Testing the Waters Before Spending Big: A CFO’s Perspective on Growth

What does disciplined capital allocation actually look like in practice?
When rubber meets the road, the reality is almost always significantly worse than modelled forecasts. Unfortunately, for capital-intensive projects, should the project fail or underperform, the sunk costs are very high. Disciplined capital allocation therefore requires some level of de-risking or market validation before full deployment, whether it’s in the form of pre-sales or getting customer commitments. If some elements of the project can be delayed to be implemented as business ramps up, that saves a lot of initial capital outlay. Whether the project is delivered as an EPC or a general contractor arrangement, it’s important to lock in the scope and costs.

Digital infrastructure is expanding fast across Africa. What should CFOs in that space be thinking harder about on the balance sheet side?
There is a general shift from in-house, heavy investment in IT infrastructure to cloud-based (laaS or SaaS) delivery. CFOs must hence ensure they are able to define the ROI that will be derived from shifting from on-premise infrastructure that is in the balance sheet to laaS and SaaS models, which will be majorly Opex. Though IFRS 16 requires that such Opex be introduced into the balance sheet, the cash flow profile, together with the tax treatment, resembles an Opex treatment.

What does good M&A execution look like at the structuring stage, and what mistakes do you see repeated most often in African markets?
At the structuring stage, three fundamental considerations and key mistakes against each: Tax implications – the structure of a merger or acquisition deal should consider the tax implications of the transaction, specifically, whether it will end up being a stock sale or an asset sale, CGT and stamp duty considerations, domiciliation of the acquirer and acquiree and the underlying tax laws. Due diligence – it’s very important to understand the context of the acquiree to clearly define the due diligence parameters. Different African markets have different governance strengths and weaknesses. For instance, a land due diligence in Kenya requires multi-level verification, whereas in a country like Rwanda, the land registry is digitised and very reliable. Regulatory complexity – a good M&A deal structure should account for time and other regulatory dynamics that must be navigated for a smooth closure. Holding period and exit considerations – how free cash flows are repaid to investors, as well as exit routes, must be considered at the structuring stage.

How do you resolve the tension between managing financial performance and actively enabling growth without one crowding out the other?
Finance leaders must identify the strategic areas of the business that they must actively invest in to generate sustainable growth. Sometimes the link between the desired outcomes is not direct or has a significant lag. For instance, funding a go- to-market initiative or a digital transformation initiative will not necessarily increase revenue generation or margin expansion potential, but the relationship might not be apparent. Finance leaders must also be willing to reorient their budgets to ensure sufficient resources are committed towards future growth initiatives.

What principles have guided your approach to capital raising across multiple African jurisdictions?
In a group structure with operations in multiple African jurisdictions, it makes sense to raise equity at the holding company level since this gives investors a diversified vehicle that consolidates the risks and returns from an array of different operations. Raising equity at the top level and funding the different capital deployments of operations based on their cash flow generation potential makes more sense. When it comes to debt, the first consideration would be to decide whether to take corporate-level or jurisdiction-level debt.

Currency and forex risk management is key. Much as hard currencies are cheaper compared to local currencies, they only make sense if an operation has a significant proportion of its income denominated in hard currency to match the debt service obligations. Lastly, compliance with local regulations is key. We have seen an increasing number of jurisdictions restrict forex outflows. CFOs must think about the ease of upstreaming hard currencies out of a given jurisdiction.

What does the next generation of African finance leaders need to be building that the current generation perhaps did not have to?
This has to be digital transformation. Whether it’s Al adoption, laaS, PaaS or SaaS, finance leaders must identify a roadmap to adopting these to gain competitive advantages. As governments continue to look for new tax revenues against a shrinking fiscal space, compliance will become critical. Finance departments will now need to reinvent themselves and embed compliance in their daily operations, supplemented by regular internal audits, risk reviews, and tax compliance health checks.

This article was first published by CFO East Africa.