How to Master Cash Flow and Avoid Costly Mistakes
Welcome back to Africa Business Breakdown (ABB)! We’re thrilled to return with even more exciting content, ready to unveil the effective strategies that African businesses have ingeniously leveraged to thrive and navigate through challenges. In this long-awaited return, we’re looking into a topic that resonates with every business: effective cash management.
A thriving business isn’t just about offering a stellar product or service that consumers want. Achieving success also involves efficiently handling day-to-day operations, strategic planning, and financial management to enhance stability and growth. At the heart of this success is cash management. Understanding the principles of cash management gives business owners important insights to maintain business continuity, whether in prosperous times or during challenges.
Cash, being the primary asset for meeting obligations, needs to be carefully managed to maximise earnings and support future growth. It’s not just about having enough cash on hand; it’s also about wisely investing any idle cash to generate returns. Balancing these aspects is crucial for a company’s long-term success. The burning question on every business owner’s mind is: how can we manage our cash effectively?
Transcorp Hotels Plc, the hospitality subsidiary of Transnational Corporation Plc (Transcorp Group), is a prominent player in Africa’s power, hospitality, and energy sectors. Transcorp Hotels Plc is setting new benchmarks in African hospitality through its ventures, including the renowned Transcorp Hilton, Nigeria’s premier hospitality destination, and the digital platform, Aura by Transcorp Hotels. Transcorp Hotels Plc, the leading hospitality brand in Nigeria, is developing premier hospitality assets across Africa, solidifying its presence in the major cities of West Africa. With award-winning hotels in Abuja and Calabar and upcoming properties in Lagos and Port Harcourt, Transcorp Hotels Plc offers luxurious hospitality and lifestyle experiences.
Despite ongoing inflationary pressures, increased economic insecurity, and significant operational costs, Transcorp Hotels Plc. displayed remarkable resilience, ending the financial year of 2023 on a strong note. For the fiscal year ending 2023, Transcorp Hotels Plc. reached a significant milestone in revenue generation, achieving a gross revenue of ₦41.5 billion ($46.3 million), representing a substantial +36% increase over the previous year.
The Free Cash Flow Yield (FCF Yield) for Transcorp Hilton shows considerable variability from 2019 to 2023. In 2019, the FCF Yield was 4.35%, and the yield increased to +14.45% in 2020, suggesting the company generated substantial cash flow compared to its market valuation, due to less capital expenditure as a result of disruptions caused by the covid 19 pandemic. In 2021, the FCF Yield decreased to 6.35%, though it remained above the 5% threshold, still indicating favourable cash flow returns. However, in 2023, the FCF Yield fell sharply to its lowest point of 1.43%. The decline was primarily due to a significant increase in the company’s market capitalisation and enterprise value (EV), driven by a stock rally. The rise in EV outpaced the growth in free cash flow, leading to a lower FCF Yield despite higher absolute cash flow figures.
Over the five years, the average FCF Yield was 6.32%, reflecting Transcorp Hilton’s overall cash-generating ability relative to its market valuation. The fluctuations in FCF Yield during these years can largely be attributed to the economic impact of COVID-19, which affected operational efficiencies and market perceptions. The company stock rally in 2023, while boosting the company’s market value, resulted in a lower yield.
Source: Company Annual Report
Transcorp’s capital expenditure (CAPEX) allocation over the past five years shows a varied investment strategy with notable fluctuations. In 2019, the company invested a substantial amount of capital, totalling ₦3.5 billion ($9.7 million), reflecting significant investment in infrastructure and growth initiatives. Capex markedly reduced to ₦1.6 billion($4.2 million) in 2020 and further declined to ₦714.5 million ($1.9 million) in 2021, largely due to the impact of COVID-19. However, 2022 saw a significant resurgence in capital expenditure, rising to ₦4.6 billion. The increase indicates a focus on major expansion projects requiring substantial financial input. In 2023, the investment level slightly decreased to ₦3.3 billion ($3.6 million) but remained significantly higher than in 2020 and 2021, suggesting a sustained commitment to growth and development.
Transcorp Hotels Plc is strategically enhancing its market position through a comprehensive approach focused on strategic investments and operational excellence. It includes the completion of the Transcorp Event Centre in Abuja, aimed at capturing the lucrative events market, and the development of a new flagship hotel in Ikoyi, Lagos, designed to attract both business and leisure travellers with luxurious accommodations and top-tier amenities. The company is optimising operations by streamlining processes and leveraging technology to enhance service delivery and workflows. Cost-cutting measures are being implemented to reduce unnecessary expenditures and improve energy efficiency, ensuring financial health and profitability. Additionally, Transcorp Hotels is forging strategic partnerships and embracing innovation to stay ahead of industry trends, deploying advanced technological solutions to enhance guest experiences and operational capabilities. The comprehensive strategy positions Transcorp Hotels for sustainable growth and continued leadership in the hospitality industry.
Cash management is a dynamic strategy aimed at optimising a company’s financial operations and enhancing profitability by effectively managing liquidity and investments. For business owners, this involves strategically managing capital to meet immediate financial obligations, make informed investment decisions, and maintain a healthy cash flow. It ensures the business can sustain operations, seize growth opportunities, and remain financially resilient. Understanding cash flow is essential as it provides a more accurate measure of a company’s financial health than profitability alone. A business might show paper profits but still fail due to cash flow issues. Working with professionals is crucial to achieving this.
At @Migasuto, our financial advisory services offer Fractional CFO solutions, allowing more African businesses to access the expertise of skilled financial professionals without the financial burden of hiring a full-time CFO. These services include strategic financial planning, comprehensive financial reporting and analysis, cash flow management, risk management, and more adhoc solutions. Additionally, we assist in fundraising, cost control, and profitability strategies, helping businesses optimise their financial performance. We also assist in improving the visibility of these businesses through our brand equity services, enabling them to effectively reach their target audience.
Disclaimer: This article is meant for informational purposes only and is not a recommendation to buy, sell, or hold a position in this stock. Migasuto will not be held liable for any investment decision taken based on the information provided in this newsletter.
References
- Annual Report (2024). Transcorp Hotel
- WebsterBank (2024). How Corporate Cash Management Helps Business Owners
- Monthly Finance (2024). Cash Management During Business Turnaround.
- Forbes (2023). Cash Management Tips For Business Owners – Make More Profit, Faster!
- Trevi Pay (2023). What Is Cash Management
