03 Jun 2021

Solving the fast-growing mid-market company’s cash flow conundrum

Burton Matthews

Investec for business – Business Transactional Banking, Regional Head at Investec Bank

Access to working capital is vital to the continued growth and success of mid-sized businesses, which generally carry larger operational expenses and overheads compared to micro and small enterprises.

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Many local mid-market businesses were already struggling with low cash reserves and unstable cash flows before the unexpected global pandemic, due mainly to South Africa’s tepid economic growth. The Covid-19 outbreak merely intensified this cash flow crunch amid an unprecedented reduction in revenue due to government-mandated lockdown restrictions and the resultant dip in consumer and business spending.

 

Companies that had access to surplus cash and funding lines were better positioned to weather these economic challenges but drawing on these operational and emergency financial reserves to sustain the business ate away at available capital.

 

Market risks remain due to threats from additional infection waves and an accompanying escalation in lockdown levels. And access to additional funding has become a major challenge for mid-sized businesses. As such, business owners must make good strategic decisions regarding how they manage and deploy available cash within this dynamic and uncertain environment to balance business sustainability with growth.

 

Solving this cash flow conundrum is critical to the continued success of mid-market businesses through the economic recovery phase. Business owners will need to protect liquidity to build resilience and focus on their core competencies to benefit from the uptick in spending as consumer and business confidence continue to rise.

 

Holding cash on hand is also vital to exploit emerging opportunities that support growth initiatives into new markets or accelerate expansion through organic growth initiatives or strategic acquisitions. In fact, companies with available financial resources tend to grow at accelerated rates during challenging economic periods as competitors waver.

 

To achieve these outcomes, business owners must view their operation through an analytical lens, paying particular attention to how they view debt and, critically, how to maximise available cash. Any cash reserves or investments that aren’t working for the business represent a wasted opportunity and could mean the difference between survival and demise.

 

Specifically, business owners need to understand which areas in their business require the most cash and allocate these resources accordingly. They must also work to rebuild depleted cash reserves and allocate funds to cover short-, medium- and long-term operational requirements and sustain business continuity through potential future market downturns.

 

Ideally, businesses should channel surplus cash into investments that build financial reserves with competitive market-related returns, yet still provide adequate liquidity and flexibility to support growth opportunities with immediate access to a portion of the investment for working capital.

 

Formulating this cash strategy will help business owners select the appropriate investment product to meet their specific cash flow requirements, while getting the best possible return on any surplus cash.

 

When selecting cash investments, business owners must remain cognisant that certain products perform differently in relation to evolving interest rate cycles. This factor makes it imperative that they shop around for the appropriate product. Currently South Africa is in a lower interest rate cycle, with very little room to lower interest rates any further. As such, taking this into consideration, we can anticipate that in time, the repo rate will be adjusted upwards and as such, businesses stand to benefit from a prime linked deposit.

 

Ultimately, constructing an individualised portfolio of money market-linked call and notice accounts and fixed deposits offers the ideal solution to balance investment returns with liquidity, while minimising market risks through guarantees on invested capital.

 

This article originally appeared in MoneyMarketing.

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