Creating a turnaround at a Freight Forwarding Company

Velu A.

Joined as Group CFO in Feb’2011. I was responsible to handle Finance, IT and HR departments. Initial 2 years company was doing well and earning profits.

However from 2012-13 onwards due to global economic slowdown there was huge drop in freight forwarding business volume across the globe. This unexpected drop in business volume resulted in huge excess inventory with shipping lines and airlines bringing down the rates drastically.

Few big shipping lines were wiped out of business during this downward spiral. Freight forwarding companies were dramatically impacted as the margins in absolute terms fell to the historical lows throwing them into the whirlpool.

In the short run it’s highly difficult to influence and control the fixed costs of a large size companies like ours with turnover in the range of Rs 350-400 Cr.

As major part of the cost is manpower and office cost and you need to have minimum set up to handle the cargo business. Even though the margins in absolute terms witnessed huge drop, volumes didn’t drop by similar proportion leaving less scope to control the manpower cost.

Burning the Midnight Oil 2012-14

Next three years of 2012-13 to 2014-15 was a real period of testing time for us. Management team burnt the mid night oil to bounce back the company into profitability.

Entire organisation’s manpower was mapped to a standard organisation chart and redundancy was eliminated bring down the cost over period of 3 years. Performance Management and Review System was implemented to reward only real performers and keep the cost under control and check.

Working Capital Loan and follow up

Interest on Working capital loan from banks was one of the major cost line item.

When we did a deep dive, we understood that over a period of time due to the economic slowdown and fall in freight rates, few big customers with high volume of business has squeezed out the margins. But our sales team also continued to do business with these customers with the fear of losing their jobs.

Margin and the Cost of Capital

But as a finance head, analysed and gave inputs to our CMD, to drop the business with few top customers where the margins had fallen below our cost of capital.

For example, if we are giving 60 days credit to the customers and the money is collected before 90 days practically, with average cost of capital of 1.5% p.m, we were incurring a cost of 4.5%. Margin from few of these top customers were far below this bench mark resulting in increasing the loss of the company.

Based on my analysis, management consciously decided to drop the business with these customers. This helped us to reduce our working capital loan requirement and interest cost in turn increased company’s profitability. 

Refocus on Company’s Fundamentals

As the company was incurring losses continuously for three years, one of the banker was pressurising to repay the entire working capital loan by selling promoters personal assets.

As a CFO, I felt that as our Company’s fundamentals are very strong and had clear visibility of turning around the company in next one – two years during that time, recommended to CMD not to sell any personal properties.

However we went back to Bank with plan of restructuring and repaying over a period of 3 years.  We worked relentlessly and retracted back to profitability in the year of 2015-16 onwards.  Once we were back in Black, negotiated with one another bank and moved our loan book.

Turning Challenges into opportunities 

It has been an immense learning during this period, where I could convert challenges into financial opportunities for a sustainable growth of Company.

I took up the challenge and shouldered the responsibilities of reviving and taking the company towards growth path along with the management and ensured we sailed through the difficult times and protected the interest of 350 employees and their families. Now, when I look back and take stock of things, I really feel proud of what we have achieved in the period of these 6 years.

Further progress during the Financial Year 2017-18

Extending Credit to Customers

Biggest challenge for any business today is ensuring that all the money is collected from customers without any bad debts. Extending credit to customers is the back bone of Freight forwarding business.

Without extending credit we can’t survive in this business. It’s a biggest risk for our business, as we extend credit for the entire revenue whereas our margin is only small portion of it. If we lose money with one customer, it may wipe off profit generated from the business with 10 more customers.

To protect the interest of the company, I came up with a credit evaluation tool which helps to do credit rating based the financials of the customer.

We obtain the financials of the customers from MCA website and review their strength based on their net worth, debt equity ratio, DSO and profitability.

Credit is extended to customers only if the tool rates them as “low risk” or “moderate risk” customers. Credit facility is declined if the customer rating is of “high risk”.

Identification  and Resolving  risk factors

Post introduction of this tool, we have protected the interest of the company multiple time by identifying the risk factor.

In one case, the company has already defaulted in repayment to their banks. In another case, one of the existing top customer incurred huge loss and got into cash flow problems, we got out of this customer in phased manner and minimised the bad debts for the company.

Challenge of GST  and InStallation of ERP

FY 17-18 was another year filled with challenges of implementation of GST. Even though the law and rules were announced in the last minute, we had no choice but to implement it from 1^st July 2017.

From that date to March 2018, it was not like a roller coaster ride for the entire team. Today We have our in-house developed software /ERP for handling operations and accounting.

With changes in the rules and regulations happening in a haphazard manner throughout the year, it was a nightmare for us to understand the changes, incorporate them in the ERP, test them and implement them on real time basis.

We trained the entire organisation on continuous basis to ensure smooth progress of the implementation. In between all these uncertainties, reporting and filing requirements and dates were also dynamically changing on month on month basis. We have a huge sigh of relief as of now, as our base system is ready to take care of all the GST requirements.

Initially GST was made applicable on export freight as well, throwing everyone’s working capital plan into a tailspin. After lot of representation form Industry, it was removed from mid of the year. But in the meantime, huge working capital for service exporters as well got locked up with government.

As there is no clarity on how to apply for refund by service exporters, we decided to avail as input credit over a period of one year to offset this entire amount. All these unknown surprises made the life for CFOs very tough. With lot of patience and persistence manoeuvred through the year 2017-18 successfully.

Creation of sustainable Growth 2018-19

Introduction of Lean Management Structure

We have moved to lean Management structure and reduced the number of management layers in the company during our Organisation structure review, in turn keeping the manpower cost under control.

To ensure targets as per annual business plan is met, implemented the performance management and review system to break down the targets of business units into KPI’s of top management and mid management employees. This helped everyone to have clarity of their role and work towards achieving them.

Further it facilitated the management to take timely correction actions or provide support to the execution team with required resources to achieve their goals.

Mitigated the risk of bad debts by introducing the credit evaluation tool. It protected company’s working capital and saved interest cost. Implemented various controls and reports in our internal ERP system during GST implementation. This has improved accuracy in the work and productivity of employees.

Thus, during my tenure with the company, by laying down the basic principles, processes, controls, systems and structures in place have created opportunities for future sustainable growth of the company.

Velu A is a Chartered Accountant and a Management Expert with 18 years of professional experience in areas of strategic planning, budgeting, MIS reporting, fund raising. He is a CFO of a limited Company of great legacy in India