As economic uncertainty continues to deepen internationally, particularly in Europe, with as-yet unclear consequences locally, South African businesses need to ensure they manage their cash flows effectively and make sure their balance sheets are working as hard as possible for them, says Keith McIvor, head of Business Banking Transactional Products and Services at Standard Bank.
McIvor’s comments come amid reports that many local companies are sitting on large amounts of cash as they hesitate to invest due to the prevailing uncertain and sluggish economic conditions, with current estimates that South Africa companies have a total cash pile of about R550 billion.
Improve your business
According to McIvor, companies should see the opportunity presented by the current uncertain period to drive an even more targeted focus on efficiency, so they maintain and even improve their businesses.
“It is normal for companies to preserve and protect cash in tough times. However, the ability of companies to forecast their cash flow is also paramount, especially in the context of an uncertain economy,” says McIvor.
Optimising a balance sheet is always important, and during tough economic conditions even more so; this entails not carrying too many assets or too much stock, and being able to effectively control sales, debtors and creditors so that cash flows can be accurately forecast.
“In times like these, it is crucial for firms to focus on cash, reducing discretionary spend, managing customer credit and suppliers carefully, and being cautious with their capital expenditure programmes,” McIvor says.
“Balance sheet optimisation means a company will be able to identify where improvement needs to be made, such as debt collection for example. They will be able to evaluate where capital is tied up and consequently ease access to working capital, and they are able to meet current liabilities.”
“An optimised balance sheet assists in improving credit ratings which can lead to cheaper funding, and gives companies the ability to improve business performance ratios such as return on capital used.”
Smart cash options
McIvor suggests that, depending on company gearing levels, there are a number of options companies can consider:
- Paying off debt, especially if there are concerns about their ability to repay;
- When times are bad, there are businesses in distress, which are easy targets for acquisitions. Companies could look for opportunities to acquire or expand so that they are ready when the economy turns;
- They could simply put the surplus cash in good interest-bearing instruments; or
- They could also consider re-investing it in some of parts of the world that are still experiencing positive growth, such as Africa. There are risks to be managed, but the returns can be highly rewarding.
“From Standard Bank’s perspective, we are already seeing a lot of South African businesses moving into the rest ofAfrica. It’s not only just big corporates, but smaller ones involved in a wide range of business interests too,” he says.
Standard Bank has seen companies such as fire safety equipment manufacturers, producers of prefabricated modular housing, mattress manufacturers and even security companies using part of their surplus cash and resources to expand their operations into the rest of the continent.
“All companies should be looking to make significant improvements in cash flow and operating margins. While most companies will have a variety of improvement projects underway at any given time, the essential questions should be focused on whether they are doing the right projects that will deliver the benefits they need, and how they use resources to best effect,” says McIvor.