Author name: Dr Maxwell Ampong

Working Capital Management – Achieving Higher Profitability

What comes to your mind when you think about the financial performance of a business? Is it the profit/loss given at the last line of an income statement? Although that’s one of the strong measures to analyze the financial performance of the business, it does not offer a comprehensive perspective to base all of your decisions on that single metric. This is due to an inherent limitation of the profit/loss that comes with subjective assumptions, accounting estimates, and adequacy of the transaction-related controls. (wikiaccounting, 2021) Hence, there is a need to consider cash flow operations which are more objective and lead to enhanced accuracy of the decision making and financial analysis. But, the question arises of how to perform cash flow analysis with perspective to working capital management and how startups/businesses can control their cash flows to achieve higher profitability. How to perform cash flow analysis with perspective to working capital management Generally, cash flow is divided into three main categories: operating, financing, and investing activities. Operating activities are about how businesses manage their day-to-day operations. These operations consume working capital/financial resources. As we understand, interest/dividend is payable on raising debt/equity (financial resources). So, there is a cost associated with raising finance and using it as working capital. Hence, businesses tend to optimize their operations and streamline their processes so that the length of the working capital cycle decreases. Working capital cycle refers to a complete process of trade. It involves the length of time required to purchase, hold, and collect receivables from the customers. So, if the business has a shorter working capital cycle, it can complete the trade process in a shorter time to earn higher profit within the business’ working capital cycle and vice versa. So, a shorter working capital cycle is desirable from the perspective of financial analysis, achieved with the shorter production time, shorter inventory days, shorter receivable days, and higher payable days. It’s important to note that higher payable days is more desirable as it brings financing within the business without any cost (in most cases). It means there is a direct connection between the performance of operational business activities and the achievement of business profitability. If activities like sales, production, and collection are performed with higher efficiency, there are higher chances of profitability, and vice versa, generally speaking. So, if the working capital cycle is shorter, it leads to a lower cost of financing and higher business profitability. The next question arises how business can control cash operations/working capital to achieve higher profitability. How businesses can control cash operations/working capital cycle to achieve higher business profitability Control of cash operations require a disciplinary approach to plan, measure, monitor, and take corrective actions for the cash-related operations. The following actions can be helpful in the effective management of the cash-related functions/working capital. Measure your current cash runwayCash runway refers to the time your business is expected to sustain without a need to raise finance from external financing sources. It considers opening cash position, expected cash inflow and outflow of cash during a period under consideration (SRJ Chartered Accountants, n.d.). For instance, let’s say your opening cash amounts to $10,000, the expected inflow is $5,000 a month, and the expected outflow amounts to $6,000 a month. The given cash outline suggests more outflow of cash than inflow. Hence, opening cash needs to be able to support the shortage. However, opening cash is limited and expected to support the business to a specific period called cash runway. Cash runway in the given case can be calculated as follows. Cash shortage during a month =cash outflow – cash inflow Cash shortage during a month = $6,000– $5,000 Cash shortage during a month = $1,000 Cash runway = opening cash/cash shortage during a month Cash run ways = $10,000/$1,000 Cash run ways = 10 months The current cash runway is 10 months. This means, in the circumstances specified, the business can sustain itself for exactly ten months without raising finance from external sources (for working capital purposes). So, the strategic decision-making persons of the company must consider the length of the cash runway to adequately plan the cash needs of the business. Setting cash runway as a benchmark can be a helpful measure to control cash-related performance. A comprehensive evaluation of cash flow in terms of revenue and expensesIf your business has more expenses than revenue, it can be taken as an alarming sign; the situation is termed as ”burning cash”. So, there is a need to reduce the cash-burning rate that can be achieved with implementable smart moves to enhance revenue. For instance, finding a new market to sell an existing product, implementing smart marketing tools, and intelligent changes in the product design can lead to higher sales and increased revenue. Speed up recovery function for the accounts receivablesMaking profitable sales is not enough for the successful running of a business. The cash needs to be ultimately realized for successful operations. Otherwise, there may be actual losses behind the profit. For instance, if the business profit amounts to $2,000 and the expected bad debt to be recorded in future for the current period sales is $2,200. It means there is a net loss of $200. Hence, there is a need to ensure the efficiency of the collection; otherwise, an apparent profit might be a loss in reality. To increase the efficiency of the collection, the business needs to optimize the process of credit approval, formation of credit policy, invoicing, following up, and collecting the cash. Work to enhance gross profit (more relevant for manufacturing business)One of the ways to achieve higher gross profit is by increasing the price of the product. However, that might not be feasible in a competitive economic environment. So an alternate approach can be to control direct costs. The biggest secret of controlling direct cost lies in the fact that if there is a higher gross profit, the business has space to offer early payment discounts while maintaining net profitability. Hence, working

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UNIVERSAL BASIC INCOME (UBI) – a timely solution for Africa’s impoverished?

Universal basic income (UBI) is when an entity, like an NGO, Government or other institution, provides a set amount of money to all of its beneficiaries irrespective of their wealth and taxpayer status. It’s based on the idea that every member of society must have access to basic resources, and further, these resources must be sufficient for the survival of an individual. So, the concept is based on social care and boosting the moral behaviour of society as a whole (peters, 2021). This social support system aims to eliminate poverty, provide easy access to basic needs for everyone, helps to eliminate bureaucratic involvement in the social support system (such system can be time-consuming and subject to excessive delays), helps to control the crime rate, and provides a greater sense of financial security. Further, the pandemic of COVID-19 has severely affected not only businesses but households around the world. Despite development of the vaccine, still a confusion remains regarding future looks of recovery (Lora Jones, 2021). So, the need to financially support society is more prominent in today’s world. And UBI can be one of the suitable options. The following defining characteristics of the UBI make it an attractive dimension for social support system. Importance of universal basic income (UBI) Universal basic income (UBI) is perceived as a great solution for the social security problem. Implementation of UBI in the United States and Iran has helped reduce poverty and improve the overall financial stability of the people. But let’s bring our minds home to Ghana and other African countries. In today’s African society, millions are facing severe issues like increasing financial challenges, adverse economic conditions from lockdowns and business closures due to this pandemic, increasing inflation, decreasing opportunities for employment, food insecurity, and many more. Hence, UBI can play an important role in uplifting living standards and meeting the survival needs of the people (JRF, 2021). Likewise, for UBI implementation, there is no need to assess individual background and other aspects. So, this system eliminates the chances of unfair rejection. This further showcases the importance of UBI in a present Africa where, in many cases, the threshold of the minimum wage is not sufficient. Another important point to note is that most public assistance programs to financially support people are outdated or lack efficacy, not to even talk about efficient implementation. If the case were otherwise, Africa would be further than where it is now. Hence, UBI can provide a simple but excellent choice to bring an element of financial stability within society. History of universal basic income  (UBI) The idea of UBI has been multiple centuries-old, and different rulers have implemented the same to support financial aspects of the society at different times. However, it’s again gaining momentum due to significant automation and development of artificial intelligence leading to a great cut in traditional jobs (Heimer, 2021). Political philosophers and economists have used this concept in the post-war economies; this was done to control the situation and rehabilitate the overall environment. Similarly, Europeans used the concept to achieve a producerist vision of society as a whole. These programs were directed to alleviate poverty and control inequality. So, the history of UBI can be linked to the colonial and post-colonial context. (Daniel Zamora Vargas, 2021) Great Britain has used UBI in India to develop a system of food distribution to control hunger and enhance developing aspects of the country. Likewise, a disciplined system of Zakat (2.5% on net equity) under Islamic laws and guidance is mandatory and has been used by states around the world (Daniel Zamora Vargas, 2021). Hence, the notion of States  and capable entities utilising a disciplined system of income distribution to stabilize the financial conditions of their people is not new. As the saying goes, there is nothing new under the sun. The history of UBI is as old as the broader history of a global social policy where states have used the concept from time to time to alleviate poverty and ensure human survival. Important facts and figures related to universal basic income Currently, no country in the world has implemented UBI in full. However, there are experiments and discussions for the same around the globe. Here in Ghana, The RIO Corporation and The RIO Think Tank (TRTT) continue to push discussion on poverty alleviation avenues and other welfare programs, backed by proper implementation structures and evaluating & reporting criteria that meet world standards, both before and after program execution. It is worth noting that the welfare system of Norway is close to UBI; the Government takes care of the citizen’s access to fundamental goods, health care, and social security income. However, that’s not truly UBI because Government has specified certain conditions to receive such benefits. The conditions include, be a law-abiding citizen, paying taxes, participating in an election, and citizen must try to find a job. All that is well and good in Norway’s eyes but as I stated above, Universal Basic Income (UBI) must be unconditional. In the United States election of 2020, the presidential candidate Andrew Yang campaigned to implement UBI in the country. This basic income program was called “Freedom of Dividend” and directed to tackle adverse impacts of automation on society. The plan intended to help every American with $1,000 per month, which may not be enough but a supportive amount to meet operational expenses (Clifford, 2020).  Likewise, multiple states have introduced basic income programs; these states include New Jersey, California, Pennsylvania, and Alaska, etc. Finland also conducted a UBI experiment in 2018; an experiment was conducted on 2,000 unemployed individuals. Each of them was given 560 euros per month, and a positive change was observed in their personality with respect to improved health and happier life (World population review, n.d.) . So, many nations of the world are inspired by the benefits of the UBI and are considering implementing it. How to implement Universal basic income – UBI Implementation of UBI is an expensive activity, and it needs massive funds to continuously support such a large base of beneficiaries. Most of the UBI programs

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Bank of Ghana (BoG) answered my question, so I fact-checked the Vice President of Ghana.

Digitization is one of the niche subject matters in the field of information and communication technology. However, its use and application have reached other fields, including the economy, to accelerate growth and development in recent times. The application of digital technologies is expected to characterize future economies as it offers a better quality of life. Many countries across the globe, especially in Africa, are increasingly embarking on the digitization of their economies. Ghana is one of the African countries recognizing the opportunity that digital development (digital economy) has for creating decent jobs, enhancing productivity, innovation, and accelerating growth. Ghana began its digital governance strategy in 2005  (Demuyakor, 2021). The government of Ghana has undertaken several flagship projects, such as the digital address system, which is essential for digital commerce, and more aggressive automation of government business processes (World Bank Group, 2019). Ghana has in place a widespread fiber-optic infrastructure and international bandwidth from five Submarine Optic Fibre cables, which are helping to provide adequate bandwidth capacity to support the digitalization agenda. The country is currently implementing the ICT4AD policy that is promoting public and private investment in various modes of infrastructure to support Ghana’s Accelerated Development Agenda. Some of the flagship digitization projects include National ID, National Digital Property Addressing System, Mobile Money Interoperability, and Paperless Ports, and e-Government Interoperability Framework (e-GIF) (World Bank Group, 2019; Songwe, 2019; Tapscatt & Agnew, 2000). The Government of Ghana, over the years, is making significant efforts and investments that are expected to position the country as a regional hub for digital services. With the upcoming e-cedi, the nation gets a central bank digital currency that will be regulated by the Bank of Ghana. At the 2021 Ghana Economic Forum (GEF) held last month at the Kempinski Gold Coast Hotel, Accra, I interacted directly and publicly with the distinguished Mr. Kwame A. Oppong, Head of FinTech & Innovation at the Bank of Ghana. During Panel 2 on Day 1 of the Ghana Economic Forum, I expressed that I am 100% for regulation, actually 1000% for it. My fear with over-regulation is that it could potentially create black-market economies that would aim to circumvent the protocols that Bank of Ghana has rightfully set in place to protect the stakeholders of the nation. With the ongoing National Digital Agenda, we are all well aware that the Western World is very much interested in having a stake in all of it. The West and the rest of the World are now very ready and willing to invest in Africa especially when it is tech-based. Flutterwave, OPay, Interswitch, Palmpay and Paystack are a few of the many tech-based entities that have reaped the benefits of a continent leaning more and more towards digitalisation. The youth across Africa are now innovating and also leaning more towards tech as they realise that’s where the future is. When the e-cedi finally arrives, it’ll be a game-changer because suddenly, the penny will drop for many naysayers and then they’ll want to get in on the action. I asked Mr. Kwame A. Oppong how Bank of Ghana is preparing the road to certification for these individuals that’ll be innovating left right and centre. My goal was not to suggest that BoG make it too easy because I recognise and agree that KYC and other due diligence measures on the applicant, the tech and how it integrates into the system must be carefully looked at. Still, I believe something should be done to promote and encourage widespread innovation, albeit still regulated. The Head of FinTech and Innovation for Bank of Ghana, Mr. Kwame A. Oppong answered my question. He said: “Thank you very much. I think one thing you’ll observe over the years is that everything Bank of Ghana has done relating to this space has been by design. It’s been carefully thought-through policy that has gotten to the point where you’re hearing some of these results. For instance, we can make a point about mobile money growth between before COVID and after COVID, even during the COVID. I think one of the interventions we made has to do with some enhancements to subscriber wallet balances, limits, etc. We saw some significant uptake in merchants acquiring digital means of collecting payment, and that trend has not subsided. It actually has continued strongly. All through that period we have not stopped. And so you would, for instance, have noticed that we introduced a new set of merchant account categories, which recognises the fact that if you look at the average merchant anywhere from a market in Tamale, a market in Takoradi, a market in Accra, some of the requirements that were in place in the law for them to be onboarded as merchants, if you looked at it, it was a bit onerous. It may be okay for maybe a Kempinski or an organisation somewhere mid-range, but it was a bit burdensome to ask that of them. And so we introduced a new merchant account category and the corresponding requirements for onboarding them that is consistent with their tier KYC approach within the mobile money space, which by the way, Ghana is one of the first countries to implement it. And you see this across the sub region a bit more. We have subsequently implemented several policies and embarked on several initiatives, including the Sandbox. I heard a conversation about Singapore and some other countries. We’re working with them on a Business Sans Borders, which is a Business Without Borders initiative that connects a financial trust corridor between Ghana and Singapore: Ghana as a hub for our region and Singapore as a hub for their region as well. There are several things that we’re doing. But let me point out this: when it comes to the issue of regulation vis-à-vis investment, let’s first understand that so far how we’ve evolved policy has wound up in consumers voting with their feet. When the Findex Survey by the World Bank was published in 2018, then using data from 2017, it put Ghana’s financial inclusion number at 58%. At that time we only had about 11 million mobile money customers. The population was about 29 million overall and

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