Goods stored in a warehouse. Expanding can be trickier than projected by a company.

By Eric Owino

In the past few years, Kenya has experienced a squeeze in liquidity, with certain sectors and businesses experiencing slow or weakening sales. Many have adopted cost cutting measures that manifest in various forms including implementing restructuring plans, cuts to non-essential expenditure and other austerity measures.

The environment has also become increasingly competitive, leading some businesses to accept credit terms they would not ordinarily accept in an effort to win and keep business.

The domino effect reaches the lenders whose loan facilities start to struggle in the bearish economic landscape the country currently finds itself in.

At 12%, Kenya currently has a relatively high level of non-performing loans (NPLs) in the East African region. If not contained, NPLs pose a systemic risk and need to be managed while there is still time and a choice of options to consider.

A number of high-profile companies have plunged into insolvency in the recent past and quite a number of other companies are struggling and operating in negative equity territory.

For some, the business environment and changes in technology pose very significant challenges and appear to be forces beyond their control. For others, overly ambitious expansion plans landed them where they are now.

In an attempt to seize new markets and get ahead of competition, rapid expansion fueled by high levels of debt has proved to be a very questionable strategy as these businesses now struggle with their working capital.

For these companies, most of their revenue ends up in servicing debts and settling creditor claims leaving very little for running operations or maintaining the critical machines that earn the money. The companies find themselves in this position for one or many reasons including poor planning, a difficult business environment, delays in taking action, fraud and theft, poor governance, over-reliance on key customers and others.

In this constrained position, it is worth asking what these business leaders could have done differently and what they can do now.

Dwelling on past mistakes is not usually productive although there are still critical learning points that can assist businesses to avoid a similar fate or pitfalls in the future.

Working capital management is typically the main reason that businesses find themselves either struggling or thriving. Though most companies focus on the profits generated by their operations, business operators and owners will agree that “cash is king”.

Expanding into new markets or segments tends to be fuelled by debt, and if the forecasts on the cash inflows vis-à-vis the increased cash outflows to service the debt while maintaining operations are not carefully planned, it is very easy for businesses to find themselves in default and a marked target for administration or liquidation proceedings. Negotiating repayment periods and interest rates can help to structure cash flows to manageable levels.

There are numerous cases of mismatches between the type of financing and the project period. Long term projects funded by short term credit are a sure way of getting pulled into a negative cash flow cycle. It is important to ensure that there is enough cash for day-to-day needs, especially the maintenance and preservation of assets that assist in operations, and also enough cash to service financing obligations.

As a general rule of thumb, before planning a major expansion, businesses should conduct a critical and in-depth review of their current operations and obligations and the impact of the expansion. This review needs to consider not just the expansion opportunity but also the potential risks. By considering what could go wrong, the impact on the business and its interests, any possible delays and how to protect key assets and the core business, as well as potential exit routes and contingency plans, businesses can prepare for uncertainty if things do not go as planned.

Market intelligence on trends is also important to identify threats to future cash flows to ensure that an organisation is not caught up in obsolescence with very limited elbow room to either innovate to remain relevant or exit to recover maximum value from the investment.

For example, is it wise to construct or lease large-capacity office spaces when the trend is toward remote working and/or flexible working spaces? Fixed offices may not be necessary or even advisable in the current environment, for some businesses. Other businesses may need to consider the advisability of expanding their manufacturing capacity of building materials if the market demand for construction is slowing down or is forecast to slow down.

Regulation is another consideration for businesses that are managing change. The ability to adapt quickly or make the necessary decisions to address regulatory requirements is key; for example, Kenya’s ban on plastic bags or the introduction of taxes and tariffs on the gambling and gaming industry caused certain businesses distress almost overnight. Some companies choose to quickly wind down operations, while others invest in innovative solutions to conform to regulatory requirements.

Other issues like operational inefficiencies and competition can be dealt with in a dynamic manner as they come along and like working capital issues, the ability to recognise the threat and deal with it early is important. Innovative tools like artificial intelligence and data analytics can reduce the scale and complexity of this task and ensure that strategic insights from day-to-day sales, production, trading or other data sources can be used to determine where value is generated within the business, aid informed decision making and improve the agility of the business in response to changing market conditions.

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When a larger company does need to wind down operations, a critical analysis of available options can help to identify the best exit route for an investor, depending on the assets available in the business and many other factors. For instance, an orderly and well-planned wind down could help manage costs, achieve maximum value for the assets of the business and prevent future claims against the company.

Seeking the input and advice of experts and consultants who specialise in this kind of planning, particularly at an early stage, can help to identify options and interventions that reduce the potential for reaching the point of no return, when liquidation may be the only option left. Vigilance, agility and early intervention are the keys to spotting and averting a potential crisis.

Proper planning should not, however, dampen the entrepreneurial spirit which is a hallmark of Kenya’s business community. Vigilance together with innovation will help Kenya’s business to weather the current health and economic circumstances and emerge stronger on the other side.

The Writer is a Senior Manager, Advisory at PwC Kenya

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