Amit Kumar Garg
The world has changed significantly in the past few months. For the first time in history, companies are experiencing a “zero revenue” situation.
Only a few segments are generating revenues, and at a much-reduced consumption level. This has resulted in value depletion for companies across sectors; it has become critical for companies to take actions to “preserve value”.
It is expected that large companies will find it easier to survive than many medium and small companies. And within this, operating and financial leverage will play an important role in reshaping enterprise value.
Companies should use this opportunity to clean up their balance sheets, reduce borrowings, exit from loss making businesses, divest from non-core businesses. Companies should also use this opportunity to identify adjacencies, new markets and opportunities and efficiencies.
Companies with good liquidity or market position will be able to use this opportunity to consolidate and strengthen their financial position.
Examples would include Reliance Jio raising funds and Vedanta and Hexaware promoters announcing delisting of listed entities.
To preserve value, four key components play an important role: the management team, revenue growth, margins and liquidity.
Management team: Survival and success of any organisation will depend on competence of its leadership in managing the crisis. Strong leaders would have set up a crisis team for managing the existing operations and a plan forward team to focus on the future.
In the current uncertainties where the duration of the uncertainty itself is not clear, simulating future scenarios will require constant testing of models, based on a deep understanding of evolving market dynamics and regular engagement with customers to understand their needs. It would require agile customisation of solutions and engagements to meet customer needs, as they manage their own economic uncertainties.
Leadership teams that will be able to bend reality will come out strongest. This means cutting decision-making bureaucracy to be able to take fast, responsive actions. The key would be how fast leaders shift projected outcomes into reality.
Revenue growth: The plan forward team will play an important role in analysing available revenue opportunities through multiple scenario analysis and identifying adjacent opportunities for the company.
While it is expected revenues will remain under stress, a strong plan forward team can help the company capture market share from competition having weak financial position or help in extending the period of competitive advantage over competition.
Further, a plan forward team with a focussed approach will have built better understanding of the change in consumer behaviour, if any.
This will prepare the business better to readjust its production and service lines. Companies that can predict better outcomes through active customer engagement will be able to safeguard revenue. Thus, helping in building a strong business.
Margins: Businesses with operating leverage on their side will come out stronger than others. Uncertainties create opportunities for streamlining costs and driving operational efficiencies.
An organisation that can take timely actions to streamline costs, and effectively renegotiate supplier contracts will be able to create operating cash flows much needed to survive but also to build sustainable profitability for future. To do this, companies will need to re-visit every single cost component and drive operational and financial efficiencies.
Liquidity: Especially in this crisis, companies will need systematic and focused efforts to manage liquidity. It will require close monitoring of expenses, receivable collections, credit periods, vendor payments, cash float and capital allocation.
Analysis of each business segment and subsidiary’s operations to assess profitability and liquidity would be required. Companies will need to identify non-core sectors and draw plans for exits.
They will need to look at opportunities to reduce debts and take actions to strengthen balance sheets like exiting from loss making businesses, etc. Strong liquidity will also enable actions to enhance shareholder value through buy back of shares, etc.
The rules of managing business have changed significantly in these few months. Companies that are able take advantage of the current situation by leading from front will come out successful and will create long term value. While liquidity will play an important role, a lot of value will be unlocked from leadership actions in managing and consolidating growth opportunities.
The author, Amit Kumar Garg has over 25 years of deep experience in the finance function. He has been the CFO of MarketsandMarkets, NIIT Technologies and Intertek. He has also worked with American Express, Fidelity International and PriceWaterhouseCoopers. He is also one of the the founders of WinPE, a not-for-profit initiative to enhance gender diversity in the investing ecosystem.
A Chartered Accountant, Amit holds a Master’s degree in Business Administration from the MIT Sloan School of Management, and has advanced education experience at Harvard Business School.
Disclosure: Reliance Industries Ltd. is the sole beneficiary of Independent Media Trust which controls Network18 Media & Investments Ltd.
Moneycontrol Ready Reckoner
Now that payment deadlines have been relaxed due to COVID-19, the Moneycontrol Ready Reckoner will help keep your date with insurance premiums, tax-saving investments and EMIs, among others.