a. Capital risk management

The company manages its capital to ensure that the company will be able to continue as a going concern while maximising the return to stakeholders through the optimisation of debt and equity. The overall strategy remains unchanged from the previous year.

The capital structure of the company consists of debt (refer note 12 and 13) and equity attributable to equity holders of Barloworld Limited, comprising issued capital (note 11), reserves and retained earnings (statement of changes in equity).

A finance committee consisting of senior executives of the company meets on a regular basis to review the capital structure based on the cost of capital and the risks associated with each class of capital, analyse currency and interest rate exposure and to re-evaluate treasury management strategies in the context of the most recent economic conditions and forecasts.

b. Market risk

i) Currency risk
The company is not exposed to any significant currency risk.

ii) Interest rate risk
The company manages the exposure to interest rate risk by maintaining a balance between fixed and floating rate borrowings. The interest rate characteristics of new borrowings and the refinancing of existing borrowings are structured according to expected movements in interest rates. There has been no change in the current year to this approach.

Interest rate sensitivity analysis

A change in interest rates by 1% would result in a change in profit or loss of R51 million (2019: 1%: R50 million).

There has been no change during the current year in the company’s approach to managing other price risk.

c. Credit risk

The potential area of credit risk is short-term cash investments, equity loans and inter group loans. It is company policy to deposit short-term cash investments with major banks and financial institutions with strong credit ratings. No collateral is held.

Each of the above operating segments has credit terms appropriate for their industry. Credit risk on vehicles supplied to external dealerships is generally secured by a dealer floorplan with a bank, who settle within the credit terms. The average credit period on these sales ranges from 30 to 90 days. When dealing with sales to external retail, construction or mining customers, full settlement or confirmation of financing from a respected financial institution is required before delivery. These measures minimise the credit risk. Credit risk exposures to customers for parts, services, maintenance and repair contracts and vehicle rental and are managed by monthly review of trade receivables ageing. The risk is mitigated by stringent background checks and credit limits for all customers, continuous review of credit limits, as well as legal action against defaulting customers. The average credit period on these sales is 30 days, however, extended credit terms may be negotiated during the account application process. It is group policy to deposit cash with major banks and financial institutions with strong credit ratings.

Each of the above operating segments use forward looking information utilised in the expected credit loss models.

The following forward looking information was utilised to estimate the expected credit loss:

• The geography and industry in which the customers operate, sales to entities based in South Africa as well as sales related to part and services are considered riskier.
• Period overdue and time taken to settle underlying receivables, the older accounts are considered a higher risk.
• Past default experiences of the operating segments, examples include the Financial Services operations, which have a very low default experience.

By the subsidiaries managing their credit risk the company therefore minimizes its risk of default of the above financial assets. Therefore there are no expected credit losses raised on any financial assets as there is no history of credit losses in any of the group’s subsidiary companies.

d. Liquidity risk

Liquidity risk arises when the company cannot meet its contractual cash outflows as they fall due and payable. The company is mainly funded through the treasury department in Barloworld South Africa and dividends received by subsidiaries. Liquidity risk is monitored through forecast cash flows, maintaining a balance between long term and short term debt and ensuring that adequate unutilised borrowing facilities are maintained.

There has been no change to this approach in the current year.

Maturity profile of financial liabilities
The maturity profile of the financial instruments is summarised as follows (based on contractual undiscounted cash flows):

There are no expected credit losses raised on any of the financial guarantees as there is no history of credit losses in any of the group’s subsidiary companies.