Five Kinds Of "Dead Law And Living Law" Of Capital Chain

After years of radicalization and expansion, it is time to reflect on and reconstruct corporate financial strategies.

A collapse of business has swept China's most important manufacturing base, the Pearl River Delta and the Yangtze River Delta, and more companies are in cash and financial crisis.

The statistics of Wande information show that the average operating income of small and medium-sized board companies increased by 36.42% in the first half of 2008 compared with the same period last year, and net profit increased by 47.08% over the same period last year.

But at the same time, the net cash flow has been greatly reduced.

There were 130 companies in 268 small and medium-sized board companies who had negative cash flow in the first half of 2008. The net cash flow generated by the 268 companies in the first half of 2008 amounted to -2.98 billion, compared with 8 billion 516 million yuan in the same period in 2007.

This is a worrying situation.

Cash is the source of the survival of enterprises, directly affecting the survival of enterprises.

According to the 2009 China economic report released by Morgan Stanley, the economic fundamentals will deteriorate further in 2009. Many mainstream economists have lowered the forecast for the Chinese economy in 2009. This also means that the tight situation of the enterprise capital chain will not be solved in a short time.

The China Europe Business Review has studied dozens of cases of corporate cash flow breakup or financial crisis since the second half of 2008. We believe that the current widespread capital chain rupture crisis can be classified into five factors: insufficient working capital, risk of accounts, liquidity exhaustion caused by the difficulty in returning current liabilities, passive external loans to enterprises, and investment errors.

The above five factors have become the main "straw" to crush the camels of enterprises.

Capital chain shortage caused by insufficient working capital

After the implementation of the new bankruptcy law, the case of "China's metal shut-down", the largest enterprise reorganization case, can be regarded as a classic case of chain breaking of operation capital.

China metal is a Taiwanese capital company registered in Bermuda and its headquarters in Suzhou and listed in Singapore.

In October 8, 2008, more than 20 Taiwanese executives of Chinese metal enterprises suddenly returned to Taiwan collectively without prior warning, and 5 of their subsidiaries ceased production.

The next day, a notice issued by China metal in Singapore showed that the company could not repay its working capital loans of about 706 million yuan, and its loans that had expired and may expire were as high as 5 billion 200 million yuan.

Since October 10th, China's metal has been officially suspended.

According to local media reports, the sale of Chinese metals in 2007 was 11 billion 300 million yuan, 170 million yuan in taxes, 400 million yuan in net profits, and the production of galvanized steel exceeded Anshan's Steel Corp, ranking second in the country.

China's metals rely on investment banks' financing, huge loans from commercial banks and support from all kinds of capital at home and abroad to achieve "fission growth".

Even at the stage of reforming the court, even creditors believe that the market prospect of China metal is not bad, and the root cause of sudden death is its high debt operation mode and radical financial strategy.

Financial crises caused by insufficient operating capital usually have the following three situations:

The expansion of the scale of an enterprise is too fast, so that it can operate over the volume permitted by its financial resources, resulting in over trading, resulting in insufficient working capital.

Due to the increase in inventory, the delay in collection and advance payment, the cash turnover rate will slow down. At this time, if the enterprise does not have enough cash reserves or loan quota, there will be no incremental capital supplement investment, but the original stock fund can not meet the needs of daily production and operation activities due to slow turnover.

The working capital has been occupied for a long time. Because of the inability of the working capital to generate income in the short term, the cash flow has a long-term lagging effect.

Capital chain breakage caused by credit risk

Yang Fuqin, chief financial officer of Feinikesi electric company in Nanjing, pointed out that the account management of customers is the most important part of the enterprise's financial work.

New customers must cash in cash, old customers also have strict credit period. They only accept bank pfers and silver tickets, and commercial bills are not accepted. They prefer to lose customers and control risks.

But in fact, most enterprises will give certain accounts to attract customers.

Credit risks are mainly divided into two types: one is the risk of sudden bad debts. Because of the unforeseen changes in the objective situation of non human beings, the accounts receivable can not be recovered, forming bad debts; secondly, a large number of credit risks. In order to adapt to market competition, enterprises use excessive credit policy to sell large quantities of credit, although they can expand the market share to a certain extent, but they also lurk a crisis of credit risk.

In 2008, the financial crisis of a large number of SMEs was caused by credit risk.

In Dongguan, Guangdong, many small businesses that sell credit to toys are lost.

Shortage of capital chain caused by lack of liquidity

Most of them can be seen in two situations: first, increasing the current liabilities to make up for the lack of working capital; the enterprises fill up the shortfall of working capital by borrowing short-term funds, causing the increase of current liabilities to trigger liquidity risk; secondly, short capital managers, enterprises use leverage effect, borrow large amounts of short-term loans from banks, and increase current liabilities to purchase long-term assets, though they can satisfy the demand for long-term assets, but they can cause the debt paying ability of enterprises to decline, and easily lead to liquidity risk.

In these two cases, the second case is more dangerous.

Chen Zhibin, a professor of accounting at Nanjing University, has conducted a special study of China's PU ma.

In 1996, 8 years after the founding of the PRC, China's PU Ma opened nearly 50 branches in China and quickly became one of the largest retailers in China.

Such a large-scale expansion needs a lot of money to support. The core mode of China's PU Ma is to expand the new store with the loan of local banks, and balance the cash flow through the cash allocation between the branches through the supplier's credit sale, and even allocate the funds of the branch as the capital of the new store.

This rapid growth mode seems perfect, but liquidity is not enough, and capital chain is tight like a magic spell.

In 2004, when a bank in Southwest China recovered a loan of 200 million yuan, the stores in China's PMA shops finally collapsed like Domino.

Failure of capital chain caused by investment mistakes

Because of investment mistakes, enterprises can not get investment returns and bring risks to enterprises.

The causes of investment risk are as follows: first, the capital demand of investment projects exceeds the budget; two, investment projects can not be put into production on schedule, resulting in the sinking cost of investment funds.

The collapse of the famous Guangdong Hejun toy factory is also the case.

Hejun toys factory had a good gross profit margin before 2006. After 2006, the gross profit rate decreased from 13% to 5% due to the rising cost of raw materials and the appreciation of the renminbi.

In order to expand production capacity and seek diversified development, the company bought and bought a bankrupt toy factory and a silver mining right in 2006 and 2007 respectively, but the toy factory finally failed to save it. Silver mining investment also failed to produce benefits because it had never obtained the mining license, and the main business was deteriorating, which eventually led to the liquidation of enterprises overnight.

Capital chain breakage caused by associated risk arising from associated party losses

In the process of undertaking guarantee, loan and deposit business with other enterprises, the risk of capital chain caused by the serious losses inside the other party is caused.

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Maybe you would say, yes, it's already too late for businesses that are faced with bankruptcy and acquisition.

But the long night of the economic crisis may continue, so it is still wise to use some tools to measure your operation and implement effective risk management.

Executives of many large companies believe that the biggest risk faced by enterprises in the current and long run is not from enterprises themselves, but from external macroeconomic risks.

Although macroeconomic risks from outside are uncontrollable, managers of enterprises must consider how to minimize the losses caused by macroeconomic risks, how to make effective use of existing capital to tide over the crisis, and make adequate preparations for a new round of economic recovery after the crisis.

In the face of panic, turbulence and rescue efforts to stir up the market, in order to ensure the maximization of the use value of funds and ensure the continuity, profitability and security of cash flow, many enterprises have begun to strengthen the management of cash flow and formulate rescue measures.

Step one: withdraw from the radical budget.

Everyone is looking for the secret to save the capital chain, but cash flow tension is just a result, not a reason. Cash exhaustion is just the last straw to cross the camel.

As an enterprise manager, first of all, we need to look at the reasons for this result: whether it is because of radical budget, putting investment and scale expansion in the primary goal and ignoring the management of profit quality, or continuing to invest additional capital when operating cash flow is negative, or relying too much on a single financing channel? All of these problems are rooted in a too optimistic and radical financial budget that is out of control.

As Shen Zhilin, assistant general manager of Kai Jie consulting company, said, if a company's financial budgets formulated at the beginning of the year are rational or at a safety level, there will be no problem of reasonable cash flow.

But more often than not, because the budget is too optimistic and radical, it overemphasizes the expansion of the scale and ignores the security of the funds, so as to lose the role of signal guidance in the actual execution. Or because the timing of cash in the setting of the assessment index only considers the situation of cash flow, it can not solve the security problem of the capital flow during the period, resulting in the rash behavior of the executors in the process.

Therefore, it is the primary task of crisis to objectively carry out environmental impact analysis and enterprise strategy analysis to ensure that cash flow is coordinated with environmental changes and re established a sound financial budget.

Step two: improve costs

For enterprises that are already at the edge of the cash flow crisis, the quickest way is to liberate cash from daily operations.

Layoffs, pay cuts, closing production lines or selling low value contribution projects are commonly used by enterprises.

Samsung Group made an example in the 1997 Asian financial crisis.

Samsung was on the verge of bankruptcy when its long-term liabilities had become 3 times the net assets of the company. The company inherited a series of measures to reduce 40% of domestic personnel, reduce 4 billion US dollars in inventory, divestiture and sell 120 items worth about 800 million US dollars, and finally brought back to life.

Although almost all enterprises are doing cost reduction work, Shen Zhilin believes that smart companies will refine the cost subdivision, use cost budgeting as an enterprise resource allocation management, clarify the cost input-output relationship, and reduce some of the costs that will not be generated or produced in the future.

McKinsey's identification process for employee performance management has this effect.

Matthew Guthrich, deputy director of its London branch, pointed out in an internal article that before conducting large-scale layoffs, enterprises should assess their performance and potential, understand what types of talents are currently promoting business value, and what kind of talents will promote business value and what talents are available at present and in 3 years from now on. At the same time, we should pay attention to the cost of training alternative talents.

Fully considering the performance management of strategic problems, we can minimize the negative cultural influence of enterprises, improve the level of profitability and help identify the talents that enterprises should strive to retain.

Step three: overhaul supply chain

Supply chain management has become extremely important during the depression.

A joke circulated in the steel industry is that the price of pig iron has fallen to a lower price than that of the previous scrap iron, so that scrap recyclers hoarding scrap iron are locked up.

In reality, because of the sharp fall in the prices of bulk goods such as steel, oil and nonferrous metals, the loss of enterprises caused by devaluation of inventories is abound.

Although zero inventory is a relatively desirable state for enterprises, how can the efficiency of the entire supply chain be unaffected? Because almost all enterprises are cutting production and demand becomes unpredictable, which greatly challenges the accuracy of enterprise sales forecasts.

In Cabot Corporation, the chief financial officer requests the salesmen to know more about the production plan and inventory plan of the customer, and to formulate the target of finished product inventory, and then make the raw material inventory target according to the finished product target, so as to arrange the purchasing plan for the raw material.

In order to minimize inventory, the company arranges purchase plan every week and even daily. For small varieties, Cabot fully implements zero inventory order production.

Step four: broaden the source of funds

For enterprises hungry for money, relying solely on bank loans is not a wise choice.

In the downward cycle of macroeconomy, banks often play the role of falling into the trap.

Therefore, enterprises should pay attention to the ratio between capital and lending, the ratio between long-term liabilities and short-term liabilities, and avoid the use of short term capital while making full use of financial resources to diversify the sources of funds.

Compared with bank loans, seeking financing for listing is also more difficult because of tight stock market.

However, venture capital trust schemes, equity financing or private equity investment are also ways for enterprises to consider.

Measures five: reasonable weight loss and counter trend expansion

For a highly indebted and low cash enterprise, reconsidering past investment behavior, selling related assets or closing production lines can quickly alleviate the thirst of cash. Before deciding what assets to sell and how much to sell, it is necessary to make a cautious value contribution analysis and discard assets that are negative to the value of the enterprise for a long time, so as to preserve high-quality assets and bring new opportunities.

Based on the analysis of value contribution, Samsung has increased its investment in the chip plant when all its competitors are shrinking the front line after selling 120 product items in the most difficult 1997. Now, this is undoubtedly the most correct decision.