Global meltdown – Shrinking cash inflows

Wherever you look, cash is the enshrined asset. Beleaguered carmaker General Motors recently announced, that without a cash bailout of $16.6 billion, it could run out of money as early as next month. Troubled mining group Rio Tinto’s recent announcement that it was to receive a $19.5 billion cash injection from China’s state-owned Chinalco sparked an angry backlash from its shareholders. Closer home, Tata Motors has been hit with falling volumes and the impending repayment of a $3 billion bridge loan taken to acquire Jaguar and Land Rover. Shrinking cash inflows and the weight of debt has placed the company in a liquidity crisis. Every day newspapers are testimony to a slew of financially troubled companies, all desperate to raise capital, from Kingfisher to developers DLF and Unitech and retailer Subhiksha.

With the supply of cheap credit cut off, companies across the world are turning their attention to the one line on their balance sheets that they took for granted – cash. The euphoria was all growth focused. From 2006 to as late as the first half of the current fiscal, the first thing many of our clients would ask is how could we help them reach Rs 5000 crores by 2010. Management guru Ram Charan, who recently conducted a seminar ‘Power of I’ for ICICI Ventures’ investee companies, said, “Before the crisis struck, your company’s indicators of success were increasing earnings per share and growing revenues. The most critical metric now is cash.

In normal circumstances, the science of cash management is simple – get money from customers as soon as possible, pay as late as possible and keep inventories of raw materials, work in process, and finished goods as low as possible. But in a period of high growth, CEOs admit that they let cash fall through the cracks. Everyone knows the theory, but in reality was this on their top three priorities? The answer is no.

An Ernst & Young report ‘Opportunities in Adversity’ says that 70% of the 350 global CEOs it interviewed in January had already conducted a top-down review of cash management. As much as 36% of the respondents report that they are considering possible assets that can be turned into cash and 21% are currently making emergency plans to release additional cash. Companies have been quick to learn that self help is the only way to shore up internal reserves of cash. Earlier one could dip into own pockets or someone else’s. Today no one can get the money any where.

In their quest for cash, firms have announced cost-cutting measures from layoffs to postponing cap-ex plans, debt restructuring and employee benefit cuts. At Maruti Udyog, which like every other auto manufacturer in the country is faced with tough times, cost cutting has run the gamut from working capital management to ensuring efficient realisation of receivables, business reengineering and process improvements to remove non-value adding activities. “Profits are opinions; cash is king”, says Maruti’s Chief GM Finance.
For most companies, the initial step is to unlock cash from operations. Larsen & Toubro group has resorted to closely managing working capital cycles of its businesses. There are many inefficiencies in the conversion from raw materials to work-in-progress and then to finished goods.

One of the first things companies resort to is lowering inventory levels. Tata Motors resorted to large production cuts in the third quarter of this fiscal to bring inventory down to ten-day levels. For the country’s cash-burning airline industry, it has resulted in the sale and lease of planes and slots at airports. By April, reports suggest Jet Airways will have as many as nine aircraft on lease to stem operational costs.