Time to steer Zimbabwean companies out of crisis

by Sunday News Online | Sunday, Jul 16, 2017 | 735 views

byo-industry

Mugove Hamadziripi
IN a fast globalising and inter-dependent world, Zimbabwean companies need to stay and remain afloat and maintain a competent economy. It therefore means the companies and policy makers need to approach the situation with an open mind so that they remain relevant in the changing world.

There is no doubt that the shifting world economic tectonic plates have every Zimbabwean manager worried.

Managers have, by default, missed the early signs of distress, notable milestones being the rise of Donald Trump, Brexit, and South African economic recession. To quote Namibian Finance Minister, Mr Calle Schlettwein, who upon his return from January 2017 Bamako 27th Africa-France Summit said.

“We increasingly see geo-political shifts and the resurgence of populism and protectionist policies, which run counter to multilateralism, inclusivity, integration and globalisation”.

Today, Zimbabwe, just like any other African country, is experiencing the aftershocks. African Growth is anchored on the pursuit of multilateral trade pacts. Having seen my share of boiled frogs, metaphorically comparing frogs that do not notice the water they are in is warming up until it is too late.

Today’s managers are in a crisis without recognising that their situation is worsening. They are not bad managers, but they are often working under a set of paradigms that no longer apply and are letting the power of inertia carry them along.

And if they do not realise they are facing a crisis, they would know that they need to undertake a turnaround. There are also regrets from managers on how sometimes they tend to underestimate how critical their situation is. Those heading blue chip companies or monopolies simply take advantage of easy access to cheap and easy capital to stay on course in spite of poor performance. Still, others get caught up in the pressure for short-term returns that they neglect to ensure their company’s long-term health — or even willfully sacrificed it.

There are rare managers or executives who step back to review their plans objectively, asking “Is this what I thought would happen when I first started going down this road?” That is a problem, because acknowledging that your plan is not working is a necessary first step towards recovery. Here are some of the steps managers can take to ensure they keep their companies on track.

Need to throw away perceptions of a company in distress.

It is next to impossible to come up with one working definition of a company in distress — and dangerous to think that you have one for your own company. Depending on the situation, there are probably a dozen different signs of potential distress.

The problem is seldom made up of just one or two of these things. Rather, it is the result of a greater number of them interacting together and with other external factors.

Critically and surgically criticising one’s plan

The biggest thing managers, executives and even board members can do to avoid distress is periodically review their business plans. When they are creating them (business plans), whether at the beginning of the year or the start of a three-year cycle, there is a need to build in some trigger points.

A simple explicit reminder can be enough: “If we don’t have this type of performance by this day or date or we haven’t gotten the following number of things done by this date, we will step back and decide if we are going down the right path, given what has happened since our last review.”

It has to be anticipated that such trigger points should be oriented both to operational and market performance as well as to basic financial metrics and cash flow of the company. Managers need to look at where they are as a company using basic financial and cash milestones, and then look at where they are with respect to their industry and competitors.

If you are not moving with the rest of the industry (or not outpacing it, if the industry is struggling), then your plan may be obsolete. And do not forget to look back at your performance over past cycles to identify any trends. If you keep missing performance targets, ask why.

Expect more from the board members

The beauty of a board is that it has enough distance from the company to see the forest for the trees. Managers often treat their board as a necessary evil to placate so they can get on with their business, but that undermines the board’s role as an early-warning system when a company is heading for distress.

It’s also the board’s responsibility to look the chief executive officer, the chief finance officer and the chief operating officer in the eyes and say, “OK, we like your plan. Now let us talk about what it would take to cut costs not just by three percent but by 20. Let us talk about all the things that can go wrong — the risks to the business.” Sometimes significant events happen that no one could have foreseen, of course.

But in a typical distress situation, a company has usually just had 18 to 24 months of poor performance, and the board has not been aware or has not asked the right questions. Independent board members — truly independent ones — can have a big impact here. The senior team at one company maintains a list of risks to the business, employees, and the plan. They review those risks with the board on a quarterly basis to ensure that they are staying top of mind. It is an excellent way to have conversations that you would not normally have in a business operation.

Concentrate on cash

A successful turnaround really comes down to one thing, which is a focus on cash and cash returns. This means bringing a business back to its basic element of success. Is it generating cash or burning it? And, even more specifically, which investments in the business are generating or burning cash?

We would like to think about this in the same way one would if running a local hardware store in Hwange, Kamativi or Penhalonga.

By that, I mean asking fundamental questions, such as whether there is enough cash in the register to pay the utility bill, for example, or to pay for the pallet of house paint that will arrive next week, or how much more cash one can make by investing in a new delivery truck.

When you bring a business back to those basic elements, the actions you need to take to get back on track become pretty clear. In many of the cases I have seen, the management team and board are focused on complex metrics related to Earnings Before Interest and Taxes (EBIT) and Return on Investment (ROI) that exclude major uses of cash.

For example, variations on EBIT commonly exclude depreciation and amortisation but also exclude things like rent or fuel. These are all fine metrics, but nasty surprises await when no one is focused on cash. Keeping track of cash is not just about watching the fattening or slimming bank balance. To avoid surprises, companies also need a good forecast that keeps a midterm and longer view. For example, failing to pay attention to the cash component of capital investments routinely gets companies in trouble. Project Net Present Values can look the same whether the return begins gradually at year two or jumps up dramatically at year five. But if you’re not focusing on the cash that goes out of the door while you are waiting for that year-five infusion, you can suddenly find yourself with very little cash left to run the business, sending you into a spiral you may not recover from.

Next week we look at what other measures managers can do to ensure that they keep their business viable.

-Mugove Hamadziripi, is an Insights and Strategic Advisor at the Erongo Consulting Group which works with companies to strategies on turn around strategies. He can be contacted on hamadziripi@gmail.com.

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