SA’s businesses have good reserves of resilience to call on
The immediate potential threat to companies’ cash flow cycles lies in further lockdowns when supply chains are frozen again
Throughout 2020 the world has been upended by the chaos of the coronavirus pandemic and we are still counting the ongoing human and economic costs. Covid-19 created a perfect storm where many businesses faced unimaginable challenges and extraordinary unpredictability.
The situation shows little sign of abating until vaccines become widely available. Initial efforts have changed from contingency and crisis planning to assessing how businesses can plan for survival and make predictions that will help pull them through this.
Corporates have contended with holes in their supply chain, mass shutdowns of operations and a lack of sales with little visibility on the duration of the crisis. Business-as-usual is redundant, but the key is to build resilience into all aspects of an operating model.
Indications show that SA businesses already have considerable reserves of resilience. In fact, SA companies are comparatively more optimistic than their counterparts in most other markets.
Results of the latest HSBC Navigator, a comprehensive survey of international trade across 39 markets for the near to midterm, show that about half of SA companies feel more optimistic about growth than they did a year ago, which is significantly higher than global sentiment (49% vs 29%). A large majority (84% vs 64% globally) anticipate positive sales growth, with two thirds projecting a revenue increase by at least 5% over the next year, compared to 42% globally.
Almost a third of SA businesses say they are thriving in the new normal (31% vs 24% globally) and about half say they are adapting (48% vs 58% globally). In line with the picture globally, almost three quarters (71% vs 73% globally) of SA companies expect their profit to return to pre-Covid-19 levels by the end of 2022, and a quarter say they are already ahead or will recover by the end of 2020.
The survey indicates that strategies to benefit from growth drivers or to address threats include improving product or services quality, expanding into new markets and investing in customer experience. Cutting costs, increasing collaboration with industry partners/peers and investing in new skills in workforce/employee wellbeing are further strategies considered by more than two fifths of SA businesses.
In executing these strategies as we go into 2021, the cycle of budgeting and forecasting takes on additional complexity. Companies must now juggle Covid-19’s effects in terms of their management of cash and working capital, while operating with subdued revenues caused by choked trading environments.
Throughout the global lockdown it is no surprise that cash has been king. But as lockdowns have become increasingly protracted, the use of cash must be reassessed. As economies look at how they can grasp the impetus to reopen, a short-term increase in demand to reignite production and distribution of goods demands a heavy use of cash.
The immediate potential threat to companies’ cash flow cycles lies in further lockdowns when supply chains are frozen again and the revenue vacuum returns. It is critical to plan cash flow requirements across the value chain to refine understanding of future cash, working capital and liquidity needs, to prepare for the future and accurately report back to internal and external shareholders.
Even for businesses that appear to have secure cash flows, scenarios must be assessed, and contingency plans put in place. Disruption in one area has the potential to affect the entire ecosystem. Companies need that snapshot of cash flow across their supply chain, not just in the immediate term but for the next three months, the next six and into the longer term.
Supply chain finance and financing of the receivables across a secure supply base, particularly across multiple countries are fundamental to minimising risk. Suppliers must have comfort that their funding is secure and confidence that they can turn receivables into cash as soon as possible.
Companies can mitigate further threats to their business by mapping their suppliers and buyers to get a thorough understanding of the ecosystem in which they operate. Additionally, diversifying their supply chain to spread the risk of further vulnerabilities from disruption is another option.
While borrowing has reached some of the lowest levels seen in a generation, agility is key. Planning cycles, particularly around capital expenditure are becoming much more short-term given the uncertainties we face. The demand for flexible funding is rising as businesses assess different ways that this can be effectively and prudently deployed.
For multinationals the capital expenditure piece becomes all the more pertinent, notably around the danger of larger cycles. Global trade means that imports and exports are spread across multiple jurisdictions; and this increases the risk associated with weathering further lockdowns and the propensity for further disruption to supply chains.
From the perspective of a bank working with international clients, we look at the wider group and its balance sheet’s ability to support the local subsidiary, which enables a longer-term view. The banker’s response has been to provide access to short-term liquidity and revolving credit facilities, or new loan facilities, bond issuance or drawing-off existing facilities.
Transparency and trust beyond the typical information provided when seeking a new facility is critical. Banks need insight into a client’s data to enable a long-term view of the business, as well as a pandemic view that provides appropriate support throughout the financial lifecycle. In times like these, a CFO needs access to broader facilities from a banking relationship than debt alone.
As regions experience further lockdowns, the effect on global trade and its plethora of supply chains will continue for the foreseeable future. Never has it been more important to create a deeper multidimensional understanding of your company’s financial health and the risks to the business, even when faced with a series of unanticipated unknowns across the value chain.
• Welsh is head of commercial banking at HSBC SA.
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