Ernst&Young: 50% of all companies had disposed of or shut down parts of their business

Cash is king across the globe as corporates tighten their belts

Nearly 50% of the surveyed companies had disposed of or shut down parts of their business and 43% were looking at alternate short term finance facilities whilst 23% were considering options to renegotiate their debt covenants as well as proactively communicating with lenders, analysts and rating agencies are considering renegotiating debt covenants.

Barely a quarter of the surveyed said the availability of cash was not an issue.

“This is an important snap shot of global corporates already facing up to a credit crunch and thinking how to respond to a recession. But the business world has experienced serious downturns before and there are opportunities to learn from past crises. There will inevitably be losers over the next 12 months but equally there will be a significant minority of clear winners,” said Mark Otty (photo), Area Managing Partner of Ernst & Young EMEIA.

Cutting costs internally and freeing up cash

Nearly 40% of the companies surveyed felt that had been a significant deterioration in the business environment in their individual sectors with over a third noting competitors withdrawing and a rise in bankruptcies. More than two thirds have already implemented increased frequency of reporting risk to their boards.

The drive to cut costs has already impacted internal business strategy. Over 80% of respondents have already undertaken a major costs saving analysis, nearly two thirds had instigated a headcount reduction program and over half had rationalized their IT spending.

European companies were more likely than their US counterparts to look to cut costs on Real Estate and IT rather than cutting direct or indirect employee costs.

Hitting customers and suppliers equally hard

The companies surveyed have already been keeping a close eye on both their customers and their supply chain. And with good reason, as over half had seen a deterioration in creditworthiness of customers (nearly 60% in Europe) whilst over half said that some key customers are in distress, and that there was an increase in the time lag between customer order and cash collection.

Companies have adapted their strategies to fit with this new environment with nearly three quarters showing an increased focus on key accounts and over 40% developing new products. A third said that fears about existing customers meant they had broadened their customer basis and a third said they had terminated contracts with customers they 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 to obtain more favourable prices or terms whilst the other half have broadened the supplier base to reduce the impact of the failure of a key supplier.

The majority of companies are already communicating more proactively with suppliers, half were negotiating payment terms with suppliers more frequently and over a quarter of companies said key suppliers were experiencing financial distress.

“Now is not the time to for companies to be conservative or inactive. Research from previous recessions has shown that the companies who will emerge the strongest will be those that clearly identified opportunities to sustain their development during the downturn and that took strategic decisions that distinguished them from their competitors. A period or crisis can provide an opportunity to drive change more rapidly and effectively than a period of prosperity,” Christian Mouillon, Markets leader, Ernst & Young EMEIA commented.

Corporates battening down the hatches

Companies were also asked about their top strategic priorities over the next 12 months. The vast majority highlighted protecting assets, performance improvement and restructuring their business.

In terms of cash management two thirds of those surveyed were considering top down review of current cash management and of cash flows, half building working capital measures into performance objectives of management and 36% considering possible assets that can be turned into cash.

And where will they be looking to save cash in the future?

There were some fairly consistent messages around where companies will continue to look for savings.

Corporates said they expected significant or reasonable savings in their supply chain operations (58%), their sales and marketing (42%), operations (56%) and IT functions (43%).

In strategic terms 40% of Global companies and 53% of European ones said they were actively considering selling non-core or non-performing business, an increased use of shared services centre (27%), increased use of outsourcing (31%), making strategic alliances (30%) and moving operations to lower cost locations (31%). Companies particularly saw an increased role for outsourcing for their IT, Logistics and Human Resources.

However a reasonable proportion of corporates saw the recession as an opportunity to expand with 34% globally and 38% in Europe thinking of making strategic acquisitions.

“Whether companies are looking to sell parts of their businesses to raise cash to help through a difficult period or are they are actively looking to buy distressed assets from their competitors the same basic rules apply. Be prepared, be flexible, think the unthinkable and take decisive action,” said Dave Read, EMEIA Transaction Advisory Services Leader.

Emerging markets and growth

Whilst most developed markets were either perceived as stagnant or in decline companies still saw major opportunities in emerging markets. China (59%), India (45%), South East Asia (26%) and Eastern Europe (31%) were the areas of the world that most global companies believed would have the best growth opportunities. US companies tended to favour South East Asia over India whilst for European companies the reverse was true.

Some 18% of companies expect significant growth still in emerging markets in the near future; the majority (57%) expect growth to continue but a slower pace than over the last two years and 25% growth to slow significantly.

“Having observed that the economic power has been moving from developed to emerging economies, from West to East and from North to South, a number of countries in Central and Southeast Europe have demonstrated the potential of driving growth and making their presence known in the global market. Regardless of the extent of the crisis, businesses will be keen to look for opportunities offering greater exposure to these markets”, said Christos Glavanis, Managing Partner of Ernst & Young Central and Southeast Europe.