HAVILAH MERCHANTS NIGERIA LTD: GENERATING CASH

FROM A COMPANY’S VALUE CHAIN

Havilah Merchants Nigeria Ltd. was Nigeria’s leading one-stop shop for outfitting libraries
and archives. The company had successfully executed over 100 library and archive projects,
and Havilah products and service had become the benchmark in the industry for quality.

Lanre Adesuyi, the founder and CEO of Havilah, was a chartered librarian with over 40
years of professional sales experience in Nigeria and in Europe. He dedicated his career to
raising the bar for libraries in Nigeria—there was even a university library named after him.

Adesuyi incorporated Havilah in 1995 as a book consolidator. By 2000 he had signed an

alliance with several U.K. publishers and by 2005, Havilah had completed its first archive
shelving systems for the First Bank of Nigeria. By 2010, Havilah had refined its business model
and was working with the oil and gas sector, the judiciary, and other government agencies. And
Havilah had outfitted 10 university libraries.

THE BUSINESS MODEL BASICS

Havilah focused on the company mission an integrity in the Nigerian marketplace, and
proved adept at providing expert consultation on the design and implementation of libraries and
archives. To do so meant becoming the exclusive West Africa regional representative of
Europe’s top shelving and hardware brands. Havilah was also skilled in executing installation
projects, and would custom design each library or archive. The company procured all of the
furniture and supplies; for libraries, Havilah then used technology to locate and acquire even
the most hard-to-find books. Havilah would assemble and install the hardware and furnishings,
and then provide follow-up maintenance of the library or archive. While Havilah had its
competitors, few managed to do all of these things well and combine the services as a single
source project.

From a cash-flow perspective, Havilah incurred costs in marketing and providing up-
front speculative consulting. During this period, they helped potential clients understand their
library or archive needs, and designed custom solutions for the potential client’s consideration.
In the case of public institutions, this process would take place within a highly regulated
government bidding process. If Havilah succeeded in getting the job, then the company
generally would receive an up-front payment to activate the project. Once activated, these
projects took several months to complete. Upon the completion of the project, the customers
often took months to make final payment. In order to shorten the project cycle, Havilah would
procure the shelving units and the most popular books up-front. But all of this required working
capital, effectively limiting the number of projects that Havilah could engage in at one time.
 To Adesuyi and others in the management team, the big question was whether it was
this model that was constraining Havilah’s growth.

In 2015, Havilah served three primary market segments:

Segment 1: Public University Libraries

Public university libraries made up the largest share of Havilah’s customer pool—
accounting for 70 percent of the company’s annual turnover. The public libraries benefited from
a fund set up by the Nigerian government to ensure quality education. The commitment to
strengthening tertiary education in Nigeria was a multiyear endeavor. The government aimed to
build up national capacity, which meant a number of new Nigerian universities, complete with
operating libraries, would be built in the 2015 to 2020 period.

Federal law in Nigeria set a 15 percent pre-funding limit for government projects. This
meant that a deposit of 15 percent of the total project value had become the customary and
accepted payment for activating a library project. Once the project was completed, these public
universities on average paid the remaining 85 percent of the contract within 90 days. Havilah
took extra care to pre-qualify its clients and had succeeded in an almost-perfect record of
payment upon completion of the project—a feat generally unheard of in the government sector
in Nigeria.

Within this segment, Havilah provided a large number of important consulting services,
and also ordered a wide variety of common as well as hard-to-find books. In return for all of
these services, Havilah earned a gross margin of 68 percent.

Segment 2: Multinational Corporations

The multinational companies involved in Nigeria’s oil and gas industry valued the
professionalism, dependability, and quality of Havilah solutions for their archiving needs.
Havilah also distinguished itself by its rapid project completion times. This segment represented
15 percent of Havilah’s annual turnover in 2015. Multinational companies tended to know their
value to a supplier, and they wielded a lot of power in establishing their terms. These projects
also tended to be more lucrative, averaging US$108,000. Multinationals typically offered no
advance payment, but once the project was completed, would reliably pay the full value of the
contract within 25 days of delivery. Since there is was no activating payment, Havilah would
instead borrow money from banks and other expensive funders in order to get the project
started quickly. While banks were ready to fund these types of projects involving blue chip
companies, Havilah would procure loans at a typical rate of 30 percent APR. On average, the
gross margin for projects in this segment was 49 percent. There were over 80 major oil and gas
companies in Nigeria, and Havilah was considering sourcing many more contracts from these
companies. As this industry segment became saturated, Havilah had another business
development strategy: approach multinational companies operating in Nigeria in other
industries.

Segment 3: Banking Industry

Nigeria’s banking sector was evolving, and the sector’s many banks offered creative and
increasingly complex banking solutions. The banks themselves also began to recognize the need
to improving their archiving capabilities. Havilah had distinguished itself by serving highprofile
banks. And Havilah expected to reach many more companies within the financial sector. In
2015, Nigerian banks represented 15 percent of Havilah’s annual turnover.

Nigerian banks were accustomed to working with under-capitalized suppliers of critical

banking services, and offered favorable terms to their service providers. They typically offered
60 percent up front as an activation payment, which enabled Havilah to begin a project quickly
and complete its work with minimal delays. Once the project was completed, the banks reliably
paid the balance of the contract within 45 days of invoicing. Havilah earned an average of 45
percent gross margin when serving companies in the banking sector.

HAVILAH’S DILEMMA

It was the fourth quarter of 2015. Despite their operational successes, Adesuyi and his
management team found themselves at a crossroads. The company seemed unable to grow
further, and the team was experiencing a year of reduced turnover. While Havilah ran a
profitable business, had six months of customer demand, and possessed the operational
capacity to increase the number and frequency of projects, the company’s expansion to date
had consumed their cash, leaving Havilah with no working capital to fund the projects in the
pipeline. This cash shortage even threatened the timing of the current payroll. In 2014, Havilah
performed 30 installations. The company earned US$3.6 million in turnover with a gross margin
of 62 percent and an EBITDA of 22 percent. To date in 2015, Havilah had completed only 15
installations—and had put 12 projects on slow course as the team searched for a financial
partner to help with cash flow. If this problem did not exist, the management team projected it
would have performed 42 installations for the year, which could have been a 40 percent year-
over-year turnover growth rate. In contrast, Havilah had to slow its marketing efforts, since it
was clear the company would be unable to execute against new projects. Absent changes
within the value chain to generate cash and minimize working capital requirements, Havilah ran
the risk of stagnating, and in doing so, disappointing existing customers and diminishing the
brand. The company also risked creating opportune gaps for their competitors to fill. It was
clear to Adesuyi and his executive team members that the key to solving their problem was
finding money. Specifically, they determined that if they could find US$2 million in cash, then
they could fund all of the projects currently on hold.
 Adesuyi has called his management team together to address this avoidable threat head
on, and to determine what they must do to get back on track with their growth trajectory. They
were not sure where they would find the funds, but were contemplating these types of
conventional sources:

1. Borrow from a local bank. Despite the annual interest cost of 30 percent, loans
hadhave been Havilah’s first course of action to secure additional working capital. A US$2
million loan would incur US$600,000 in debt liability. However, securing a loan had become less
feasible, given currency instability within the Nigerian banking. Moreover, banks were increasing
the amount of collateral to insure the loan, posing a problem for Havilah, which already had
much of its assets tied to current debt. In the past year, despite multiple attempts, Havilah was
close in on an expanded line of credit.

2. Seek project funding from investors. This approach meant finding financiers willing to
advance a bridge loan to Havilah on terms which were more flexible than a bank would provide.
It required someone from Havilah to manage relationships and negotiations with these potential
financiers, and then manage multiple financing arrangements. Although common practice in
Europe, the investment community in Nigeria was not active or familiar with this type of
financing activity and it would require considerable marketing effort, which would distract
management from devoting sufficient time to the business.

3. Look for equity investors. Adesuyi, as founder and CEO, was open to equity
investment to grow the business. He foresaw offering up to 35 percent of the business.
However, given Havilah’s plateau in revenue due to cash flow constraints, valuation would not
be attractive, and the investment for a 35 percent equity stake would not make a substantial
difference.

4. Continue along the same path and do nothing. This was not a viable option, however.
It would only be a matter of time before Havilah went out of business. Another Possibility –
Generating Cash from Havilah’s Value Chain The team set about looking for financial partners,
focusing on banks, individual investors, and private equity partners. They identified promising
sources, but the process was proving long, and forced them to dig a little deeper. Fortunately,
another idea entered the conversation. Adesuyi wondered if it was possible to work with the
existing customers and suppliers to reduce the cash flow pressures. Perhaps Havilah could
harness untapped cash potential from its value chain.

THE PROPOSED INITIATIVES

The team put their heads together and identified a number of opportunities. They
calculated the potential improved effect to cash flow from each opportunity, first based upon
their 2014 data, referenced in Exhibit

1. Then the team rationalized the figure based on estimated project After reading each
proposed initiative, the challenge was to determine the exact amount of cash Havilah might
generate. Customer Collection and Payment Terms – Generating Cash from Accounts
Receivable Havilah knew that the company’s value chain could generate cash if they could
collect payment for their projects quicker, as well as reduce write-offs. After brainstorming a
dozen ideas with senior leadership, the sales team decided to implement the following:

1) Increase up-front activation deposits from universities: In 2014, Havilah succeeded in

obtaining an 85 percent up-front payment, instead of the statutory 15 percent payment, from
one of its university customers. Since the university’s funds could only be used for this purpose,
this collaborative librarian used his discretion to decide that it was in the university’s interest to
finish the project quickly. As such, he followed the initial 15 percent payment with a second
payment equal to 70 percent of the project bid, in order to help Havilah start the project earlier.
Following the completion of this project, Adesuyi asked the librarian to confer with his
colleagues from other university libraries, to share his perspective and experience. Following
these meetings, another university agreed to pay an additional 30 percent midway through their
project. In response to this positive feedback from the university community, Havilah decided to
adopt a more aggressive up-front payment for all future projects. The team believed that across
the university segment up-front deposits could increase on average from 15 percent to 25
percent. Havilah estimated that this approach would prove effective at 90 percent of Nigeria’s
universities.

2) Focus sales agents on bank deals: With approval from Havilah senior leadership, the
sales team decided to cease uncovering new leads in the multinational customer segment in
order to focus on deals with banks, so as to capture the large up-front activation deposits. Even
though there was a margin loss with this decision, the ability to cover all project costs up front
through the deposit was extremely appealing. Using 2014 actuals as projections, the team
estimated that Havilah could replace five corporate deals with bank deals—as well as increase
those deals to a total of 13. Adesuyi considered this approach to be 75 percent feasible.
Negotiate Better Credit Terms with Suppliers – Generating Cash from Accounts Payable Havilah
knew that the company could minimize its working capital cash requirements if the team could
establish or improve credit terms with their key suppliers. After brainstorming a dozen ideas
with senior leadership, the purchasing/procurement team has decided to implement the
following:

3) Negotiate supplier credit with shelving suppliers: Shelving equipment, utilized on all
of Havilah’s projects, represented 55 percent of the company’s cost of goods sold. Havilah’s
shelving suppliers currently required payment before shipping any material. Shelving shipments,
which arrived from Europe by cargo ship, usually required 23 days for transit, plus seven days
to clear customs. These orders were placed once the project contract was signed, with
shipment typically occurring seven days later. As the exclusive agent for Bruynzeel, Elsevier,
and Ebsco brands, Havilah visited these companies to discuss obtaining supplier credit.
Havilah’s purchasing agent believed that visiting the suppliers at their factories would increase
the likelihood of a positive negotiation. Adesuyi accompanied the agent to underscore the
importance of the relationships. Together, they made a case to their suppliers that the provision
of supplier credit would reduce the firm’s working capital constraints, which would ultimately
increase the volume of products sold. They learned that, in exchange for supplier credit, all of
their shelving suppliers would require Havilah to lock in a rolling 12-month forecast with
financially committed 3-month rolling purchase orders. In return, the equipment manufacturers
could offer 60-day credit terms, with Bruynzeel considering an even longer option if the change
toward locking in purchase orders proved successful. Implementing this project would increase
Accounts Payable by a total of 60 days. Havilah considered this initiative to be 100 percent
feasible.

4) Renegotiate purchase and credit terms with rare book suppliers: Rare books
represented 10 percent of the company’s cost of goods sold. These books were sourced from
various locations and consolidated in London. This process took 30 days in addition to the 23
days plus 7 days for clearing, similar to the shelving requirements. Typically, rare books
required a 10 percent upfront deposit, with the balance due 10 days later. Havilah’s purchasing
agent spoke with their top suppliers and worked out a way to restructure these payments.
Some of these suppliers then agreed to restructure Havilah terms. Specifically, in exchange for
a 20 percent upfront deposit, they would grant Havilah 120 days to pay the remaining balance.
Havilah estimated this initiative to be 100 percent feasible. Restructure Inventory Supply Chain
and Logistics – Generating Cash from Inventories Havilah realized that the company was
holding a considerable amount of cash in inventory. After examining the supply chain, the team
realized that the following operational improvement in their inventory management process
could minimize these cash requirements:

5) Shorten project cycle time: One of the firm’s university projects had a unique learning
outcome when Havilah had a bottleneck in the assembly process. Specifically, the firm was
experiencing delays at the final shelving assembly step, which was constraining the output of
the entire process. To resolve this bottleneck, Havilah hired two additional casual laborers to
help the operations team reduce assembly and installation time. Adding the two people
permanently was the only additional labor required to reduce the installation cycle time by 25
percent, thus shortening the time from eight weeks to six weeks. By completing the installation
more quickly, Havilah was able to “start the clock” for the 90-day final payment sooner,
effectively accelerating the receipt of the final cash payment by 14 days (relative to the start of
the project). This two-week cycle time reduction had an insignificant labor cost increase. This
cycle time change was only feasible for the university business, yet was considered 100 percent
feasible.

6) Restructure book inventory procurement and management processes sizable portion

of Havilah’s finished goods inventory consisted of commonly sold books that were purchased
based on forecasts of new projects. These books accounted for 25 percent of the company’s
cost of goods sold. In 2015, Havilah purchased these books directly from individual publishers.
Because the failure to deliver these books during the final week of installation effectively
delayed project completion and subsequent cash receipts, Havilah always stocked
approximately six months’ worth of books (with average inventory holdings of $172,300). This
inventory ensured there would be no project delays by minimizing the risk of not being able to
procure a book in a timely manner. Given Havilah’s leadership position in this market, the
company approached a leading book consolidator in London to act as their sole book supplier.
Through bulk purchasing arrangements with the publishers, the consolidator should be able to
offer Havilah similar prices, but would then deliver the books in a more “just in time” manner.
This approach would require Havilah to hold only one month’s worth of inventory. Havilah
expected that this change would have a minimal impact on margins. Havilah estimated this
initiative to be 100 percent feasible.

7) Freight reduction for shelving components: Havilah was able to identify a shipping
company willing to transport in cargo containers that were half the size of what previously had
been used. This enabled Havilah’s shelving materials buyer to cut the purchase order size in
half, which in turn reduced the raw materials stored in Lagos from 6 months to 3 months. In
2014 Havilah’s inventory cost for these shelving materials was $600,000. This initiative was
considered 100 percent feasible. Operating Cost Reductions Havilah also realized that the
company could save cash by controlling operating costs.

8) Energy savings: Havilah was testing new office procedures to reduce overhead costs,
most significantly, the energy costs. The company decided to operate the generator during
strictly prescribed hours— which meant it would turn on at 9 am, shut down from 1 to 2 pm,
and then turn off at 5 pm sharp, with a newly implemented fixed end-of day ritual. These
measures resulted in a 35 percent energy savings, without significantly impacting the
company’s operations. Havilah’s energy bill is $3,000/month. Since this change was an internal
move, and controllable through management, it was considered 100 percent feasible.

With these measures, they foresee creating a larger cash reserve for working capital.
But would it be enough to set the company on a path towards greater growth?

Havilah Market Segment Profile 2014

Item Universities Multintional Books Total

Corporation
Revenue 2,520,000 540,000 540,000 3,600,000
Cost of Sales 806,400 275,000 297,000 1,378,400
% Total Turnover 70% 15% 15% 100%
Number of Jobs 20 5 5 30
Average Project size 126,000 108,000 108,000 120,000
Gross Margin 65% 49% 45% 62%
Activation Deposit 15% 0% 60%
Days to Receive Final 90 25 45
Payment
Accounts Receivable 479,600
Accounts Payable 109,950
Inventory 495,003
Source: Compiled by authors, based on company reports.
 ANSWER THE FOLLOWING:

1. How much cash would Havilah generate if the company implemented each of these
new initiatives, as outlined on 5 to 7? Consider both the monetary benefit and the feasibility of
occurrence.

2. Of all the things Havilah could do to improve the timing of cash flows, what would
you have prioritized for its ability to provide the greatest impact and likelihood of success?

3. What would be the costs associated with these new initiatives? Can you quantify
them?

4. What other ideas would you suggest to Havilah to further improve the timing of the
company’s cash flows?

5. What similar activities related to accounts receivable, accounts payable, and inventory
management would be relevant to your company?