Businesses must assign highest priority to free cashflow

Businesses must assign highest priority to free cashflow

These days businesses are groping in the dark on how to sustain growth against market downturn. In the backdrop of years of subdued market conditions, the quest for enterprise sustainability is prompting us all to relook at strategies to build resilience.

Profit margins continue to dive as clients pursue lower costs, while the cost of doing business such as government fees and human resources remains high. Fewer have escaped its impact. Competition too is playing a role in allying with these factors to further burden corporates.

These place immense liquidity pressures, resulting in frantic capitalisation and debt calls from businesses. Most donors are averse to risks in these conditions, and businesses are faced with a mammoth challenge of how to do a balancing act between stability, growth, profits and liquidity. Indeed, a challenge for most CEOs is they are expected to ensure business momentum, not just continuity even as most conventional business resources shrink.

We understand this is a typical fallout of any market slowdown, but for SMEs and under-capitalised enterprises, this creates turmoil. These must undertake this litmus test on how to fund their cash needs whereas little can be done to garner the needed resources.

The prevalent cash crunch for companies, especially when debt options have dried up, is forcing them to seek fresh equity injection. However, this too is not an easy option and comes under the close scrutiny of shareholders. They also prefer that management use them as lender of last resort and not otherwise.

The supply chain is another crucial factor of market cost and which needs a full alignment. Its fixation with short tenures is further complicating business dynamics. And experience tells us that if the supply chain is predominately populated by SMEs, then turbulence is likely as cash flow shortages add to the woes.

These outcomes elaborated earlier are placing a bigger onus on CEOs for a more innovative strategy to ensure fundamental sustainability. A strategic approach towards innovation-based lean and tactical operations is the need of the hour.

However, innovation is technology- and process-dependent, and that is capital- and time-intensive. A Catch 22 situation for businesses.

Considering that money is a scarce resource in the current market conditions, stakeholders have to seek other means to inject or create liquidity to fund innovation. I do not think that much can be accomplished through cost-cutting in this pursuit of cash. Particularly in the context of a continued market downturn, not much of a cushion is left to cut costs after having undertaken similar exercises in the past too.

Given these pressures, it is the management that has to take the lead to build sustainability because market behaviours are inherent to any businesses life cycle. The companies must embed resilient measures to manage market highs and lows.

These must not take businesses by surprise as enterprises must have a deep understanding to prepare them for any eventualities. Little can be done to influence their fundamentals except for an embedded culture of caution.

For instance, banks are known for their cautious responses. But businesses need to ward off these challenges and ensure the business has free cash flow reserves. I would disagree that market downturns are unforeseen, but there should be a will and resolve to manage and mitigate these. Having spent three decades in business leadership positions, I would suggest should be full preparedness to manage and mitigate these.

Most managements would wonder where to seek the magic wand that can help to build enough free cashflows in markets with traditionally low margins and deferred payment terms. I would recommend that we must make free cash flow generation as the mantra rather than just profitability alone.

Source: Gulf News

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