Sector specific, asset based measures for businesses to conserve value

16Jun 2020
The Guardian Reporter
Dar es Salaam
The Guardian
Sector specific, asset based measures for businesses to conserve value

For the first half of 2020, business sentiment has been upset by the Covid-19 pandemic and uncharacteristic heavy rains.

Finance Minister, Dr Philip Mpango

The budget tabled in parliament by the stellar Finance Minister, Dr Philip Mpango last week forecast an updated GDP growth rate of 5.5 percent for the year, up from 4.0 percent last month, but down from 6.9 percent projected earlier in the year. According to Dr Mpango and Bank of Tanzania in the Monthly Economic Review for April 2020, this is due to “disruption of supply and demand chains” as a result of mitigation measures adopted to deal with the public health phenomenon.

Perhaps a bit more ominously, a new World Bank economic analysis titled the Tanzania Economic Update Addressing the Impact of Covid-19 projects that, “Tanzania’s growth will decrease sharply in 2020, due to the impact of COVID-19.” In fact, the Bretton Woods institution projects growth to decline by as much as half to 2.5 percent this year.

Much as we might be tempted to debate the exact numbers and forecast scenarios at hand and likely to play out in the future, business cash flows are generated by earnings from business operations. While there is certainly an upside to the economic environment including lower oil prices, higher prices for agricultural produce and rising commodity prices, business leaders will certainly be well-advised to brace for the uncertainty.

From the assumption of disruption in global, regional and country supply and demand chains, it wouldn’t be unreasonable to infer a possible unfavourable outlook for the tourism and hospitality, construction and real estate, transport (especially air freight), energy and mining sectors. It would then be a matter of time before this translates to the financial services sector where we have seen reports of banking industry leaders responding expeditiously to renegotiate and reschedule loan repayments, providing much needed grace periods for their clients.

Various other measures have been proposed to save the day. Anything that gives business a competitive edge should be explored, including leveraging digital solutions to enhance efficiency and effectiveness. These can be wide ranging, from the recently proposed online submission and signing of documents which would fit in with SMEs profile to adopting robust artificial intelligence platforms which would be more suitable for established business organizations. Businesses may also need to streamline operations and supply chains, reviewing processes and initiatives that don’t add most to the organizations core objectives.

All of these solutions speak to the business and strategy side of the solution. The purpose of this article is to add to this proposition sector specific, asset based solutions to review and implement physical asset management, restructuring and valuation measures to help business leaders conserve hard earned value in the year 2020.

Non asset intensive industries: Financial services

Risk managers in the banking sector may need to reassess how well secured the banks’ loan portfolios are by collateral assets that they currently hold. Judgement will need to be exercised as to whether further remedial action is needed in so far as how sufficiently these assets cover exposure in terms of the outstanding Loan to Value Ratio. In addition to the enhanced reporting requirements demanded by the IFRS 9 expected credit loss model, this prudent measure will mitigate risks around recovery amounts not meeting the outstanding loan amounts and reduce loss in event of client default.

To do this, relationship managers and credit risk officers will need assistance to review the pledged collateral asset’s existence, condition and valuation in light of evolving market conditions and how adequately these factors mitigate the bank’s risk level in event of default.

Asset intensive industries

In asset intensive industries, such as energy and mining, construction, real estate and transport, manufacturing and industrial processing; financial reporting managers may want to consider whether all business assets are accurately recorded and fairly valued in accordance with applicable accounting standards. This is certainly true because of the long time that has passed since when various companies initiated relaxed office/store/factory attendance and inspection requirements – and hence induced laxity in relation to asset management.

Business leaders may also need to reassess their capex and working capital requirements for the remaining part of the year. To do this, managers may need to conduct valuations of core and support assets, assess accumulated depreciation and obsolescence and establish remaining useful lives. This would enable the estimation of capex requirements for the remaining period of the year or whatever time period would be deemed appropriate.

There will also be a requirement to analyse and project working capital requirements. For companies in the fast moving consumer goods and allied industries, this would include conducting an inventory count and removing obsolete inventory.

An ageing analysis would also be required to assess whether any debtors are in default and how this will impact the receivables balance for the company. All these have an impact on how the company itself will manage to meet creditor obligations when they fall due and the net cash flow position of the business.

Conclusively, contrary to expectations echoing in the developing world, where most of the economic activity is generated from service industries, digital technology is most advanced and remote working is thriving, the role of the physical space in Tanzania and Africa in general is certainly not in immediate jeopardy.

Business leaders may therefore want to review how they manage office/commercial/factory space and if adequate spacing is available to maintain the one meter (3 feet) distance advised by World Health Organization to minimize chances of transmission of Covid-19. Surely, the role of sound and informed asset management and valuation can therefore not be underestimated.

NB:

Kevin Kimario is a registered valuer and an experienced financial analyst. Views expressed here are his own. He can be reached at +255 686 782 190 or [email protected]

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