Kudzi Sharara Business Correspondent
A FEW years ago just after dollarisation, recapitalisation was the buzzword among Zimbabwean companies.
Several listed companies were engaged in various capital raising strategies to revitalise their operations.
Some like OK Zimbabwe were successful as evidenced by their current financial position as well as profitability.
However, for most manufacturers the plan went horribly wrong.
From our observation the recapitalisation plans failed because the companies focused on getting funds to pay off part of their expensive debts, without necessarily making changes to their operations or product offering.
One such company was Art Corporation – with its going concern status now in question.
In 2010 the group had a rights offer to raise US$4,67 million of which US$3,9 million was for debt settlement.
Fast forward to today and the group is still saddled with debt with short-term borrowings amounting to US$6,7 million.
Auditors are now having to issue modified review conclusions of financial results of the group with current liabilities now exceeding current assets.
When hanging on for the rainy day can be costly
We believe recapitalisation while retaining the “business as usual” mentality was not the best way to handle the new economic environment.
Increased competition has left many inefficient companies struggling to survive.
The globalised nature of the “new” economic environment is now characterised by cheap and in most cases quality imports.
Companies were supposed to quickly realise that cheap imports would put pressure on profit margins, while dollarisation would make costs real.
A lot of companies now have their viability status seriously in question despite raising new capital in the last couple of years.
However, there is now the realisation that being nostalgic to old business models and oversized plant and equipment will drag the companies to the “graves”.
There are several cases where one can see that an organisation continues to suffer yet they are a machine or two away from being in the right spot.
Rationalisation should be the new buzzword
Statements from several company executives in Zimbabwe and across the globe points to a new buzzword in town.
Rationalisation is now topical at most company briefings and there are many forms of it too.
At its last AGM Hunyani said it expects a leaner structure this year as part of the group rationalisation process, which has resulted in the disposal and leasing of mainly its non-core assets.
Olivine also said it is currently engaged in product rationalisation to focus on products where it has a competitive advantage in the face of increased foreign product competition. Presenting the group’s financial performance for the six months to June, M&R also hinted that the group was considering staff rationalisation.
Dairibord this year concluded its rationalisation exercise that will help the group make net savings of approximately US$1 million per year.
The list goes on with several other companies realising that selling off or closing down some plants or units to reorganise operations will help improve efficiencies or cut costs.
Spar Corporate Store rationalisation implemented during last year showed positive results. Pearl Properties’ rationalisation and realignment of group shared services helped the company save 25 percent payments.
Even internationally companies like HSBC, Europe’s largest bank, sold off assets as part of a three-year US$3,5 billion cost-cutting and rationalisation exercise.
In short, there is no doubt that rationalisation either via long-overdue consolidation or a shift in business model can be a new way to improve the viability and profitability of Zimbabwean companies.
Other forms of rationalisation can be consolidation of suppliers or renegotiating existing agreements, for example your credit payment terms.
Product line rationalisation can also help companies to focus on their best products by eliminating or outsourcing the marginal products.
In that way resources that were being wasted on the low-leverage products can then be focused on growing the “cash cows”.
Some companies are already doing that, for example, Powerspeed has been building its business around retailing, through the Electrosales brand and analysts believe that further rationalisation of the Electrosales and IE branches will deliver even greater efficiencies.
In the fast changing global corporate scenario the rationalisation of organisational structure is now reigning supreme.
Reducing costs in this climate for every business, charity or public sector organisation is a necessity.
However, before chopping and cutting companies must be cognisant of the fact that cutting in the wrong places can seriously affect the ability to bounce back if and when the economy improves. In that aspect companies need to cut costs.