Excessive liquidity can result in an organization’s inability to meet required payments on liability claims and, at the extreme, in bankruptcy. This explains why TELLS could not settle its debt. We therefore we will like to recommend that TELLS divert some its investments plans from long-term assets to short-term assets like T-bills, T-notes and T-bonds which are much easier to liquidate, has a lower cost, with little or no loss in principal value(Saunders and Coronet, 2006). 3.
Working Capital Management Working capital is needed to run the day-to-day business activities without any interruptions. TELLS has been operating with negative working capital (as shown in able 1). This is not good enough. The negative working capital could be as a result of the major components of working capital ( That is, Cash, receivables and inventories) forming a small portion of TELLS’ assets. It can also be seen from the trend of working capital that efforts are being made by TELLS to achieve a positive working capital.
We therefore recommend that TELLS should have a cash conversion cycle which will be aimed at minimizing the time between cash expenditure on materials and collection of cash sales. If the firm is able to minimize its average collection erred and inventory conversion period, cash will always be available for working capital to improve. TELLS’ expenditure increases at a very faster rate than revenue. From table 1, it can be noticed that 2001 expenditure as a percentage of revenue was 88. 4% and as at 30th June 2002, expenditure as a percentage of revenue stood at 87. 4%.
This is not a good sign since TELLS spends most of its revenue on expenditure. We therefore recommend that TELLS should cut its expenditure in order to increase its net income. 4. 5 Improvement in Free Cash Flow TELLS’ free cash flow for 2001 was negative (As shown in table 2). We recommend that TELLS should focus on improving free cash flow from negative to positive. They can do this by reducing capital expenditure and also aim at increasing EBITDA as well by reducing its operating expenditure. 4. 6 Reducing Operating Leverage Between 2000 and 2001, TELLS’ operating leverage was very high.
They made too much acquisition which made them highly risky. We do understand that due to the nature of TELLS’ business-telecommunication-as a result of technology, they are likely to invest more in technology but all the same, We will like to recommend that TELLS invest more in variable cost rather than fixed cost since too much fixed cost in the capital structure can make the firm’s earnings and ROE decline with the slightest reduction in revenue. Also TELLS can consider merging with other Telecommunication companies instead of always acquiring.
This will also reduce the operating leverage. 4. 7 Risk Management Aside the above, we also recommend that TELLS should also aim at managing its risks. It should manage both business and financial risks. Business risk depends on a number of factors such as demand variability, sales price variability, input cost arability, ability to adjust output prices for changes in input cost, foreign risk exposure, and the extent to which costs are fixed: operating leverage and ability to develop new products in a timely, cost-effective manner.
TELLS should control these factors to minimize the risks involved. TELLS can do so by reducing the volatility of future input costs, they can negotiate a long term labor and materials supply contract which will lock in the input prices. They can also engage in hedging to reduce the business risk. With financial risk, TELLS should reduce the intake of debts since more debts results in more financial risk. They can resort to hedging by accepting offer of New York-Based hedge fund to swap millions of dollars of TELLS bonds for share.
