The Headache of Managing Cash in a Tough Economy

By: Luis Colaco, Director, Sub-Saharan Africa, Consumers – EFG Hermes Research

It has been a tough year for most companies with the shilling losing ground to the dollar, a rise in fuel prices and an increase in the cost of borrowing money – interest rates.

While these have grabbed headlines, one pain which has severely affected industries in Kenya especially manufacturers, is the payment of excise duty on a daily basis.

Excise duty is a tax charged on goods and services manufactured in Kenya.

Following the enactment of the Finance Bill 2023, the payment of the daily excise taxes took effect in August 2023.

The impact from all the above shocks and regulatory measures has seen manufacturers face tough options in managing their cash; and we are likely to see many companies not generating as much cash as was the case in the past.

Manufactures will have to manage their inventories better, hold back on dividend payments, extend their debt repayment and negotiate with their suppliers in order to manage their cash flows better.

An example is listed manufacturer EABL. Cash flows in Kenya are being hit by challenging macro environment and by the daily payment of excise, despite taxes holding in EABL’s half year for 2024 (July to December 2023)

If you are giving money to the government earlier, it means your working capital is declining, impacting your ability to generate cash.

EABL generated Ksh11 billion from cash of operations in the year ended June 2023, a significant drop from the Ksh25.9 billion it generated the previous year.

Our estimates are that it will generate KES4.2bn of free cash flow in the current financial year which ends in June 2024, but we acknowledge that the visibility on earnings is, at this stage, low.

Rising inflation has pushed up the prices of raw materials, forcing manufacturers to pay more for their cost of goods (lower margins) or pay their suppliers in advance (working capital investments).

Manufacturers have, as a cautionary measure, held onto a higher inventory of raw materials to avoid disruption and a hike in prices.  This constrains the manufacturers’ working capital.

A major setback for Kenyan manufacturers, especially those importing raw materials, has been the undervaluation of the shilling to the dollar.

This has made importation of raw materials expensive because manufacturers have to spend more shillings to buy the dollar.

The shilling opened the year at Ksh123 to the dollar, but it has since depreciated to Ksh152, a 23 percent decline.

Furthermore, accessing dollars has been a challenge for the manufactures because of scarcity of the greenback.

Manufacturers are therefore forced to hold onto more dollars so that they have enough currency to bring in imports.

Manufacturers must walk a tight rope to balance inventories, manage their cash reserves and grow sales. This is forcing manufacturers to think about their debts and dividend payments.

Against this backdrop of slower cash generation, currency fluctuation and payments of suppliers, companies are likely to be more cautious in paying their dividends.
This article was first run on Business Daily