The important point to note about cash flow management, working capital management or liquidity management is that it is not about the finance area alone. It is an all-pervasive ethos which spans across the sales and finance functions. At Info Edge, or Naukri more specifically, we recognised the need to collect sales in advance very early because it was essential for survival. No bank would have given us a working capital loan back in 1997 and we did not have the cushion of venture capital back then. Venture capital funding came later, in 2000. By then the terms of trade had been put in place.
The second point is about the industry structure and competitive position. Naukri was an early mover and has been the market leader pretty much from the start (and has continued to strengthen its market position). It, therefore, allowed us to maintain the terms of trade.
The third reinforcing factor was to align sales team compensation (incentives/commissions/bonuses) with actual amounts received and realised and not amounts to be collected or invoiced or booked. This ensured that the sales team was in sync with the company's focus areas.
Fourth, there was a rigorous discipline in this approach. There was a time when well-funded and better-positioned competitors came in with attractive offers to our clients and there was the temptation to dilute our terms of trade by offering longer payment cycles. However, we held steadfast to our beliefs and have maintained the terms even through difficult business cycles, for example in 2008-2010 and 2012/13. Finally, it is ingrained in the DNA of the company, starting from the top. We discuss actual "cash collected" and not billings/bookings/revenues in any internal discussion. That has been institutionalised across our businesses. This has ensured that all of our subsequent businesses -99acres, Shiksha and so on - have benefited from the same way of thinking and discipline.
#Revenue: Rs 392 crore, up 21.5%
#EBITDA: Rs 117 crore, up 43%
#PAT: Rs 103 crore, up 64%
(Figures for 2011/12; Source: Annual Reports)
#Debt almost zero, cash and bank balance at Rs 222 crore
#Current assets at Rs 40 crore, stable since 2008/09
#Working capital cycle at a negative 72.74 days versus a negative 59.75 days last year. This means it gets payment for the work in advance.
Liquidity management has another flip side, which is prolonging the payment cycle. We did not resort to doing this since we had positive cash flows from sales. To begin with, no one would give us credit but as time elapsed and our financial position improved, our business partners gave us longer credit terms, thereby improving our liquidity position.
When times are tough (that is, demand is weak), clients resort to one of the two or both: they ask for looser credit/payment terms and they ask for discounts. We have stuck to our payment terms during 2012/13 because any dilution of these terms becomes the norm for the future. This approach comes from a long-term approach to the business and the confidence to walk away from some deals. What has also helped is an improvement in our competitive position over the past few years. This allows us the flexibility to set our terms, together with pricing since both of these are indexed to the competitive position. At the same time, we have got better payment terms from our business partners and vendors leading to longer payment cycles. However, our biggest cost element is employee-related expenses. We have not compromised on paying our associates on time, whether in the form of fixed salaries or in paying sales incentives since employee morale is far more important than any benefit to be derived by prolonging payment cycles.
In summary, set the terms of trade early, be a market leader (great if you get there), align sales team performance with the terms of trade, maintain discipline and do not dilute standards. Finally, talk the same language.
As you can see, finance has crucial role to play in maintaining discipline and record keeping in line with what is required, but it is an organisation-wide initiative and should be firmly ingrained in the way that the organisation runs into business.
Ambarish Raghuvanshi is Director, Group President (Finance) and CFO of Info Edge. He has been adjudged Best CFO in the category - Consistent Liquidity Management (Medium)