The future of South African growth lies with SMMEs

South Africa has learned a lot form this round of loadshedding. Pressure is being applied on Government to not only answer a few key questions regarding the country’s energy strategy, but Government is coming under increasing pressure to come up with a workable solution to end what is becoming a practice that is increasingly detracting from the value that South African companies can add to an already constrained fiscus. Small, Medium and Micro Enterprises (SMMEs) have always played an important role in the economic development of the country and we may see more of this in the future.

But are SMMEs ready for the increased role that they will be playing?

Areas of development for SMMEs

A News24 article points out that the National Planning Commission (NPC) has weighed in on the electricity crisis, calling for an emergency plan to end load shedding in two years.

The NPC advises government on the long-term development issues of the country, specifically the implementation of the National Development Plan.  It is chaired by Minister in the Presidency Mondli Gungubele.

Its plan calls for 10 000MW of wind and solar power and 5 000MW of battery storage to be built as an urgent priority, which would require the short-circuiting or lifting of some regulatory constraints.

EWN reports that the CSIR recently launched a programme aimed at empowering SMMEs in renewable energy sector.

Acting research group lead for the CSIR’s energy centre, Aradhna Pandarum, said their energy industry supported programme was a partnership with various entities in a bid to assist SMMEs.

“The CSIR will be capacitating SMMEs in terms of what opportunities will actually be created in South Africa with renewed energy technologies, that are going to be selected and how do the enterprises actually leverage off these opportunities to build economic growth in South Africa, and create more employment opportunities.

“This is also focusing on technically incubating SMMEs and with this programme, we are partnering with the EWSeta, Black Management Forum in terms of trying to identify how we can help these SMMEs and what is required to improve economic development in South Africa.”

Where can turnaround professionals help SMMEs?

Turnaround professionals can add significant value to SMMEs.

In today’s increasingly competitive business environment, companies need whatever edge they can get. That’s especially true when it comes to improving free cash flow.

The report points out that, beyond simply enhancing your accounts receivable, accounts payable and inventory management processes, adopting a working capital strategy can position your company to outperform its competition. In essence, enhancing your cash flow management positions you to improve operational efficiency, better manage your cost of capital, mitigate operational and financial risks and improve shareholder value.

The report adds that, to realize these benefits, however, you need to understand working capital best practices, adopt a cash management culture and benchmark against industry leaders. We can help on all fronts. Deloitte’s working capital professionals work with your teams to not only uncover process gaps, but also to tactically implement new processes, policies and metrics that deliver long-term performance benefits. You work hard to earn your cash.

Adopting best practices

It is important that everyone within the company are aware of the goals that are set when it comes to cash management and the best practice principles that facilitate this.

A report by Deloitte points out that using technology to shorten the cash conversion cycle is important.  By delivering invoices electronically rather than via mail, you can speed up billing and collection. By implementing a vendor portal, you can give vendors electronic access to invoices, enable electronic payments and reduce the time it takes to resolve disputes. These solutions also tend to provide organizations with timely and robust reporting that can help you take proactive steps to resolve delinquent accounts or take advantage of supplier discounts.

There are a wide range of optimization techniques you can adopt to improve cash management. For instance, effective accounts receivable practices include reducing error rates on invoices and adopting a regular schedule to follow up on collections. Effective accounts payable practices include negotiating favourable terms and rebates with suppliers, issuing purchase orders for new orders, using available volume rebates and trade spend initiatives, and periodically benchmarking vendor contracts against industry standards.

The report adds that there are also best practices that companies can adopt from an inventory perspective. For instance, it makes sense to periodically analyze accounts and SKU profitability to identify slow-moving, obsolete and non-profitable inventory so you can reduce inventory levels. It’s also important to consider the cash flow implications of changing your supply chain strategy. Companies that source product from low-cost countries, for example, might enjoy lower per unit costs, but might need to make earlier cash outlays or place bigger orders. On the flip side, companies may pay more per unit to purchase locally, but avoid an upfront cash outlay. There is no one-size-fits-all approach. The key is to understand the implications of different strategies so you can make an informed decision.

The report points out that, to truly foster a cash management culture, you need to actively track your cash flows. Forecasting is a critical step in cash management and ultimately improving profitability. This involves looking at both income and cash flow statements and linking your cash flow forecasts to key working capital metrics from the balance sheet, such as DIO (days inventory on-hand), DSO (days sales outstanding) and DPO (days payables outstanding).

As well, be sure to include capital expenditures, debt repayments and other operating cash flows so that management is aware of the full spectrum of cash requirements. To enhance the accuracy of these forecasts, consider automating this process rather than relying on error-prone and labour-intensive spreadsheets. It is helpful to actively review variances in actual results as compared to forecast and use this process to refine and improve the accuracy of your forecast assumptions. Also be sure to integrate cash flow forecasting with your P&L statement and balance sheet so you can track performance against a range of indicators.

The report adds that, when times are tight, cash management can be even more important, buying time with key stakeholders, reducing the likelihood of covenant breaches and minimizing the need for additional financing. Be ready to move to weekly cash flow forecasting and reporting to improve visibility and reliability of information and consider establishing a cash committee to oversee this process and drive change through the organization.

Every business has both short- and long-term cash flow obligations. Short-term requirements encompass day-to-day operational expenses. Longer-term obligations typically refer to capital project investments and term debt maturities. To become proficient at cash flow management, companies must match their various sources of funding to their capital flows. This can ensure that an otherwise profitable business has access to the cash it needs to meet its ongoing obligations.