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Cash is king: Finance bosses look for creative ways to ride out turbulent economic times

Saturday June 02 2012
atul

By improving their cash flows and taking measures to cut down on credit, most CFOs plan on using the internally generated funds to fund any large expenditures in their budgets

If keeping a lid on costs has been tough for most chief financial officers (CFOs) in East Africa’s companies in the first quarter of this year, they now have more reasons to worry.

CFOs are worried about the financial health of their primary customers and suppliers, and see this as one of the biggest risk in doing business, a new survey by advisory services firm Deloitte shows. Threatened corporate profits are forcing company finance heads to make tough choices in re-engineering their strategies to reduce exposure to risks and appease shareholders with the forecast of a difficult year ahead in mind.

Interviews done by The EastAfrican with a number of finance bosses reveal that rising interest costs — which have forced companies to turn to cheaper loans in foreign currencies — are bringing about a shift in business models where many of the firms are looking to slash their inventories and sell goods on cash as opposed to credit so that they borrow less.

The Deloitte survey titled Playing to win in turbulent times, shows CFOs are also concerned about political risks and competition.

At least a third of the 64 CFOs polled in the region said they saw political factors as the biggest concern. Financial health of primary customers came second with 27 per cent of the CFOs seeing it as a very high treat to business.

Although the political risk in Kenya is not new, there has been increased risk in recent months as Kenyan elections get closer and the risks associated with politics affecting the rest.

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But the fact that the CFOs are now concerned not only about the state of their own finances but also of their customers and suppliers, is a testament to the turbulent times facing most companies and their business confidence in general.

“The current short term interest rates especially hamper businesses that are in the growth curve, given the working capital requirements that come with the growth. This requires CFOs to navigate between spending for growth and saving to pay the bills, along with stretching payments to suppliers. This pressure on payment cycles brings with it vicious circles that can erode the confidence in the markets,” the Deloitte report says.

Businesses in the region have faced high finance costs because interest rates have remained high. Kenya’s benchmark interest rate has been retained at 18 per cent as the Central Bank of Kenya reined in on inflation and a volatile exchange rate.

Bank of Uganda has also kept rates high at 21 per cent. The high benchmark rates have forced commercial banks to increase the cost of borrowing.

Subsequently, companies have seen a marked increase in their cost of funds. For example Safaricom’s finance cost shot up to Ksh2.78 billion ($32.3 million) in the financial year ended March 2012 from Ksh1.04 billion ($16.2 million) the previous year. Commercials banks have seen their interest expense increase as they are forced to pay more for deposits.

Unlisted

In Uganda, unlisted companies seem to be suffering a bigger burden on financing costs largely due to less prudent capital management strategies and higher risk perceptions among lenders.

Ninety per cent of the CFOs in the survey said they see the current interest rates to be high or very high.

Harveen Gadhoke, partner financial advisory at Deloitte said the CFOs will look at stretching payments to their suppliers, look into collecting their debt and cutting down on credit to customers.

The CFOs hope the measures will increase the level of cash their companies have and increase the level of operating cash flows into the business even as they are faced with high costs of operations.

“They are doing all these measures so that they do not have to resort to borrowing,” said Mr Gadhoke.

But the CFOs still remain optimistic of growth prospects. Seven out of every 10 CFOs interviewed said they plan to increase their capital expenditure in the next 12 months. By improving their cash flows and taking measures to cut on credit, most of the CFO’s plan on using the internally generated funds to fund any large expenditures in their budgets. And because more of the CFOs are playing an important role in navigating their companies through the turbulent times, some are ascending to the positions of chief executive officer.
Peter Kebati for instance, will take the helm at Kenya’s Mumias Sugar on July 1. Mr Kebati served as the finance director at the listed sugar miller since 2003.
The report says that today’s top CFO has to be adaptable and innovative to come up with winning strategies.
“This is a development that is similar to the evolved world, where the CFO role has developed to beyond just the financial person, supported by an increasing trend of CFOs succeeding departing CEOs,” the report says.
 

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