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Throughout the pandemic, businesses have had to refocus on aspects of their operations which they may not have looked at for some time – such as costs, cash flow and operating efficiencies.
Not that the economy was previously strong, but businesses that were doing well might have developed inefficiencies and blind spots during the buoyancy of their operations.
The initial lockdown changed that – providing a pause for owners to revisit their entire value chain and make some tough choices as to markets they should and should not be in.
Many a small business has fallen victim to the lack of available cash flow, but the focus on the importance of cash flow has brought about some positive changes too, says Banach. “Those business owners not already aware that cash flow is the lifeblood of their operations, certainly are aware now. Following the behaviour of a business’ cash flow during the unpredictability of the pandemic, spotlights where the major risks are in a business which in turn brings about a greater understanding of risk management for the owner. Astute owners moved quickly to cut costs and exit underperforming markets – and they may stand today in a more sustainable position, characterised by a changed view on debt and more efficiency.”
The traditional view has been that debt is a last resort form of funding.
If the pandemic has brought about anything it is a more sophisticated view of debt as part of cash flow means.
“Business owners have rather come to see debt as a tool which can make them more agile and responsive to the sorts of shifts in the market we have just seen. Those businesses that had sound cash management processes at the outset were better placed to survive the storm.”
Market unpredictability is exactly when a business needs partners for support. “Businesses operate in an ecosystem, of which funding is an integral component. The role of a funder such as Investec is to understand the present realities that business owners are dealing with. Through mutual understanding of what each is going through, we are able to guide each other to a safe landing,” she explains.
Merafe agrees, identifying one of the symptoms of Covid as amplifying the underlying condition of a business: companies with sound cash flow management flourished, those with poor cash flow succumbed more so than usual. “Where we also saw businesses able to pivot quickly – it was typically through a partnership mentality. It is here that Investec’s philosophy of ‘backing the jockey’ came to the fore because we were already backing them and were able to handhold them firstly through adapting to a new reality, and secondly to identify and fund new opportunities in this market.”
According to Merafe, there were certainly some tough decisions to be made but business owners who made the difficult decisions during lockdown have found themselves in a much stronger position exiting the crisis.
One thing above others that business owners have learned, is that there is such a thing as ‘good debt’. The right type of debt gives you access to liquidity at the time they need it.
"When we sit with clients, we focus attention on where the constraints are in their business balance sheet, unpacking those and developing appropriate tailormade debt structures at each area of constraint to become a facilitator for their growth.", says Merafe.
Debt remains one of the cheapest ways of funding a business, as it does not involve giving away equity. Business owners’ reluctance towards debt usually revolves around its cost. Instead, it has to be viewed as aiding sales which earn a higher profit margin than the cost of the debt.
Having facilities in place then enables a business owner to negotiate terms of the contract and match their facilities to supplier and client payment terms and ensure the alignment of cash flow in and out. Merafe explains that the cash flow difficulties businesses get into usually involve a mismatch between these two. “However, there are also times when it is impossible to match them – the lead to lag is simply too great no matter how well the terms of trade are negotiated. This is where you need active engagement with your funders to bridge the gap between outflow and inflow.”
The role of appropriate funding structures is to change the very nature of a business owner’s negotiations with suppliers and clients, with the former having additional tools to work with and an active backer behind them.
It is in these nuances of a business that requires a bank with a human touch. Much of the process of aligning cash flow is vested in the art of negotiation, which is rarely just about figures but EQ (emotional intelligence). “We would never tell a client how to run their business that they take a lot of pride in having created, but rather concentrate on spending time with these mid-market owners so we all understand each other. Our philosophy is to walk the journey with them which involves jointly finding the appropriate solution,” concludes Merafe.
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This Focus article also forms part of the Business Class series. For more insights into other Business Class content, click the image below:
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