Economy Uncensored with Tapiwanashe Mangwiro
It has been a week of statements from companies that are failing to meet their immediate costs and another that has eventually moved into corporate rescue and the two companies have one thing in common, “expansion through growth”.
BETA Holdings issued a statement regarding their failure to pay their workers for months due to shortage of working capital and they stated that it was because of their expansion projects that will give them more benefits in the future.
Metro Peech and Browne has closed its doors and opted for corporate rescue despite having built a very big and lucrative shop in Harare and rumoured to have acquired what was once the Marondera Rugby Ground to erect an alike building for their operations.
With the company opening its doors for the first time in Msasa in 2007, it went on to construct and open 19 other branches in the next 16 years, while BETA Holdings has purchased new brick machines, new site in Melfort, an operation in Zambia and a quarry station all in the past five years.
These two businesses have prompted me to look into the issue of working capital management and growth as they are profitable but cannot cover immediate costs due to growth through expansion.
Problems of rapid growth
Some companies suffer because of the working capital cycle, which is the time it takes to turn net current assets into cash and there always will be a delay between buying raw materials and selling finished goods. However, if the working capital cycle is slow, that will cause significant problems for an expanding business.
The process can be improved by shortening the time that inventory sits on the shelves, reducing receivable days, and increasing payable days. However, these steps take time to implement, which can be an issue when sales grow every month.
Business growth rarely follows a smooth trajectory, instead, increases in sales volume tend to come in spurts. Consequently, it can be challenging to predict things like inventory requirements and staffing levels with certainty.
However, a business must be prepared for the peaks in demand, so the inclination will be to invest in resources to cope with the maximum turnover. That over-investment can lead to cash shortages during the dips in sales growth.
Both the companies we are talking about today suffered from what is called overtrading and a lack of working capital in the time between investing in business growth and realising the profits can cause serious problems for some growing businesses.
Overtrading happens when a business expands too quickly without having the money to support such fast growth. Lack of resources may mean you are unable to deliver on contracts or pay for your company liabilities.
Overtrading can occur if your customers are buying on credit or paying late or you are overspending on equipment, materials, among other things before you are able to generate revenue.
One of the biggest mistakes is to expand too quickly and this can put your business at risk because growth can create excessive pressure on every aspect of the business from supplier to staff to all important cash flow, all of which can push your business into a downward spiral.
Insufficient planning is another issue to be mindful of and can also hurt your operations.
Possible growth management
If you are experiencing periods of negative cashflow, you may try to relieve them by extending payment terms to suppliers, either by taking additional time to pay or negotiating longer terms.
Reducing the capital that you take out of the business, freezing salaries and increasing prices may all help to produce some respite but in the case of Metro Peech and Browne they were running a low margin high volumes business and could not increase prices.
If problems arise from lack of cashflow, stopping expansion for a short period should enable revenue levels to catch up.
Good cashflow control is important for any business and for a growing business, it is absolutely crucial, since financial problems can limit or stop the growth of your business. Overtrading can similarly cause grave issues.
Making the best use of your finances should be a key part of business planning and assessing new opportunities.
You may need to pass up certain opportunities if pursuing them would take essential funding away from your core business.
Growth typically increases costs in a business, often putting a squeeze on the day-to-day finances and borrowing money may relieve some of the pressures, but it can also put your business at risk.
You should carefully control every element of working capital to maximise your free cashflow during growth.
There is also a need to balance the timing and the amount of money flowing into and out of your business with good practices for credit management, factoring and invoice discounting, stock control and inventory management as well as supply chain management.
Prepare for any shortfalls, if you can and predict peaks and troughs in your cash balance by preparing realistic cashflow forecasts.
In periods of growth, holding obsolete stock may become a problem and you may want to manage your suppliers to reduce delivery cycles, or switch to suppliers and systems that can handle just-in-time delivery.
Planning ahead helps you to anticipate your financing needs and arrange suitable funding and for many growing businesses, choosing the right finance options and possibly bringing in outside investors to finance growth will be a key decision.
Proper management of working capital is key to any business’ financial health during growth.
Lack of working capital is not the same as unprofitability, but the effects can be just as catastrophic and if you do not have enough working capital to cover your obligations, insolvency can result.
You may find your business facing legal problems, liquidation of assets and potential bankruptcy as is the case with Metro Peech and Browne.
Tapiwanashe Mangwiro is a resident economist with the Business Weekly and writes this in his own capacity. @willoe_tee on twitter and Tapiwanashe Willoe Mangwiro on LinkedIn