Investec’s Dr Greg Cline: We are seeing spouts of opportunity, even in a constrained environment.
By Dr Greg Cline, head of corporate accounts at Investec for Business
Markets and the economy are likely to remain fragile for some time to come. In fact, recovery in global growth is expected to be bumpy and divergent, and if we consider that locally GDP contracted by 51 percent in the second quarter of 2020 and 2.2 million jobs have been lost, as financial results start to trickle through, it’s evident that businesses have had to make hard decisions and very importantly, have had to repurpose.
Having said that, however, we have also seen the resilience of many South African businesses, with many realising what they have to do to effectively stop the bleeding and turn things around. Some have had to raise equity to put into the business to allow for business continuity, while others focused on understanding how to alleviate costs within their cost base and looked for ways to become more nimble.
In fact, some businesses have thrived because they understand the implications, have self-assessed and have examined overheads they are carrying that are unnecessary. In trimming the fat, it has made them more agile and able to trade at probably higher profitability levels, even on the back of reduced turnover. As a result, we are seeing spouts of opportunity, even in a constrained environment.
Growth and opportunities are there for companies in a recovering market, especially if they have a strong cash position, so the question then is not whether there are growth opportunities but rather what role lending plays in recovery and more importantly, a growth strategy.
View on debt and right sized lends
Having sufficient cash to allow you to trade (and capitalise) is going to be critical going forward. South Africa generally is quite a conservative lending environment. Businesses have lived through times when interest rates were 25 percent and they have been badly burnt – so there is a conservativeness around debt, traditionally.
This, however, needs to change and more importantly, the view on debt needs to shift. Debt doesn’t always have to be seen as a negative, but rather can be used to release working capital or improve cash flow. In fact, the right type of debt and the right type of funding can be incredibly positive for a business.
Certainly, you can’t plug a hole where you’ve got eroded earnings, but if we look across a working-capital cycle, be it funding to assist in the purchasing of raw materials or products or a new facility where working capital that’s tied up into your debtors can be released – debt can provide that platform for growth, creation or for the fulfilment of additional sales and turnover. And that comes from different points.
Predominantly it allows you to pay for the goods that you need to put into the system and allows you to buy stock or materials, but it also allows a business to provide terms to their customers to extend some relief.
What’s also changed in the Covid-19 landscape is that a debt provider traditionally would look at a business’s historical financial information, and that becomes a proxy to understand the capacity for borrowing. However, lines between debt and equity in that sense have blurred a little since Covid-19. To purely look at historical financial information now means it’s going to be clouded by Covid-19 noise that sits in the system. The trading profitability doesn’t represent the true consistency of the business, because of the massive fluctuation.
Those businesses that have built up retained earnings and built up strength in their balance sheets means – more often than not – that net asset value on the balance sheet is reflected in the form of either stock on hand, debtors in the business, or capital assets. Having a funding partner that takes the time to understand that and back the business based on this, rather than just surface information, is fundamental to being able to get the right-sized lends, when needed.
Maximise your cash
Additionally, as focus now turns to recovery and stimulating lacklustre demand, it will become critical to protect liquidity and focus on core competencies. If cash or investments aren’t working for the business, they are a wasted opportunity and, in this market, opportunity is everything!
We know that ‘cash is king’ but understanding where to put it can be a difficult exercise. Understanding where the cash in the business is going, what needs to be saved for, and how long some cash can be put aside for is critical. The better you know your business, its ebbs and flows, the better you will be able to make these decisions.
Ideally, businesses should channel any extra cash into investments offering new growth opportunities. However, in difficult economic times, where businesses are having to work extra hard just to maintain market share and margins, or where growth opportunities are hard to come , this isn’t always a viable option.
Take time now to understand the business’s cash realities and what this cash strategy could look like. This will go a long way in making the cash work harder for the business. Look for a cash investment product that can help the business get the best possible return on its cash – but more importantly, understand how to structure this investment to ensure flexibility. Of course, the rate you choose for a cash investment product will depend heavily on the business’s unique cash flow requirements but more importantly, look for a cash solution that is as unique as your business.
A big lesson learnt through this crisis is that many companies realised that there were insufficient business savings put away to carry them through a cash flow crunch like the one we’ve just experienced and in order to survive, fundamentals need to be put into place, not only to survive the tough times, but to thrive.
Optimism drives solutions
Even in difficult economies, companies are growing and diversifying. In fact, many companies grow significantly during difficult financial times because they have set aside the resources not only to survive, but to expand as others waver. So, no matter the business environment, and the amount of available cash coming off this weaker base, businesses should always be thinking about their lending and cash strategies – and how they can use this to not only ensure better returns, but to grow and capitalise on opportunities that are being presented.
