Restructuring Today For A Rapid Recovery Tomorrow

MRCA Event

Restructuring Today For A Rapid Recovery Tomorrow

Recognising the challenges faced by retailers, MRCA’s F&B Division hosted a webinar on preparing for future crisis, improving retailers’ knowledge on working capital and business cashflow position, as well as how to sustain a business in the long-term, among other key concerns faced by retailers.

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he webinar featured Lim Ben-Jie, Head of e-Commerce, AirAsia and K L Boon, Director of Advisory, YYC Advisors Sdn Bhd, who share insights on challenges faced by businesses during the pandemic and how to sustain effectively.

LIM BEN-JIE

Ben-Jie explained that a significant number of retailers have been struggling over the last 2 years and have downsized their operations, with some even closing their businesses down permanently, caused by low demand and supply chain issues, among other reasons. He adds that a survey conducted by MRCA on its members’ businesses revealed that 55% of retailers have downsized, 72% have reported a workforce reduction, and 40% have terminated at least more than 10 staff. Ben-Jie highlighted that a total of 36% of MRCA’s members’ businesses have been unable to operate beyond 3 months with their cash flow position.; while another survey conducted indicated that 52% of businesses required financial assistance. He noted that changes in consumer behaviour has also been observed in terms of purchasing habits and the switch to online e-commerce platforms.

K L BOON

Boon shared that since the pandemic started in 2020, Phase 1 of the Movement Control Order (MCO), between March and June 2020, witnessed 10,000 SMEs closing their operations; while the RMCO period saw nearly 30,000 SMEs close down. In August 2020, close to 20,000 companies ceased their operations. FCMO 2021 saw approximately 580,000 or 49% of micro, small and medium enterprises closing down by October this year.

Citing research conducted by SME Corporation, Boon said that key factors leading SMEs to fail included lack of financial and business planning; poor cash flow management; lack of updating accurate financial information; the absence of competitor analysis; funding and financing issues; challenges with internal management; and, lack of effective delegation of responsibilities.

He added that the pandemic had impacted businesses with supply chain disruptions, bankruptcy and soaring shipping costs, among others.

According to Boon, specifically F&B businesses were impacted in several areas from a financial perspective that included, a deterioration of GP margin; excessive staff cost and rental of restaurants; lack of clarity on company valuation; and, over-reliance on bank borrowings resulting in a highly geared position. From an operational perspective, F&B businesses were impacted by the increase of the presence of e-commerce and the shift in consumer behaviour; business digitalisation; and, food supply chain disruptions.

The market outlook for the F&B industry in 2022 revealed that the services industry is expected to experience a year-on-year growth rate of up to 7%, and F&B and Accomodation is expected to increase by 7.3%. Boon advised that this is a good time to harness the opportunities to cash out on missed sales over the past few months.

Statistics revealed that only up to 54% of SMEs can sustain up to 2 to 3 months with their current cash flow position. Boon advised business owners to assess how long their cash flow is able to sustain and what is their cash burn-rate.

Several strategies on how to prolong cash flow was highlighted during the session, which included clearing excess inventory and turning them into cash; assessing how to reduce capital expenditure; quantifying cost savings; reducing rental; cutting sponsorships and ineffective marketing costs; deferring unnecessary operating expenses; identifying alternative

Working Capital/Cash Conversion Cysle

CCC = STD + DTD – CTD • STD = Stock/WIP Turnover Days

(Stock/COGS x 365 days) • DTD = Debtor Turnover Days

(Debtor/Sales = 365 days) • CTD = Credit Turnover Days

(Creditor/Purchases x 365 days)

Common Company Valuation Method

Method 1: Price Earning Profit After Tax x PE Multipls

Method 2: Net Tangible Assets Total Assets –Intangible Assets – Total Liabilities

suppliers with cheaper or better terms; invoicing as soon as product or service is done; and, plugging bleeding business units.

Sharing about the Cash Conversion Cycle, Boon explained a few equations that would be helpful for business owners.

For the knowledge of business owners, he pointed out a few financial ratios to measure the ability of the company to repay debts and shared the formula to calculate this. He said that a financial gearing of less than 100% is recommended for companies, while gearing of more than 200% is not acceptable and needs immediate intervention.

He added that there are 2 common methods for company valuation which include Price Earning Ratio and Net Tangible Assets.

The PE multiple depends on business valuation, and whether future business partners are able to perceive the future value of the business. Boon shared that when Tealive was taken over, the PE Multiple was more than 20 times. The reason for sharing the two methods is to enable business owners to know the base line when negotiating price during a merger and acquisition.

CASE STUDY

Sharing a case study of an F&B business operating in the Klang Valley Boon explained that the company, which comprised 100 staff, was adversely affected by the pandemic. With existing 5 outlets, the company was planning to open up 2 new outlets right before the MCO started.

The company’s pain point was the deteriorating GP margin. Key recommendations to remedy this was to embark on a drastic cost optimisation, to target a 20% cost savings and source for new suppliers with more favourable terms. Recovery measures advised were to scrutinise the existing payment cycle process and conduct a costing analysis by the business segment.

Another pain point experienced by the company was excessive staff cost and rental due to the newly opened outlets right before the FMCO. Key recommendations to address this was to reshuffle existing staff to help online food delivery preparation; a pay cut with letter of consent in compliance with Jabatan Tenaga Kerja PK requirements; and, negotiation of rental rebates with landlords for all their premises. Recovery measures advised included assessing revenue per staff and rental per month per outlet.

Yet another pain point was the lack of knowledge of the business owner about determining the company’s valuation. Key recommendations provided were to leverage on YYC’s Power of Cash solution to gauge the company’s valuation and price range; and, apply YYC’s Power of One strategy and improvement plan; and, negotiate better price, and terms and conditions with investors. Recovery measures included price earnings, net tangible asset approach and assessing the discounted cash flow of the company.

The company was also overreliant on bank borrowings resulting in a highly geared position. Hence, they were advised to seek government support and subsidies; constantly monitor profit improvements; and, cancel unutilised and costly bank facilities. Recovery measures advised included interest cover, gearing ratio and debt service coverage.

How’s Your Company Latest Financing?

Balance Sheet

① ②

Cash at Bank Fixed Deposit Bank Borrowings Net Cash Net Debt Equity

Solvency

Gearing

Debt Equity = Total Debt Total Equity

CONCLUSION

Boon offered retailers a free 1-to-1 consultation, worth RM10,000, for business owners who are struggling to sustain their businesses. Contact YYC consultants at their Hotline 011-6186 0887.