The Chief of Finance at Spice Jet is remarkably sanguine. The company is still sitting on Rs 150 crore, part of last year’s capital infusion from PE firm Wilbur Ross. Capacity reduction was a strategic move across the industry. In our industry, operational efficiency is about being able to sweat your assets better than competition referring to efficiency levers like aircraft turnaround time.
For telecom major Bharti Airtel, given its capital-intensive business model, “sweating of assets” has to constantly be driven through revenue growth, site utilisation, customer collections, and inventory control. Early on, the company forged a tradition in outsourcing many parts of its value chain to partners like Nokia, Cisco and Nortel, thus freeing up considerable cash.
This is done keeping in mind some key criteria – keeping pace with technology, scalability, people skilling and cost efficiencies says CFO Bharti Airtel. Also for Airtel, an advantage is that a large proportion of its revenue is prepaid. It works well for both the consumer and the company.
For others juggling bills is more of a problem, so they delay payment to vendors and collect accounts receivable. The idea is that wherever you find cash is locked, you liquidate it. At Infosys Days Sales Outstanding (company’s average collection period) has just come down to 56 days from 60-65 days}. They look at overdue receivables every day, focusing their energies on studying the credit quality, credit defaults spread and vulnerability of clients and clearing their dues.
Where cost elements cannot be eliminated, they can be shifted from fixed to variable. Fixed costs mean a burden on profitability in a low demand scenario. Compensation is usually the first cost component to be variabilised. MUL has moved some costs from fixed to variable by restructuring manpower & processing costs by linking manpower numbers with productivity. Lay-offs are still off-limits for many Indian companies but performance monitoring needs to be sharp.
While it’s often the low hanging fruit that organisations attack first – halting production, freezing business travel, delaying payments to suppliers – the more complex part of cash management is actually shedding assets and hiving off parts of business to free up cash, which organisations are still not comfortable with. Cash has three internal sources: earnings from operations, working capital, and the sale of assets. All three must be pursued vigorously.
Taking that approach could mean risking growth when planning for a downside. The $7 billion L&T group has been attempting to sell non-core operations and last May its coffers were boosted by Rs 916 crores through the sale of its ready-mix concrete business. The disposal of assets must be perfectly timed and not reactive. A Director of Finance was not willing to reveal the group’s current cash reserves but vouching for full order books.
The company however is being judicious about its capital expenditure projects. All projects that are “high-impact investments” will proceed like L&T’s foray into equipment manufacturing and the forging business plant in Hazira. Planned investment in ship building may not. Luckily, commodity and material costs have softened so the idea is to allocate resources prudently says the Director.
Others are also being forced to limit capex plans to projects that ensure immediate revenue opportunities or sustain critical operations. Tata Steel has pushed back building new steel plants in Jharkhand and Chattisgarh but is likely to go ahead with high-revenue capacity expansion at Jamshedpur and a green field plant in Orissa. The smart organisations, provided they have the cash tied up, will build capacity now to be ready for the upturn, especially where the gestation period of the project is 12-24 months.
In a recent interview, Cisco CEO said companies with cash are king, queen and the royal family. With $30 billion in reserves, Cisco Systems likes to point out that it has more cash in hand than other technology companies. Infosys plans to use its cash reserves of $1.98 billion for inorganic growth opportunities. Achieving positive free cash flow in these difficult times is a competitive advantage because it provides enormous leeway to invest in and hence grow the business.
It is no secret that the companies, who think strategically about reducing their business’s long term cash needs, will be better positioned to ride future upturns. The biggest challenge, CFOs say, is managing the cultural shift among employees. Suddenly, even quarterly reports on cash, inventories and receivables may not be enough. They do daily tracking so that they can act upon variances immediately.
Inarguably, cash management should have been a discipline all along. But as they say, people lose sight of the fundamentals in a bull market. The thing to remember is that it is always a trade-off between cash conservation and business capex and working capital needs. The way to manage this trade-off is to set clear objectives for the business units in terms of free cash flow targets and monitor and review these frequently. And for all those who are prone to thinking that this too shall pass, the warning is “Consider that hard times may last longer than you think”.