Abraaj’s flawed operating model

A lot has been written recently about Abraaj Capital, the private equity company based in the Dubai International Financial Center. The current focus is around Abraaj’s actions with regards to the potential co-mingling of client funds with its own operating funds. News is updated on a relatively frequent basis about the subject and there is clearly a lot to learn on many fronts. However, it is too early to do a full post-mortem as investigations and legal cases have not come to a conclusion. But there are some things that can be gleaned that could be instructive for investors. The aim of this post is not to judge Abraaj, the courts will do that. The aim is to try to see if there are lessons that can be used by investors to better manage their portfolios. Continue reading

Cash Conversion Cycle Red Flags

In my work helping companies transform themselves to take better advantage of economic opportunities and to manage risks more efficiently, working capital risks are frequently overlooked even though they are at the front line of risks faced by companies of all sizes.

The cash conversion cycle, an important liquidity measure that usually forms the core of a company’s working capital, is of particular importance . The cash conversion cycle is a measure of how long it takes for a dollar that is spent on the development of a product or service (which is subsequently sold on to a client) to be converted back into cash in the form of revenues. Mismanaged it can destroy a company’s finances. Continue reading

Why the cash flow statement matters

Cash flow for me is the most important financial statement as it can corroborate or invalidate what I see on the income statement. In the last three weeks I’ve looked at the income statements, balance sheet statements, and the link between the two for various companies. Today I will use Shuaa’s Q3 2017 financials to show how the cash flow statement can provide insight into the more famous income statement.

Cash flow basics

A little refresher course in accounting first. Cash flow accounting as a measure of the performance of a company is flawed because it does not reflect the timing of transactions. For example, if a company is paid an annual subscription to provide a weekly magazine, then cash flow accounting would recognise a large income upfront and then the expense of publishing the weekly magazine is recognised about evenly across the year. This can make things look far better than they are. There are other situations where the opposite could happen, or where the effect is on the balance sheet, eg depreciation. Continue reading

Jawbone lessons

Jawbone, best known for fitness wearable technology, went into liquidation last month in part because of too much funding, according to CNBC. I believe that this is a good case study for some of the companies in the GCC that receive easy funding. Too often, certain investments are deemed strategic and then there is a blind mandate to fund them at any cost. One of the most frequent cases is the legacy business of a family conglomerate. Although other business lines might be doing fine and the commercially rational decision is to liquidate the legacy business, there is too much emotion tied to it. Often there is the belief that the loss of the legacy business would signal an unacceptable loss of face.

Of course if that funding is never-ending, you end up with zombie companies as the negative cash flows from operations and investing are offset by positive cash flows from funding, forever. This is why it is extremely important to look at the cash-flow statement. I have seen actual financial statements of large companies show that new debt funding is not only being used to pay for operations, an unsustainable situation, but to also pay off maturing debt. When you start using debt to pay for debt you’re in trouble.

The way this is explained to boards is that a certain debt is being matched to a certain activity. This is, of course, baloney – a proper analysis looks at the aggregate. If operating plus investment cash flows are negative and there is maturing debt it can only be paid off via more funding, be it equity or debt.

Sabah al-Binali is an active investor and entrepreneurial leader with a track record of growing companies in the Mena region. You can read more on his Twitter feed or for deeper analysis on LinkedIn and al-binali.com.

Crisis Response Strategies

This entry is part 3 of 3 in the series Strategy

In a world of uncertainty management is constantly evaluating potential risks as they unfold and deciding how to respond.

At one end of the response spectrum is what might be called the Anglo-Saxon Fast & Furious model: ignore all risks until they become an existential threat of such dire proportions that there is only one available response and it is blatantly clear to all involved.

At the other end of the spectrum is what might be called the Asian Ancient Wisdom model: treat everything as an existential threat at all times and avoid taking any proactive decisions whatsoever lest it lead to greater danger.

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Who Wins, the Trader or the Investor?

The perennially favourite discussion topic is trading versus investing. What’s the difference? Is it short time horizon versus long time horizon? Is it growth versus value? Is it Soros versus Buffet?

This post is a continuation of my 2007 article in The National. Reading the previous article is not necessary to benefit from this post, but looking at the ideas across an eight year period might be helpful.

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An Investment Analysis of Home Buying: Renting is Sometimes the Better Choice

Buying a home is an admonishment that is drummed into the heads of most people. Buy don’t rent. Renting is throwing money away. At least if you lose everything, you’ll have some place to sleep. At least that’s what people say. But is it rational? Before you decide to invest such a large amount of money, don’t you want to analyse it a bit? You know, the same way you analyse a share purchase that costs a fraction of the cost of a home? Or analyse the merits of a Samsung versus an iPhone?

I think that the main confusion is due to the fact that there are several issues interwoven into this decision. In particular, two cash flows are being net off, thus hiding a valuable insight. To understand this, consider somebody who is renting a house. He pays rent to the owner of the house which results in a cash outflow to the renter and a cash inflow to the owner. When the renter is the owner these two cash flows do not go away, they just cancel each other out. Absurd as this may initially seem, getting to grips with this unintuitive insight is key to making intelligent investment decisions. Continue reading

Scaling Profits

Why do so many start ups manage to reach cash flow break even and often manage to break through that barrier but then get stuck in terms of growing their profits much more than that?

Arguably the number one reason is that entrepreneurs have a fear of failure. This is normal, only sociopaths and narcissists feel no fear. The problem lies in an inability to overcome that fear and manage the business in way that balances fear of risk with the equally important requirement to make a return. Continue reading

Breaking the cash flow break even barrier

I recently covered the challenges of managing negative cash flows. Breaking through the cash flow break even barrier is a completely different matter. Start ups seem to reach this point and never leave it, a gravitational black hole not unlike the friend zone. Understanding this statistical anomaly requires a mix of finance and psychology.

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Cost Management Insights for Entrepreneurs

My basic philosophy on business is that opportunities and challenges are continuously presented to us and we need to respond appropriately. When it comes to managing challenges it makes sense to prepare in advance. My experience is that many entrepreneurs have difficulty doing this at two key points: right after a round of funding and when their business goes cash flow positive. The idea of saving for a rainy day goes right out the window and the dangerous assumption that the business will never go cash flow negative again sets in. This has destroyed many a promising start up.

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