When Less is More

Jesús Díaz Barrientos, Head of Finance at DO & CO AG

Jesús Díaz Barrientos, Head of Finance at DO & CO AG

When we talk about an efficient structure, we mean having an adequate use of the company’s resources. Companies are continuously making decisions based on the profitability of their business units or based on new growth opportunities (initiatives for innovation projects, mergers or acquisitions that reinforce positioning or opening new markets). Long-term strategic decisions and the timing of expansion/investments must be linked to a financial analysis and the measurement of constant return ratios to evaluate the suitability of continuing to invest or, on the contrary, to make one of the most important decisions, usually unpleasant but with a vital opportunity factor in a company: disinvestment.

Divestment is the reallocation of resources from assets or business units that are not providing the desired profitability in order to assign them to others. Folding sails is not an easy task, but given the current economic framework we are suffering, it forces us to have a long-term strategic vision. Since the rise in interest rates to contain inflation is making companies more vulnerable by making loans, purchases from suppliers or supplies more expensive. Factors that generally prevent us from passing on this effect in full in sales prices, damaging the returns on investment that we had planned, and for this reason, we must continuously measure the suitability of all the investments and business units.

In addition to the internal analysis, investee companies must rely on their investors. These investors are committed to achieving the maximum return on their capital, with risk aversion being a key factor in investing in a less profitable plan that offers them less return, but where a safer investment may be the better choice. Therefore, the investor’s needs take precedence over the return of the investment. For this reason, and due to the context of uncertainty and high interest rates, at the end of last year the main listed companies in Spain carried out a series of divestments in order to amortize debt, strengthen liquidity and generate resources to invest, enabling growth (on the roadmap of most companies). In addition, the increase in cash flow obtained from the divestments, will help to strengthen working capital, and may also accelerate the changes that each company has in its strategic planning (R&D, ESG, etc.).

"In addition to the internal analysis, investee companies must rely on their investors"

The reasons for the expansion of a company are the same as for divestment, to create value, therefore our mission as finance experts is to ensure the viability of the company, to anticipate possible cash flow gaps, and undertaking actions, always based on transparency and financial ratios.

Obviously, divestments are not popular measures and can go against the company’s initial strategy. These are decisions, that most of the time (except for very specific political or market environments), are based on safeguarding the company’s cash flow, to reallocate it or to be able to cover deviations in a market with an irregular trend to our forecasts.

We all know companies that have not properly managed their divestments in business units or countries where they were expanding. With heavy investments with a lower profitability than expected and that, by not evaluating their returns correctly from a strictly financial point of view, have had real problems to survive or have straight closed for this reason. To ensure the survival of companies and take care of the cash, less is more.

Jesús Díaz Barrientos, is Head of Finance at DO&CO in Spain and author of the book “Claves para evitar la quiebra en pymes” also translated into English “Keys to avoid Bankruptcy in SME’s”.

Financial