Focus on cash flows and not just on profits. This is a liquidity crisis and cash is king,” says Sudip Bandyopadhyay, Chief Executive Officer, Reliance Money. Bandyopadhyay has led a rapid rollout of services at Reliance Money, and surely, understands the importance of cash flows. He feels that a robust cash flow is more important than net profits in this period. Supporting him on this issue is Richard Rekhy, Chief Operating Officer, KPMG in India.
Rekhy says that companies should ensure that cash comes back soon through a robust collection and billing process. “Draw down credit lines and finance capitial expenditure if possible. Save money where possible. Ensure that risk is commensurate with tangible reward. Increase supplier’s credit,” adds Rekhy.
Dash for cash
- Since October the cash reserve ratio has been cut by 350 basis points, releasing $29 billion (Rs 1,45,000 crore) into the banking system
- In the same period, banks have added $24 billion (Rs 1,20,000 crore) to their investments in government securities imply ing that lending to the corporate sector has not seen big increases
- Forex reserves have fallen by $7 billion (Rs 35,000 crore) since November, of which we estimate $4.6 billion (Rs 23, 000 crore) is due to valuation changes. This marks a slowdown in the pace of forex reserve losses
Source: Goldman Sachs research report
Cash flows are likely to keep corporate India on its toes, even as the Reserve Bank of India (RBI) takes cautious steps to ease liquidity. Inflation had fallen below 7 per cent for the week that ended on December 6.
The rupee is also not expected to fluctuate much now. In fact, according to Subhada Rao, Chief Economist, YES Bank, the rupee-dollar rate is likely to hover in the Rs 48-52 range.In this scenario, a healthy cash position will make it that much easier for a company to seek financing.
Companies that have large capital expenditure planned but do not have a sizeable cash bag on the assets side of their balance sheet will be in trouble. On the other hand, companies that can place their own money on the table upfront for a project, especially in the infrastructure and real estate sectors, can have banks eating out of their hands.
A recent report put out by Goldman Sachs said: “We believe the RBI will continue to cut rates till mid-2009, we expect the effective borrowing rates to start moving down.” But the overall liquidity will remain tight—and, therefore, lenders will remain tight-fisted, as globally, the crisis is far from over.