The overall working capital performance of the largest South African public mining companies improved in 2011/12 and remained near the best levels achieved in the past decade, according to research released earlier this month by global strategic business advisory and operations improvement consultancy The Hackett Group.
Hackett states this improvement stemmed from revenue growth, and was not the result of improvements in working capital management.
“The study also found that the largest South African mining companies have more than R48.6-billion in excess working capital, which is the largest cash opportunity the industry has seen in the past five years,” Hackett states.
According to the research, typical mining companies, compared with the top performers in other industries, collect money from customers two-and-a-half weeks slower than they did in the past, pay suppliers nearly 21 days earlier and maintain double the inventory.
The study also found that while South African companies are beginning to reinvest in expectation of growth, with capital expenditures rising by nearly 19%, they are also continuing to stockpile cash, partially by relying on low-cost debt.
“During the global financial crisis, when the availability of finance was scarce and expensive, companies outside South Africa turned to optimising working capital to release cash tied up in operations. Currently . . . they are focusing more on globalising their footprint and tend to assign fewer resources to improving or sustaining the performance of working capital.
“As a result, companies are borrowing more money and increasing their debt position and . . . cash position,” Hackett director Jonas Schoefer tells Mining Weekly.
Hackett found that companies’ working capital increased at a pace greater than that of their top-line performance during 2011/12, a confirmation of their reduced attention to working capital, he adds.
While South Africa was affected by the financial crisis to a lesser extent, in the South African context, interest rates remain historically low, which makes using debt facilities instead of optimising processes appear attractive, he says.
However, Schoefer warns against this, stating: “Once the cash is in the system, it is difficult to get it out and, as a result, the processes have become encrusted with an abundance of cash.”
Meanwhile, Hackett also found that few companies were able to generate sustainable long-term improvements to working capital.
Schoefer advises companies seeking to improve their working capital performance to, among other actions, obtain cross- functional participation and incorporate working capital targets into incentives.
“Mining companies in South Africa should particularly focus their source-to-settle activities on increasing the return on social investment.
“It is widely unknown that, in South Africa, it does not suffice to simply enlist a broad-based black economic-empowerment (BBBEE) supplier and offer the supplier a good payment. The regulations state that, to claim the BBBEE benefits in economic development, actual payment has to take place within a maximum of ten days from the supplier invoice date,” he says.
“There are but a few companies in South Africa that have an invoice-management and settling process that is completed within this timeframe and, therefore, should a company get its source-to-settle process under control, it would not only yield cash but also lead to increasing BBBEE points,” Schoefer explains.
A second-stage intervention could then be spend reallocation and supplier-base rationalisation towards suppliers with a preferential BBBEE rating, he says.
“It is likely that legislation on preferential procurement will become more focused on sustainably growing small and medium-sized enterprises in your value chain to create jobs and grow the economy,” he adds.
Sustainable Revenue and Cash Flow
If companies want to ensure the long-term sustainability of their revenue and cash flow, it is important that CEOs and CFOs understand the trade-off between cash, cost and service.
“These three variables are strongly interrelated,” Schoefer says.
However, CEOs and CFOs often fall into the trap of assuming that there is no traction loss in the system, he says.
“For example, they might assume that more inventory should have a positive impact on their businesses’ on-time delivery. However, inventory covers only suboptimal pro- cesses, and the better inventory is managed, the lower the inventory levels required to achieve the same on-time delivery,” he explains.
“It is about taking the fat out of the system and overcoming process and mindset challenges,” he says, adding that similar opportunities exist in creditors and debtors management by allowing quicker payments by eliminating errors on customer invoices and having an effective dispute-management process.