Happy New Year!
The beginning of the year is a great time to kick off your company’s strategic finance initiatives. With last year behind us, you would have the first six months of business performance figures at hand if your financial year ends in June or full year results if it ends in December.
Current half-year business performance would be a good proxy to extrapolate the full year with a high degree of confidence.
It may seem as though all of the important financing/funding areas would have already been addressed (that is facilities are in place, budgets are set, bankers are kept at bay, etc.).
This is the precise reason that many companies become complacent with their financing and treasury management and become reactive rather than proactive when a strategically valuable opportunity presents itself.
Here are five strategic finance initiatives where CFOs and treasurers can kick start the year and add high impact to their companies.
Revisit the company’s capital structure – Start by asking the following questions: Is our capital structure still applicable in view of the company’s current life cycle? How does it compare with that of our peers? Are the assumptions on cost of equity and debt still correct in view of the market? Is current debt to equity mix maximising shareholder value? How does the company’s required rate of return compare with the weighted average cost of capital (WACC)? Answers to these fundamental but essential questions often provide insights on whether the company’s current financing strategy requires modification.
Stress test (Sensitivity Analysis) internal KPIs and loan covenants – With the new extrapolated financials, your company can retest how robustly the current status meets its internal KPIs and financial covenants with banks. This is to ensure no unexpected surprises occur in the near future and can also be presented to the banks in the upcoming half-yearly report, pre-empting any potential unwelcome comments or requests from your banks.
Proforma acquisition/business development analysis – No doubt well managed companies are constantly reviewing potentially strategic business development opportunities, which could be an outright acquisition of another company or an expansion into a new product line or new geographic area. All these would potentially require additional financial resources and could impact the company’s balance sheet, profit and loss and cash flow in the short to medium term. It would be worthwhile to run a proforma merger analysis and determine the appropriate price/investment you would pay and the efficient debt/equity mix to fund the project or acquisition in order to maximise shareholder value.
Conduct a shadow banking analysis and credit assessment – In addition to cross-checking actual financials against loan covenants, a shadow credit assessment will include other key credit assessment items, such as liquidity, profitability and solvency of the business. It is about finding out where you stand in the eyes of your banks. Mitigate issues before they are known to your banks. When checking loan covenants, remember it is always good to maintain at least 0.25x buffer.
Analyse your company’s banking wallet – Map out all financial related service providers your company has relationships with and how much they are earning from your company. I cannot emphasise enough the importance of knowing your company’s total banking wallet because your bank, and every other bank you contact, would have set targets on what they like to achieve from your business. By knowing your company’s banking wallet, you will understand what the banks want from you and thus know how to leverage what you want to achieve from the banks. Without this information, you cannot effectively negotiate with banks.
Final Thoughts
My advice to those who often question the loyalty of their banks is to remember that banks are interested in safely getting their loans serviced and repaid on time. They have lower risk tolerance than you and thus will have little interest in your company’s blue-sky growth prospects.