Cash is king as corporates tighten their belts

Ernst & Young research into 350 global companies reveals a challenging and rapidly changing business environment

An Ernst & Young report released today, “Opportunities in Adversity”, highlights how nearly 350 major global corporates are adapting their business strategies and key priorities in order to face the current international recession. As financial pressures increase and the slowdown intensifies how are leading international companies responding?

Cutting internal costs and freeing up cash
The starting point for any business is free cash and many global corporates have already tightened their belts. Nearly 40% of companies surveyed felt that there had been a significant deterioration in the business environment across their respective sectors with over a third noting a rise in bankruptcies and a withdrawal of competitors.
The drive to cut costs has already impacted internal business strategy. Over 80% of respondents have conducted a cost saving analysis, nearly two thirds had instigated a headcount reduction programme and over half had rationalised their IT spend. Other areas where savings were being sought were sales and marketing, operations and supply chain logistics.

The credit crunch has further forced companies to seek alternate ways of improving liquidity. Nearly half of the companies surveyed had disposed of or shut down non essential or non performing assets while 43% were considering alternate short term finance facilities. 23% were considering their options with respect to renegotiating existing debt covenants and proactively engaging with lenders, analysts and rating agencies.

Garen Walkerley, Director of Ernst & Young Transaction Advisory Services, said, “Although South Africa has not yet experienced the same level of fallout from the financial crisis as many of our foreign counterparts, various sectors of the economy such as the mining and motor industries, are really feeling the pinch. No sector is immune and it is likely that South Africa, along with the rest of the world, will be sailing turbulent financial seas for at least the greater part of 2009.

Internal cost cutting, layoffs and divestitures of non-core assets are likely to be a feature of many companies as they attempt to navigate the storm. “

Hitting customers and suppliers equally hard
Many of the companies surveyed have been keeping a close eye on both their customers and suppliers, and with good reason. Over half noted a deterioration in creditworthiness of customers together with a marked increase in cash collection periods.
Many companies have adapted their strategies to combat this phenomenon ,with nearly three quarters showing increased focus on key accounts. A third reported that fears about the stability of existing customers had resulted in a broadening of their customer base and/or a termination of contracts with customers perceived as high risk.
In terms of suppliers, respondents were split equally between two very different strategies. Half the companies surveyed have narrowed their supplier base in an attempt to leverage more favourable prices, while the other half have broadened their supplier base to reduce the impact of the failure of a key supplier. The majority of companies were communicating more proactively with suppliers and negotiating payment terms more frequently.

Walkerley says, “Despite the strain caused by the credit crunch, it is clear that the cogs of the global economy are grinding away and that corporates are taking proactive measures to both shield themselves from the worst of the recession and to ensure their survival and sustainability over the longer term.
Those that proactively manage their risks and are able to identify opportunities amidst the uncertainty are likely to achieve these objectives with a greater level of success than their competitors.”

Battening down the hatches
Companies were also questioned about their top strategic priorities over the next 12 months. The vast majority highlighted asset protection, performance improvement and internal restructuring. Among the performance improvement measures noted were top down reviews of cash management and cash flows, the incorporation of working capital measures into performance objectives and the possible divestment of non-core assets that can potentially be converted into cash.

And where will they be looking to save cash in the future?
In strategic terms, 40% of Global companies reported that they were actively considering the sale of non-core or non-performing assets, an increased use of shared services (27%) and outsourcing (31%), entering strategic alliances (30%) and moving operations to lower cost geographies (31%).

On the other hand, those corporates that are in slightly better shape, saw the recession as an opportunity to expand with 34% globally considering strategic acquisitions.
Walkerley adds, “The current landscape potentially presents those corporates who do have cash with the opportunity to make strategic acquisitions at bargain basement prices.

Against the backdrop of an economy where finance is largely unavailable on either the debt or capital markets, it is unlikely that there would be a ‘free for all’ when assets do become available creating and ideal buyers market for those with appetite and cash resources.”