Community Conversation reveals that CFOs shouldn’t apply thrive strategies too quickly
Deloitte’s Jo Mitchell-Marais says businesses should focus on contingency planning to survive an ongoing crisis.
On 10 February, during the second CFO Community Conversation of 2021, Deloitte Africa restructuring services leader Jo Mitchell-Marais explained that it’s not a company’s ability to survive the initial peak of the crisis but its ability to survive the aftershock that will determine who will be successful after the pandemic.
“The ability of companies to be agile and flexible enough to know what their trigger points are, which interventions need to be implemented and at what point they need to be deployed will determine who will survive,” Jo says. “This is what we call contingency planning.”
She encouraged the finance executives attending not to jump into “thrive” strategies too quickly, but to stay in survival mode and take their time to focus on the right contingency planning, because the pandemic isn’t over yet – and won’t be for some time.
Using what she called a “demise curve”, Jo explained that the point in a company’s lifecycle when it starts to feel financial underperformance and starts moving into financial stress is where contingency planning comes to play. “If the contingency planning is unsuccessful, companies will move further down the curve into financial distress, where business rescue and liquidation takes place.”
She said that one of the mistakes that the leadership of companies who are feeling financial underperformance often makes is that they only start doing contingency planning when they reach financial distress, at which stage it can be too late and they need to undergo formal restructuring. What these leaders don’t realise is that “contingency planning can happen during any cycle of a business”.
She explained that it is possible for a business to move back up the curve if the contingency planning is successful.
Successful contingency planning
When companies start to feel financial underperformance, appropriate remedial action needs to be implemented to improve performance or to turn it around. It is at this stage that consensual restructuring of the company needs to take place.
Jo explained that, at this stage, you need to flesh out the various options available to the company. This may include strategic sales, non-core disposals, developing turnaround plans, looking more specifically at working capital management, looking at a cost optimisation process, and building those into contingency plans. “But you need to have a very clear understanding at what time you pull the trigger on those plans,” she said.
When companies are already in the financial restructuring phase, the right contingency plan includes preparing everything you need to ensure a successful business rescue. “You have to ensure that you have the right business rescue practitioner, have the funding required and that the plan is well-developed so you know what success is going to look like,” Jo explained.
She added that, without all the right things in place for a business rescue, companies often end up going into liquidation. “This is why it’s important to start contingency planning before you reach financial distress.”
When Covid-19 started impacting businesses, Deloitte told their clients to stop their discretionary spend and to put a halt on any major capex projects that were going on. But a large part of Deloitte’s services fall within discretionary spend, so the big SAP implementation projects that Deloitte Consulting does were halted and canceled. This had a huge impact on Deloitte. “We had to do what we were telling our clients,” Jo said.
She explained that Deloitte had to look at their liquidity and at the tough decisions they had to make to survive, including cutting bonuses and increases. “We had to try to right size the business and get to a stable platform.”
The company also had to look at what would need to happen for it to bring back some of those bonuses or increases, and equally what the terrible decisions were that they may need to make if things started to go south again.
The attendees were then split into two breakout rooms where they had a chance to share the contingency plans they have had to make in the last year.
Zutari CFO Joe Ndala said that they had to declutter their balance sheet and bring their liabilities down. “And when it came to cash, we had to monitor every cent.”
He explained that he and the COO had to take turns to phone clients when there were issues, and that they have weekly cash discussions so see where there are blockages.
As a startup business, ROAM Africa relies on funding from its stakeholders. Because of this, conserving cash is very important. CFO Herbert Pasipamire explained that they had to look at getting all their staff to work from home, which has helped them to renegotiate their office rentals going forward and save money.
“We came up with various scenarios for dealing with the revenue shortfall – not just plan B, but plan C, D and E as well,” Herbert said. “By June, we realised we weren’t going to see a worst-case scenario, which helped us to not be too aggressive but to focus on creating a sustainable business going forward.”
He added that, as a business, the learnings they have had from the Covid-19 pandemic have been invaluable.
At PPC, CFO Ronel van Dijk did everything in terms of contingency planning. “We ran scenarios for 30, 60 and 90-day lockdowns, with various ramp-up scenarios. We approached our employees and asked them to forfeit leave. We looked at pension fund holidays. We approached the bank for interest holidays and relaxation of covenants. We approached some of our customers to regulate payments, and in certain instances we assisted them. We tried to push suppliers out as much as possible.”
For three months, there was no spend without Ronel’s direct approval and in the end PPC’s volumes were better than the previous year. “So in hindsight we did more than we needed to. But the relationship between PPC and its South African lenders has improved a lot.”
ETDP SETA CFO Nonhlanhla Mona-Dick explained that part of their contingency planning included containing the company’s expenditure. “We spent the whole year with vacant positions that we weren’t going to fill because we knew that we wouldn’t have the same revenue as always,” she said. At the same time, the SETA had to try and maintain their operations as much as possible despite the vacant roles.
She added that liquidity management came naturally with the events of the lockdown. “Because we had Treasury approval to keep our surplus funds, we could pay the contracts that we had concluded,” Nonhlanhla said. And, because of the hard lockdown, many of their training programmes had to be delayed, which served as a hedge for the SETA to delay spending money. “We were investing more funds because they weren’t leaving our bank and put those returns back into the business to fund our operations for the current year.”
The attendees all agreed that liquidity management played a very important role in their contingency planning and, because of it, their companies were able to survive the initial shock of Covid-19. They also believe that, because of this successful contingency planning, their companies will be able to survive the ongoing pandemic and be able to enter thrive mode once the pandemic is over.