When Companies Face Working Capital Constraints
Strategy

James Rouse (a US real estate developer) once said that ‘Profit is not the legitimate purpose of business. The legitimate purpose of business is to provide a product or service that people need and do it so well that it is profitable!’ Very candid words indeed. However, the reality that 2018 offers many businesses in Zambia is that macro-economic forces continue to put pressure on their working capital.

 

With the recent revision in fuel energy prices (announced last week by the Energy Regulation Board), many businesses will be consulting their management accountants on how they can cushion the effects of the upward revision. As Central Statistics and the Central Bank will be rehashing the inflation numbers, boardroom reality will be escalation of product pricing as the next option.

 

However, it is not that simple. It is sector dependent. In addition, it also depends on the forces of competition that the company is in. Take for example the transportation sector. It is a business that is largely profitable if the business owner has scale economies. However, it is also a very competitive arena. Regulation comes to the fore as transportation lobbyist will be seen to be demanding for bus fare increments. This is because for scale businesses, their product tends to be low margin hence any increase in operating expenses means that the bottom line (profit) is affected.

 

Now the transportation arena is a very complex one. As opposed to quickly raising the cost of a ticket, we propose rearranging the operations of the fleet. For example, in a ten seater bus that comes with a conductor or call boy, rearranging the configuration of the buss to accommodate an extra seat by eliminating the cost of a conductor could be considered. Granted, this would mean the loss of a job, however the conductors’ role may not necessarily be eliminated completely. This can be achieved by reassigning the conductor to another role in the transportation value chain.

 

Although this is a simplistic way of looking at things and the realities on the ground may offer different scenarios, the truth is the heart of value preservation lies in the operations management of the business. Many CEOs will be faced with the challenge of justifying the number of employees that they have as macro forces continue to put pressure of their businesses. Each employee will have to justify their existence in the firm. Some CEOs who are forward thinking will have serious questions of their management accountants on how they can rearrange the business in order to ensure that their entities remain profitable.

 

Costing of all of a business’s activities has never been more important than now. Echoes of have been heard of many businesses that are now looking at Activity Based Costing (ABC) which offers the strategic impetus of ensuring that waste that is caused by unnecessary activities in the value chain are eliminated. This is important because it provides information to the CEO on what recommendations are available for ways in which product costs can be lowered to improve profitability and make product pricing more competitive.

 

In the end, price increases will always remain undesirable. However, they are necessary for businesses to remain afloat. However, as time goes by, it becomes important for the business owner to ensure that pricing model that they have adopted does not leave room for disruptive competitive forces to enter their arena. Higher prices tend to be associated with higher turnover which is often mistaken as the symbol of a profitable business. However, once you have ended reading this article, you will agree that the secret to profit lies in managing your cost of doing business.

 

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