When we talk about an efficient structure, we mean adequately using the company's resources. Companies continuously make decisions based on their business units' profitability or new growth opportunities (initiatives for innovation projects, mergers, or acquisitions that reinforce positioning or open new markets). Long-term strategic decisions and the timing of expansion/investments must be linked to 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 not providing the desired profitability to assign them to others. Folding sails is not an easy task, but given the current economic framework we are suffering from, it forces us to have a long-term strategic vision. The rise in interest rates to contain inflation makes companies more vulnerable by making loans, supplier purchases, or supplies more expensive. Factors generally prevent us from passing on this effect in full in sales prices, damaging the returns on investment we had planned. Therefore, we must continuously measure the suitability of all the investments and business units.
“ Folding sails is not an easy task, but given the current economic framework we are suffering from, it forces us to have a long-term strategic vision ”
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 precede the return on 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 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. It may also accelerate each company's changes in its strategic planning (R&D, ESG, etc.).
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 company's viability, anticipate possible cash flow gaps, and undertake actions, always based on transparency and financial ratios.
However, 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, reallocating it, or being 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 lower profitability than expected and, 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.
