easiest and least painful option. Others are wanting to finally implement that BEE deal they have been putting off, and in so doing realise a portion of their hard earned retained income; a welcome distribution to shareholders that can be siphoned offshore to keep options firmly open. Still others simply can no longer continue to resist the easy comforts of a steady job and a regular pay cheque.
Entrepreneurs are smart – they did not fail to notice the effortless confidence of the corporate yuppies who eagerly swapped their suits and briefcases for sweats and webcams. Sitting at home for months on end in perpetual paid leave bliss, like suspended politicians. We jealously watched them making pillow forts with their kids and occasionally chatting pantlessly on zoom. By contrast, the stressed out business owners desperately tried to pivot their businesses, dive, survive, submit UIF relief claims for their employees, arrange debt relief and payment deferrals and watch helplessly as their bank balance imitated an hourglass. It’s rough in Africa, for some.
Well, reasons may vary, but the one constant for all these businesses remains a certain line item in their Annual Directors Report or SWOT analysis. It sits there like the proverbial sore thumb in both the Weaknesses and Threats sections. It goes by different names such as Political Risk or Economic Downturn. It stems from systemic underinvestment, structurally high unemployment, growing income disparity, corruption and crime. It is the South African economy in spreading, seeping decline. These businesspeople didn’t put it there, they are not to blame, and they can’t fix it. It is insidious and beyond the control of the average citizen but they are forced to listen for it constantly, like a baby monitor for a fevered prem.
We have found that increasingly, this malaise provokes the entrepreneur into action, often rash action, that can lead to poorly devised and executed corporate activity or ambitious emigration pathways. Impulsive and emotional decision-making has been known to decimate long held investments and collective wealth, leaving individuals without sustainable income streams and families stranded and separated from their loved ones.
But it doesn’t have to be that way and help is at hand. The good news is that Covid has taught us new, useful and relevant skills. It has given us the webinar and the live event, the online conference and the virtual interview. It has shown us all how to reach out electronically, how to engage with experts on different continents and in different time zones. It has helped us understand how to build networks for common interests and solutions to common problems, how to create virtual support systems, express our concerns, allay our fears.
And so, it was that the pandemic helped The FD Centre to see what was right in front of us all along. We came to realise that we have a unique set of strengths and capabilities – our global footprint, that allows us to provide distinctive advice and meaningful facilitation to those clients particularly interested in diversifying their product offerings or services into other countries. It has given us a ‘virtual toolbox’ for South Africans to work on their concentration risk problem. And it is good.
How does it Work? Thanks for asking, it’s a Treasure Map. The CFO Centre Group has offices in 92 locations, across 18 countries and 5 continents. There are over 600 of us worldwide, mostly CA’s, with a wide range of leading-edge sector experience and specialist knowledge. We have a mature presence in all the countries that South Africans traditionally expand into such as the UK, US, Europe, Australia, Canada, New Zealand, China, India and many more. The South African chapter of The FD Centre has recently opened satellite offices in Ghana, Uganda and Mozambique and is looking to develop its capacity across the continent. It is a formidable team of business professionals in all corners of the globe and that’s not to mention our extension distribution partner network in each country. We might not have quite the same reach as the big four audit firms, but we are embedded in your business, we know the practical steps required to implement a global strategy and we have the business model to make the journey manageable and affordable, honestly.
Why now? Many countries on our radar have invigorated their investment and business incentives to attract foreign investment in an effort to stimulate their economies since Covid. For example, Mauritius has halved its minimum investment required to acquire an occupation permit as an investor from $100,000 to $50,000.
Australia is also focused on attracting migrants able to stimulate their economy and have seven streams available to emigrate as an investor or entrepreneur, with the lowest minimum investment for Permanent Residency of $595,000. It is also rumoured that the country is drawing up plans to shake up their investor visa requirements even further.
Canada, another popular destination, is widely believed to be one of the ten easiest countries to start a business in and has a Start Up Visa Program requiring you to provide investment and support from as little as $275,000.
In short, there has never been a better time to begin your journey to establishing a new operation of your business in a foreign jurisdiction.
Perhaps you would like us to arrange for one of our Part Time CFO’s in Auckland to set up a Zoom call with some of his agri processing clients in the dairy sector. Maybe you are interested in Hedge Fund investors in Singapore or Hong Kong. Perhaps you have a small but growing leather accessory business in Cape Town and would like to explore distribution channels in Milan.
Or maybe you are interested in acquiring a fast-food franchise in Mumbai and don’t know who to speak to…
The quicker you want your company to achieve its goals, the sooner you should consider hiring a part-time FD or CFO.
That’s because a part-time FD or CFO will provide your company with the high-level financial expertise necessary to scale up (things you and your team may not even be aware you need), for a fraction of the cost of a full-time FD/CFO.
Hiring a part-time FD or CFO provides your company with many advantages that really help it to grow and stand out in any marketplace. Here are the top nine advantages you and your employees and stakeholders can expect when you hire a part-time FD/CFO.
By hiring a part-time rather than full-time FD or CFO, you can avoid the often-hefty recruitment and hiring costs (and the delays they inevitably entail). What’s more, you can hire a part-time FD or CFO for a fraction of the cost of a full-time employee. You won’t have to offer a benefits package or bonuses to retain the appointee.
Your part-time FD or CFO will provide you with strategic analysis and support on every financial aspect of your business. A report from the Financial Executives Research Foundation (FERF) described CFOs as “critical to the success of start-up and early-stage growth companies” since they provide key insights.
It found CFOs play key roles in not only managing a young and fast-growing company’s finances but also in setting broader strategic goals and establishing and achieving financial and non-financial milestones.
What’s more, part-time CFOs or FDs can highlight potential threats or risks of which you and your team may be unaware or perhaps aren’t equipped to deal with.
You can use the services of your part-time CFO or FD for what you need when you need it. That could be for a variety of different financial functions or a specific project. This means you and your CFO or FD can tailor the role to suit your company’s needs at any time.
Multiple industry experience
Although you can choose to work with part-time CFOs or FDs who have direct experience in your given industry, you can also opt to work with those that have experience across multiple industries. The advantage will be that your CFO or FD will provide you with access to networks and multi-layered insights that you might not otherwise have exposure to.
The loss of major contracts, customers or employees can be devastating for any business. Your part-time FD or CFO will be able to help you and your team navigate your way out of the crisis. This could include producing short-term cashflow reports, identifying costs that can be cut, producing new financial forecasts, and helping with raising vital funds.
He’s seen first-hand what pressure does to business owners.
“I’ve sat in sales meetings with entrepreneurs who had literally been brought to tears by stress and frustration and the feeling that it’s all too much.”
That’s where a part-time FD or CFO can help. He or she can act as an independent sounding board for the over-burdened, stressed-out business owner. With their ‘big business’ experience, it’s more than likely CFOs or FDs can provide solutions to what can seem like overwhelming problems to the CEOs of growing businesses.
Mentorship for your team
Part-time CFOs help to establish sound reporting systems and tools that help improve reporting metrics and communications to investors. They can also act as mentors to members of your existing finance team, guiding them where necessary and providing the advice they need to rise to new challenges.
Access to a national and international network
If you choose a part-time CFO or FD from an organisation like The FD Centre, you’ll benefit from the expertise from all the FDs in its worldwide network. That’s hundreds of years of experience in every aspect of finance — all for a fraction of the cost of employing a single full-time FD.
You won’t get left behind
If you’re still hesitating about whether now is the right time to hire a part-time FD/CFO, consider the sorry tale of Kodak — a company that got left behind, despite once being one of the most powerful companies in the world.
Kodak was once known for innovation (being the creator of the Box Brownie camera, Kodachrome film and the Instamatic). Here’s what’s remarkable — a Kodak engineer, Steve Sasson, developed the world’s first digital camera way back in the mists of time (actually, 1975). Okay, it was the size of a toaster, took 20 seconds to capture low-quality images which had to be viewed on a TV. But still… it had the potential to disrupt the market massively.
The company poured billions into developing the technology to take photos using mobile phones and other digital devices, but delayed acting on it due to fears digital technology would destroy its film and photographic developing business. It failed to act fast enough and to identify the opportunities posed by digital technology.
On January 19, 2012, Kodak filed for bankruptcy protection in 2012, then exited its legacy businesses and sold off its patents. It re-emerged in 2013, albeit in a vastly slimmed down version of its former self.
If you want to avoid becoming a post-script or salutary tale in your market, appoint a part-time FD or CFO. He or she will provide you and your team with strategic help and advice to recognise threats and to seize opportunities — thanks to vast experience and expertise.
The FD Centre (and CFO Centres) offer the services of part-time FDs or CFOs with big business experience who can use what they know to help your company achieve rapid yet sustainable growth. What’s more, they’ll help remove fear, confusion, and stress from the entire process.
To discover how The FD Centre (or CFO Centre) will help your company to scale up, please call us on 0861 127 280 or contact us here.
How it works
The FD Centre’s part-time FDs use a proven framework known as the ’12 Boxes’ to identify where the problems are within any business. They use it to review every aspect of your company finance function and identify every problem area.
They will help you to understand your company’s finances and not only eliminate cash flow problems and identify cost-savings but also to improve profits.
They can also help you and your team to understand your main profit drivers; find and arrange funding; identify your Critical Success Factors and Key Performance Indicators (KPIs), help you to expand nationally and internationally; and build value to make your business more attractive to investors or buyers. To discover more about the 12 Boxes, click here.
To find out how an FD Centre part-time FD or CFO will help your business, contact us now on 0861 127 280. To book your free one-to-one call with one of our part-time FDs, click here. You can see how they add rocket fuel to any business here.
What people are saying
People are sharing their experiences with The FD Centre’s part-time FDs. Find out what they’re saying here
Where are you going wrong?
You can identify strengths and weaknesses in your business in just nine minutes with the F-Score click here now. Just answer a brief series of questions, and you’ll receive an 8-page report that will reveal potential current or future pain points for your business. It will also help you to rate the performance of your finance function and uncover untapped opportunities for growth. Click here to take the F-Score.
Got a Big Question?
Have a burning question for one of our team of FDs? Just ask it here, and you’ll get an answer within 24 hours. The question must be finance-related (sadly, they can’t predict who will win Wimbledon).
 ‘Scale Up: How to Take Your Business to the Next Level Without Losing Control and Running Out of Cash’, Mills, Colin. BrightFlame Books, 2016
As you emerge from the ‘government life support’ phase of this COVID crisis and look to plan your future in an uncertain world, preparation is essential.
As we attempt to return to business as usual during what some commentators are forecasting to be the worst economic collapse in our lifetimes, businesses will need a clear strategy to help them emerge into what will, for many, be a very different landscape.
South African SMEs with a turnovers’ between R25Mil – R500Mil will be crucial in driving an “economic renaissance” and helping South African Entrepreneurs move forward with renewed vigor and resilience. SMEs are a key driver of our economy, often overlooked and not adequately represented in the way the bigger firms are. According to the stats more than 50% of the workforce in South Africa work in the SME sector.
Despite the various levels of government support available, irrespective of how quickly the COVID-19 situation improves, plenty of financial damage has already been inflicted on SMEs in one way or another.
It’s not just your balance sheet and cash, but a responsibility to the various stakeholders with whom you interact: your shareholders, employees, customers, supply chains and competitors.
Help, in the form of expert financial assistance, over and above financial support, will be imperative.
Such help can be split into three core categories; react, plan, and rebound.
Typically, SMEs are not strong at strategic planning, but this is something you cannot ignore. You will find that the world will have changed considerably, and your business will need to adjust accordingly. We are now coming to the end of the initial reaction phase, which has revolved around preserving cash and using the various government schemes to the maximum to secure your business viability for as long as possible. It has also been about negotiating with creditors and banks for as much relief as can be obtained.
Seeking professional advice at this stage is critical, particularly regarding short-term cash management, making the best use of government schemes and negotiating working capital facilities where required.
The coronavirus crisis is often dubbed as “unprecedented” with little or no data to predict future outcomes. Whilst the economy as a whole has entered into a recession, there are certain sectors who are suffering more than others, such as hospitality and tourism. Whilst some sectors are actually thriving, Economists are envisaging a lengthy recession and persistent high levels of unemployment with a lot of businesses not being able to survive.
To help guard against the worst of such outcomes, SMEs should be moving into the restructure, re-invent phase, where it is critical to involve scenario planning as part of your recovery plan.
Traditionally employed by large corporates, the disciplines and benefits of scenario planning are equally applicable (and beneficial) to small businesses. Simply by imagining different futures and outline planning for those outcomes – good, bad and somewhere in between – will help create tangible action plans for each possibility, which can then be rolled out when it becomes clearer just what that future pathway is shaping up to be.
We believe that SME’s need to ask themselves a few key questions. Amongst these should be:
Looking at end consumers, who will be buying? Will there be a lot of them or a few? What will they buy and through which channels?
Amongst our customers, which businesses will be able to pick up broadly where they left off and which will have greater problems (financially, operationally – e.g. staffing, etc)
Will all of our competitors still be around (not just the big ones, but the small ones, too)? And in what shape are they likely to be?
A new segmentation of markets will be critical – seeing customers not categorised by industry, geography or what they buy, but by whether they emerge as strugglers, survivors, or “escapers”
But it will also be vital to ask:
Will our supply chain be intact? And if not completely, what areas will be weak or gone? How might continuity of supply be affected? How might prices for materials look compared with now?
What illness disruption might we face amongst our workforce and are we doing enough to protect our staff?
Rebound: Critical success factors
Well prepared, SMEs will be able to recover faster, particularly when a clearer economic picture emerges towards the end of 2020 and into 2021.
In the meantime, small businesses should identify from their chosen strategy the set of critical success factors (CSFs) that will impact their ability to recover, pivot and prosper, before translating them into a core set of dynamic KPIs that tell how well the business is doing achieving these. And keep all of your employees updated with your decisions, and the progress being made to maintain their engagement.
By getting to grips with KPIs such as forward cash, customer retention, working capital management and supply chain resilience, there is nothing to stop a well-prepared SME from not just surviving the current economic and societal afflictions, but thriving.
If, after reading this you’re feeling uncertain about the business plans you have in place, and would like to get a better grip on what the future might look like, The FD Centre is offering a complimentary 90 minute Planning Session with one of our top notch CFOs. In this session you will receive help building the structure of your “bullet proof plan” to come out of 2020 leaner, sharper and stronger than before.
The FD Centre has helped hundreds of businesses emerge through this pandemic more resilient.
Please click here for more info, or to book your Planning Session:
Recently, I read a thought provoking article from a few years back, highlighting a key message for entrepreneurs and CEOs – Why organizations need a good CFO for their business? Especially now during these trying times, a CFO provides sound stewardship and guidance, helping restructure to create sustainable financial viability and long term success for business.
Critical to success, the CFO needs to understand the core business model, economic drivers and cashflow cycle. Being able to relate to and work with all the key stakeholders of the business is paramount (directors, shareholders, employees, customers, suppliers, auditors, bankers, etc.). Providing reliable financial and management information, tax planning, budgeting and forecasting, access to funding, exit planning and compliance management.
Determining the type of CFO or what level of skill is needed is dependent on the state of the company, and where it’s aspirations lie.
In summary, a good value adding and pro-active CFO would be required when your organization is faced with periods of:
M&A opportunities, potential busines re-organization or debt re-arrangement
When profitability and cashflow is not at a desirable level, and you don’t know why.
Needing a better and more complete understanding of business drivers
Developing a Financial Model that talks to your business strategy
Visibility of future cash flows and risks
Provision of detailed financial data, critical to making sound business decisions
If this describes your business or if you are facing a period of vulnerability due to COVID-19 we are here to help.
As part of the lockdown implemented by our government in March, they announced the Covid-19 Loan Guarantee Scheme amounting to R200bn. The Scheme was to be managed by the commercial banks on behalf of the government. The initial take-up of the scheme was poor, commercial banks only advanced R12bn of the allotted R200bn. Government acknowledged that some of the conditions applied were too restrictive and loosened some of the criteria during July 2020.
“The Covid-19 Loan Guarantee Scheme provides loans, substantially guaranteed by government, to eligible businesses to assist them during the COVID-19 pandemic. Funds borrowed from this scheme, through the banking industry, can be used for operational expenses, such as salaries, rent and lease agreements and contracts with suppliers”.
The amendments in July, included a change wherein “The test for good standing has been made easier. This has now moved back to 31 December 2019 from 29 February 2020, which will accommodate firms which were already experiencing cash-flow problems in February”
According to Treasury, Banks must apply their own policies on whether they wish to extend a loan to an applicant and each of the commercial banks have set out their requirements. Examples of the application of this policy include
ABSA’s requirement is that their customer must “have been negatively impacted by the COVID-19 lockdown and the resultant slowdown in the economy”.
Nedbank states: “In financial distress, i.e. the ability to generate revenue has been adversely affected by Covid-19.” They add, “exhausted capacity to borrow under BAU terms.”
Standard Bank highlights: “Have no existing capacity to borrow and negatively impacted by the COVID-19 lockdown and the resultant slowdown in the economy
This article highlights how commercial banks have undermined the government’s attempts to provide relief to the economy.
It is clear government wished to accommodate firms experiencing cash flow problems in December 2019 (following amendments). What is crucial here is to understand cash flow was a determinant factor in defining stress. Not necessarily income or revenue as already highlighted.
In addition, from the statements made above by government, it is clear that their intention was to cover the entire profit and loss statement, that is, operational expenditure and contracts with suppliers. Contracts with suppliers effectively includes cost of sales.
Experiencing cash flow problems
In the medium and small business environment, the critical factor to survival has been and always will be their ability to maintain a positive cash flow.
South Africa has a traditionally poor record of paying their suppliers in accordance with their terms or stretching terms to 60 and 90 days. And while government is a chief culprit, business does not have a good track record in this regard either!
During the Covid-19 pandemic, this will become substantially worse and unfortunately like the disease itself, it too has an incubation period beginning only 30 or 60 days after the revenue has been recognised.
In addition, firms that appear to be experiencing a positive growth benefit from the Covid-19 pandemic will also experience the negative impact from a phenomenon called “overtrading”. An example is a PPE supplier, who experiences a surge in orders and after recognising the revenue is left waiting for the cash from his customers and is forced to liquidate as he is unable to pay his suppliers or his staff. Other examples in the industries allowed to operate during the lockdown such as Food Manufacturing, are now experiencing cash flow stress.
Government was clear in recognising cash flow as being a determinant in their guidelines, while commercial banks through their policies and directives have unwittingly narrowed the requirements set out by government by limiting their enquiries to the impact of revenue. Negative working capital movements, or negative free cash flow, have not been accepted as indicators of stress.
Contracts with suppliers
One of the areas highlighted by the government statement is that contracts with suppliers were included in the types of expenditure being considered for the relief measures.
In my view, this allows us to delve into the firm’s ability to ensure they have sufficient trade finance.
In the example of a PPE supplier, substantial cash resources are required to ensure the inventory can be ordered and paid for prior to the revenue or cash being received from their customer. In my experience it has been the same for industries that continued to operate during the lockdown. In addition, their experience was one of longer supply chain lead times, increased costs and even potentially expired inventory.
While the thrust of the Loan Guarantee Scheme was to support distressed businesses who, from the outset were unable to generate revenue, I believe that the parameters of the Scheme was sufficiently wide enough to allow commercial banks to consider firms whose financial stress was not directly linked to their revenue generating abilities.
In this regard, I would submit that ALL firms were negatively impacted in some way and a narrow view of the regulations has resulted in the Scheme being considered a failure.
Ultimately, first principles continue to apply, it is clear that any applicant must have a sound business case demonstrating why they need funds; demonstrating the impact of Covid-19 on the business and finally demonstrating how the loan will be utilised and hopefully repaid.
Robert Walsh is a Principal at The FD Centre, based in the Western Cape.
The FD Centre provide the skill sets of experienced Finance Directors of large corporations to the small and medium sized enterprises (SME) sector, allowing smaller organisations to benefit from the expertise of a highly experienced Financial Director without incurring the expense of hiring someone full-time. Over the last 20 years The FD Centre has become the largest and most respected provider of part-time Finance Director services globally.
The FD Centre can help small and medium sized enterprises to put such plans together so that the bank clearly understands the need for financing.
If you are a fan of the guest brokers on Bruce Whitfield’s Money Show, you would know – there are bargains to be had in listed shares right now. We have all heard the stories of fabulous fortunes being made in times of recession. ‘Take a punt’ they say.
Still… going along in this particular bear market might not be such a sure thing. Deep discounts need to be weighed up against the long-term impact that the pandemic might have on markets (insert ‘new normal’, ‘disruption’ and ‘pivot’ here). The undeniable truth is that some sectors might never recover, some businesses will not survive. Moral of the story … Buyers Beware! (that is assuming of course, you have extra cash lying around). Yeah right.
The market turmoil is ubiquitous, no company is immune, there is no corporate vaccine. The unlisted space is no different to the exchanges, albeit a little closer to home. Many businesses have succumbed to lockdown and company fatalities are high. While Covid19 relief measures have provided some respite, this has mostly assisted the workforce, and entrepreneurs are left carrying the can. SMME valuations have tanked in many sectors and yet owners are still contemplating selling their businesses. They have no option – the bank balance has dried up, the bills are piling up and there seems no end in sight. Or is there?
Before throwing in the towel, it is important that CEO’s exhaust all their options. Exiting in a buyer’s market is to be avoided. Act in haste, repent at leisure. By now, most businesses will have prepared detailed cashflow forecasts and will be implementing strict ALCO strategies. Inventory levels will have been run down, arrear debtor’s will have been collected, non-core assets sold off, rent and supplier payment moratoriums negotiated, headcounts optimised etc.
The next step for a wise entrepreneur would be to take a long hard look at the Balance Sheet with a view to undertaking a restructuring or refinancing. ‘Is there scope for raising additional capital?’ our intrepid CEO may ask. Well, equity is usually the last resort when it comes to monetising value. It is the most expensive, both in terms of the long-term cost of funding as well as upfront transaction costs. Also, finding a suitable investor with a chequebook in hand, is easier said than done.
On the other hand, raising additional debt in the current climate is considerably less challenging. The low interest rate environment and relatively relaxed credit regime lend themselves to a smoother process with a higher probability of success. Right now, banks are more sympathetic to ‘out of the ordinary’ liquidity gaps and there are many financial institutions to choose from, all vying for your business.
That said, the biggest pitfall to a successful fund-raising road show is poor information and ineffective communication. It is vital to approach the right financier, at the right time with the right request. Many SMME’s stumble at the final hurdle by not understanding and addressing the minimum term sheet requirements in a convincing manner. Packaging the loan application with bank friendly terminology, a comprehensive financial model and an impressive business plan is fundamental to a positive outcome.
That is where we come in. The FD Centre globally enjoys formalised development partner relationships with many banks and credit providers, and we understand their product offerings and requirements. We are instrumental in assisting many small businesses to access Covid19 subsidies and grants during this time. We have developed many emergency cashflow arrangements and business continuity plans for our clients, often on a pro bono basis or at reduced rates, given the circumstances. We understand that unless your business is surviving and thriving, ours will not either.
So, if you are a CEO of a mid-sized corporate who has been contemplating divestiture, just know that The FD Centre can assist you in this path, but we would strongly suggest that you delay this decision until you absolutely certain that there is not unseen debt capacity lurking in your Balance Sheet.
If you appoint one of our world class Finance Directors to undertake a Balance Sheet Optimization exercise on your behalf, you can expect that we will assist by identifying one or all the following:
Existing debt consolidation with longer tenor and upfront interest and capital moratoriums;
Short-term asset-based financing options (factoring, trade finance, working capital);
Hidden assets for collateral/security (off balance sheet leasing, cashflow discounting);
Long term asset revaluations (properties and investments);
Risk hedging and derivative applications to improve Loan to Value;
Expansion and M&A opportunities (new markets, strategic equity partners, new products).
We will quickly present the various alternatives to you and, once you have ‘in-principle’ approval from your board, we will work closely with your finance team to identify the most suitable finance providers and put together a watertight, best of breed finance application that will maximise quantum, sharpen pricing and ensure that your liquidity nightmares are a thing of the past.
Covid19 has been quite a shock to the system, grinding the world to an abrupt halt and causing economies to nose dive. All over the world business owners are grappling with the after effects of C19 and have never been as busy. Your business, that was built to be on auto pilot for day to day tasks, now requires you to rethink many processes and often only the business owner or senior management can deal with these new issues.
What we need to try avoid, in amongst this “new busy”, is losing sight of the opportunities that C19 presents. It is possible that your business and industry may now be better positioned to grow post C19. There are many industries that will be bigger and more profitable, for example online retailers; other industries will eventually return to something similar to the old normal, tourism businesses spring to mind; and those industries that are structurally worse, will need to re-invent their business models to be relevant post-COVID.
In addition, the cost of debt and business valuations have dropped significantly, and may stay at these levels for a while, creating a window of opportunity to grow significantly. If your business is in the winner category, or is positioned to return to the old normal, then your planets may have lined up and it is time to attack the market. If you are game for this challenge then the two question you need to answer are, where to invest your money, and where to get the capital.
In terms of where to invest, you have most probably been eyeing an industry, market, product or competitor and know exactly who to target. If not, some focussed strategic planning and research should be able to identify good opportunities. It is always a good idea to get a transaction advisor involved, who can review the logic of the acquisition/merger, advise on all the steps in the deal and protect your identity in the approach. Often you will find that it is easier for an intermediary to talk to a target and get them to open up and give some high-level information to make sure the deal makes sense.
The second focus area is funding the deal. There is no rocket science to raising funding, as a matter of fact it requires a fair amount of grunt work. It requires a good story, reflected in a simple well thought through set of numbers addressing all the questions the funders may have, especially those around cashflow. The financial model should be robust and should talk to the rationale of the deal; it should be simple enough to understand (don’t get tripped up by overly complex and detailed models) and detailed enough to reflect reality. It should include the proposed funding structure and be built in a way that key assumptions can be changed to test sensitivities. It should be built using best practice such as separating inputs, calculations and outputs and the model should reflect ratios important to debt and equity funders. The model should include a balance sheet, income statement and cash flow, the so called three statement model (“3M”).
The FD Centre can help you identify potential targets, sense check the rationale, support you in approaching and negotiating with the target, build a fit for purpose 3M model and raise the funding to take advantage of existing opportunities. We are flexible in our approach and are happy to provide the full service or support your existing resources to do the work themselves. If you would like to discuss how we can help you please feel free to contact Andrew Meerburg who is Regional Director of the Corporate Finance division in Gauteng or The FD Centre directly.