Importance of Liquidity Management Office

Cadila Healthcare
Nitin D Parekh (CA, CFA, MBA-IIMA), Chief Financial Officer, Cadila Healthcare Limited

Motives of holding Cash:

In Keynesian Economics, we learnt about three motives of holding cash. These include (1) Transaction motive, (2) Precautionary motive and (3) Speculative motive. Perhaps from the time I passed my MBA from IIMA in 1985, it is for the first time that I truly understood and acted on the precautionary motive of holding cash and we established, in a formal manner, Liquidity Management Office (LMO) in Zydus Cadila group.

Priorities during Pandemic:

Just after lockdown was declared in March 2020, the top management asked me to decide the measures to achieve three main objectives: (1) Continuity of business operations (2) Conservation of cash and (3) Rationalization of costs. I am very happy to record that we could achieve all these objectives.

Considering that pharma is an essential service; we were allowed to operate our business even during lockdown. We took several measures of safety for our team members and ensured continuity of business operations.

Liquidity Management Office:

  1. Liquidity Management office: To manage our business efficiently in the most critical times, we established a liquidity management office. The committee comprised of myself (CFO), CSO, business finance leaders and other senior members from operations team.
  2. Measures for cash conservation: With the establishment of LMO, we took several measures for cash conservation. We changed the authority matrix for approval of capital expenditure and took a holistic view about the time bound capex to get the priority. We also worked on measures to extend the payment cycles wherever feasible. We decided five priority areas of payments which include the following:
    1. Employee wages and salaries, including any employee loans strictly for medical emergencies.
    2. Payment to suppliers of materials and services, which is strictly necessary to ensure the continuity of manufacturing operations, and which cannot be procured/continued with extended credit period and to MSME parties.
    3. Payment to transporters to ensure availability of inputs at manufacturing locations and timely supply of finished goods to our customers.
    4. Statutory/obligatory payments-like income tax, GST, power/fuel bill, insurance etc.
    5. Repayment of debt and interest as per the agreed terms with lenders
  3. Rolling plan: We work on three months rolling forecast for revenues, costs, profits, and cash flow.
  4. Scenario Planning: We worked and are still working on optimistic, realistic, and pessimistic scenarios for different businesses in different geographies because the duration and depth of disruption is different in various location and we are having businesses in USA and Brazil.
  5. Sensitivity: We work out sensitivity of cash flow based on different assumptions of customers availing cash discount scheme vs. customers availing extended credit terms.
  6. Matrix to monitor four parameters: We developed a matrix to track on four parameters daily and collated information across the geographies. These parameters are-collection versus sales, sales versus production, production versus purchases, and purchases versus payments. This helped us in maintaining optimal working capital. Although some of the geographies are not on SAP, but we have managed to collate information daily. We have developed this as a regular practice.
  7. Liquidity status reports: We bifurcate the monthly cash flow forecast in weekly forecasts and prepare and submit LMO status reports. We generate “Daily cash position report” as well as weekly and monthly reports to share with management. It gives us visibility to our cash position; credit terms and provides management with other strategic insights related to business and finance.
  8. Improved liquidity position: In addition, we also worked on strategies to improve liquidity – for example, giving cash discounts to vendors who were in position to pay us earlier or on time. We offered extension of credit period for some customers. Further, we encouraged digital payments and gave discounts to buyers for using NEFT/ RTGS transfers. It helped us in receiving quick payments and reduced the need to visit bank premises physically. Our net debt (Gross debt minus cash and bank balance) which was about Rs. 6740 crores as on 31 March 2020, got reduced to about Rs. 3808 crores as on 31st December 2020, giving reduction of Rs. 2932 crores. Even if I deduct the net proceeds of QIP and Preferential allotment of shares Rs. 858 crores, this amounts to net debt reduction of Rs. 2074 crores in 9 months’ period. This success is attributable to LMO.

Cost reduction and improvement in EBIDTA margins:

The measures taken for cost rationalization yielded rich dividends as reflected in a significant improvement in the EBIDTA margins of the company. The EBIDTA margin for 9 months period ended December 31, 2020 reached 22.1% as compared to 19% in the same period in 2019.

Final thoughts and way forward:

Going forward the focus of LMO would include growing the core and reimaging the future. Reimaging future includes both costs transformation and technology adoption and to some extent, they are connected in that sense that use of cash for technology would bring cost savings over a period. Thus, there is going to be focused investment in digital initiatives. The pandemic has given time and opportunity to have a zero-base view on the activities and costs and as a result, the company has embarked on zero based budgeting exercise, which aims to reduce the costs by Rs. 150-200 crores on an annualized basis.

About the Author – Nitin D Parekh (CA, CFA, MBA-IIMA), Chief Financial Officer, Cadila Healthcare Limited

Nitin D Parekh’s job responsibilities include the whole gamut of finance, IT, and legal functions at a group level. The same includes accounts, audit, banking, costing, direct and indirect taxes, MIS, resource mobilisation, company secretarial and other corporate functions, forex and treasury management, and M&A etc., at Cadila Healthcare Ltd., as a CFO.

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