TOPIC 3 (Continued)
What you really need to know to optimise your operation
Tough times awaiting Carriers. Within the spectrum of Global economic uncertainty, especially here in South Africa, the road freight industry needs to take cognizance of how it is likely to affect their business interests in the short and medium terms as well as dealing with the consequential challenges in servicing debt and shareholder Capital (ROCE).
Bleak economic indicators
Given the World Bank’s latest figures published in July 2019 Gross Domestic Product (GDP) of the Top 15 economies totalled US$85,8 trillion in 2018, which accounted for a whopping 75% with United States at 23,89% and China 15,86% respectively. Now putting SA’s GDP numbers into perspective, they amounted to only $US 0,37 trillion or 0,43%, behind Nigeria, at 0,46% of global GDP. Together, these two largest African GDPs total less than 1,00% of Global GDP! Hence massive unemployment and consequential lack of business opportunities on a Continent of over a billion people.
Will SA survive the negative consequences?
Given the precarious state of SA’s National debt, extremely high unemployment (said to be in the region of 38%) and labour turmoil, together with very little growth over the past four years there is a very real threat of rating agencies further downgrading the country’s credit rating making the cost of Government borrowing prohibitive. Regrettably, these situations will culminate to further weaken the prospects of any early recovery in the short term which is bound to accelerate Market interest in off-shore investments and these are only a few serious challenges making an early economic recovery very bleak.
Eskom woes might be the breaking point
Beyond these almost impossible-to-forecast situations, the rapidly depreciating Rand: one of the highest personal tax rates in the world (45%) weakening disposable income, together with loads of private debt defaulting, continues to accelerate job losses. Added to this extremely negative outlook, there’s uncertainty in the country’s power generating SOE to provide reliable electricity supply!
The road freight industry is particularly vulnerable
Remembering that the road freight industry is a service entity, dependent upon economic growth to maintain investor confidence, it is imperative that C-level executives build confidence by addressing how they intend weathering these challenges in the short and medium terms, while offering some level of comfort to shareholders, albeit at lower trading levels.
Decisive action from the top is essential
The first step is to begin with appraising your customer base in terms of likely affects going forward in the forthcoming financial year, the importance of which can’t be over emphasised. Here are some suggestions:
Road freight services are extremely broad-based and cover almost every aspect of basic logistics, each is affected differently by the current economic scenario, so a good place to start is to focus on your customers (Shippers) requirements.
This prompts a question: Are you carefully analysing past sales figures to note negative movement over the past four years? If so, what are they telling you about trends affecting demand for your freight services and what do these trends indicate in respect of their past quarter’s trading? If you service more than one shipper, then these trends are bound to differ considerably.
Negative cash flows
Another extremely critical pointer is to do the same exercise highlighting any marked change in debtor payment days as this could indicate growing cashflow difficulties. Also note frequent pricing requests as it could indicate increased competitor bidding.
Carefully monitor your break-even numbers
While there is a great deal more to retaining business in tough trading times be prepared to explore every possible avenue to retain current business levels in these depressed market situations. Given the possibility of reduced freight volumes in the face of tough competition calls for frequent monitoring of your breakeven numbers.
Caution is needed when experiencing negative returns simply to retain clients and maintain fleet utilisation as it will quickly result in cash flow problems arising from funding loss-making business. Remember, Shippers are quick to take the lead in a depressed market situation.