By Azim Omar
South African businesses, and especially entrepreneurs with fewer resources, are facing ongoing economic challenges in the battle to make their businesses more resilient – but often overlook the most important parts of the equation. By Azim Omar
SOUND cash management plays a critical role as most small and mid-market companies typically function with just a 30- to 90-day liquidity buffer, without rich balance sheets, extensive credit lines or lots of cash lying around.
And increasingly we are seeing this tactic being employed by larger companies too as they struggle with a very tough economic environment – exacerbated by the recent sharp rises in interest rates which require an even greater need to focus on cash management.
Any number of situations can set a business back: competitor innovation, inflationary pressure, a pandemic, supply chain disturbances and more.
Regardless of the sector a business calls home or what product or service it offers, it needs to confirm that their companies have ample cash lifelines during disruptions.
Here are the top three tips for financial resiliency and business survival:
1. Be aware of and avoid common cash management fallacies
The majority of businesses fail within their first year.
A great many business closures directly result from poor cash management tactics that leave a business unable to overcome macroeconomic challenges.
During the height of the Covid-19 pandemic, there was massive disruption to the workforce, and supply and demand. For some companies, that meant sales and cash evaporated overnight, while at the same time, their sources of capital dried up. You can’t run a company without customers, and you can’t satisfy obligations without liquidity.
Too often, ambitious entrepreneurs pour their energy into making their products or services more competitive at the expense of managing net working capital: accounts receivable, measured as days sales outstanding; accounts payable, or days payable outstanding; and inventory, or days inventory outstanding.
They don’t make sound cash management a priority and leave themselves vulnerable to disruptions, such as a pandemic or a down market.
The balance sheet is your suit of armour in turbulent times, and if it’s strong, it gives you the opportunity to respond in ways that others can’t. Underinvestment in maintaining your balance sheet can lead to failure.
2. Know your position in the different stages of a disruption
The wider business community categorises resiliency according to the various stages of a market downturn and into three phases similar to how government agencies categorise natural disasters: prevention, response and recovery.
The stages are as follows:
- Prevention – Managing and limiting risks, mitigating the likelihood of disruptions to the best of the organisation’s ability. Companies that actively invest time and resources into proper cash management are often found in the “prevention” phase.
- Response – The ability to absorb the impact of a disruption, such as a serious macroeconomic event or competitive disadvantage. Ample investment in prevention can help reduce the likelihood of requiring a response, but if a disruption cannot be avoided (such as a pandemic), proper cash management will provide the business with enough resources on hand to inject added flexibility and maintain resiliency. An example is managing through an economic downturn without laying off talented staff or reducing the physical footprint, if the business maintains brick-and-mortar locations. In fact, EY analysis found that companies with effective cash management are 25% better at mitigating the initial shock of a disruption.
- Recovery – What was learned from the disruption to prevent its recurrence? Or, how was the disruption repositioned into an opportunity? Resilient organisations can recover faster and be best positioned to capitalise on the rebound, such as acquiring talent ill-prepared competitors had to let go or absorbing new customers and clients from companies that lacked the resiliency to serve them during the disruption.
Studying these phases can help entrepreneurs take an honest look at their organisations and apprise how financially resilient they are.
3. Inculcate cash-conscious behaviour into your company
Executive teams must prioritise building a reserve to fall back on in case of hardship, either by setting aside a lump sum for an emergency or building up that total over time.
Leaders also must embed cash-conscious behaviour into every new hire, business department and executive, especially during times of high inflation.
Analyse the business’s expenditures; what made sense a year ago might no longer be the best choice. Is it time to consider other options? Empower the CFO to ask these hard questions as doing so benefits all employees and stakeholders mutually.
Lastly, confirm that leadership has visibility and control over cash flow through regular updates and check-ins, which will help spot issues before they begin or mount. This will also help the company focus on the cash conversion cycle, pricing and improving long-term cash forecasting rather than pouring all its energy into the product.
* Omar is EY Parthenon Principal, Transaction Strategy and Executive Leader Africa
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