Mr. Vasani discusses that quite a few believe it will take forever and a day before the financial performance of their business gets on par with the levels preceding the pandemic. For them, BAU now stands for Business-As-Unusual. This underscores that adapting perpetually is the new way to exist.
He says – enterprises that act now to focus on priorities, analyse, play to their strength (whilst respecting their weakness) could define themselves, stay the lane, and ladder up to success. It’s the time to hasten your steps and get busy!
CFO Engage: Recently in an interview you spoke about keeping the faith and quoted Helen Keller who said – keep your face to the sunshine, and you cannot see a shadow.
PV: Being an eternal optimist, I believe there are never bad days, only not-so-good days. One of the key learnings from previous downturns is that the ability to remain positive is a valuable asset. There will always be hard yards ahead. While we confront the most brutal facts of our current reality, we must have the faith to believe that with the right will, strategy and mindset; we will prevail in the end.
Besides Helen, I also often quote Amelia Earhart, a courageous aviator, who said – some of us have great runways already built for us. If you have one, take off. But if you don’t have one, realise it is your responsibility to grab a shovel and build one for yourself and for those who will follow after you. I’m sure we can win this one around as well.
CFO Engage: Everyone’s talking about unlocking and conserving cash, essentially back to basics. Your take on it.
PV: It is true across global markets and economies that cash is (again) the king. It is cart-ridging its typical role as a soother of uncertainty. Enterprises need to make sure that they have sufficient cash on hand (at the bank), along with headroom/liquidity buffer/rainy day funds, to survive and thrive. Businesses need to review the cash flow projections, covert inventory to sales put the pedal to the metal on invoices collections (or secure valid/alternate negotiable instrument), offer creative payment options (like payment by credit card, cash discount for early payment, etc.), reduce credit lines, narrow payment terms, stiffen procurement/large financial outgoing approvals like Capex and M&A, time out payment, seek reduction or instalment of payment of immovable property rent, request the bank for a line of credit, debt service, etc.
They can also look at other measures like withholding dividend, discretionary spend cuts, partial waiver of salary, offering partially paid leaves to employees, postponement of bonus pay-outs, reduction of overtime, delayed hiring, etc. Enterprises should run various scenarios and its consequent impact on cash-flow, P&L and Balance Sheet – at a regular interval. Working capital management will be essential to find a way through the crisis. It calls for a judicious blend of slash-and-burn survival mode (reduction and cuts) & boldly investing in the downturn (investing for recovery and growth in the future).
CFO Engage: Mr. Vasani, many enterprises are transposing fixed costs with variable cost. Your comments.
PV: The fixed cost base in service sectors is usually around 62 to 70 per cent; while in manufacturing, it varies between 25 to 30 per cent. The ongoing crisis may lead to colossal operating losses (as existing fixed costs were built to support the enterprise at the pre-COVID volume levels) to many businesses without the expenses are brought down significantly. Enterprises will experience a renaissance and will focus on the need to make their cost structure more variable and malleable, with no superfluous fat – wherever possible. And therefore, they will now pin down what must be kept autogenous and scrutinize opportunities to outsource the balance such that fixed costs can be kept minimal. Slimmer cost structures could lower companies’ breakeven levels to a large extent.
For instance, if you run a store in a mall, post resumption of business, you can agree on a revenue share model with the landlord for a foreseeable future, instead of paying a fixed rent per month. This will take care of the interest of both parties. This should be continuously monitored and adjusted where needed.
CFO Engage: Is it a good time to be investing in innovation and research & development (R&D)?
PV: Although innovation sounds like a buzzword, the truth of the matter is that it will take charge of an organisation’s destiny in the future, one way or the other. It calls for staying closely attuned to changing needs and recognize transformative ideas and create disruptive solutions that have the potential to solve real-world problems. Essentially, it requires to focus on – capabilities, structures that enable the effective use of it, pro-innovation culture, and last but not the least, strategy. Enterprises are forced to respond to the wakeup call and be smarter.
Many manufacturers and service providers have already reinvented themselves, introduced new methods, ideas, or products and proved that ingenuity can yield innovative results. Even though it is a hit on bottom-line, most organisations should not reduce their spend on R&D. R&D projects currently underway by the organisation needs a reassessment – as to whether they need to continue or paused or the resources need to be redirected. Enterprises need to continue to invest in it to be ready for the post-crisis scenario. It is indeed the ‘ray of hope’ for most businesses to survive and stay relevant.
CFO Engage: Has the financing mix changed in recent times i.e. are enterprises preferring to finance growth with equity and not debt? Any changes expected from the regulators in this context?
PV: If history is a guide, it will become perilous to finance growth mostly with debt. This is primarily due to the associated cost of repayment, dent on credit rating and also, as debt markets will have a finite compass. Most enterprises would look at equity financing to avoid any financial burden on their organisation. Despite the vice of repetition, equity financing is easier to obtain, carries no repayment obligation (strengthens not just the liquidity but also the economic recovery to follow) and provides extra working capital (though it requires giving up a portion of ownership). Also, equity infusion from a foreign land brings more FDI.
Also, while most funds will be realigning their capital allocation stack, private equity funds are expected to leverage this window (of opportunity) through the ingenious mix like debt restructuring and bridge financing. To support this, governments and regulators need to make equity financing easier to access by bringing appropriate and bold amendments. It calls to scrap the need for time-consuming consultations, damaging taxes and change in valuation method (arm’s length principle instead of fair market value), the Takeover Code, permitting FDI besides equity shares/compulsorily convertible instruments, etc.
CFO Engage: You have always spoken about inspiriting human capital and been a fanatical advocate of the motto, ‘people first’ esp. during these turbulent times. Please elaborate.
PV: People are the bloodline of an organisation. Stringent measures to ensure employee’s physical and mental wellbeing is the priority for each enterprise. It is important for the leadership to continually engage with the workforce and be transparent (with the big picture) and forthcoming of the realities of the situation. This includes not just the employees but also other stakeholders like vendor partners, and other internal/external customers. Leadership teams need to recce all possible substitutes to tough calls like issuing pink slips, including layoffs, furloughs, temporary benefit adjustments, salary cuts, bonus deferment, job sharing, and so on.
It is imperative to build a culture of agility and involvement throughout the organisation while answering and preparing for ‘where to from here’ – as the best ideas and potential strategic directions will come from the colleagues on the ground. The situation calls for investing even more in upskilling talent to encounter the obstacles of working in new fit-for-purpose (remodelled) conditions, respond, recover and prepare for future of work. Also, it may be a great chance to reinforce the existing team (additional or replacement) with new and high performing talent.
It is hard letting go of people when you are invested in them. It is important to inform people why the change is being made and where they fit into the plan. It is fundamental to have emotional and cultural intelligence to keep the people at the centre of all decisions being taken by the enterprise. This goes beyond keeping the employer branding intact.
About Pankaj Vasani:
Mr. Vasani is a business leader and finance expert with over two decades of experience. He has held many senior executive roles, served as a board and audit committee member. Over the years, he has held leadership roles with Vodafone, Publicis, Subros and Coca-Cola.
An avid academician who has contributed to enhancing the sensitization level of the community, he officiates as a jury chair/member at various awards and is a speaker at various India and international seminars & conferences. He’s also a guest faculty at various professional bodies and esteemed B-schools in India.