Fundamental solutions of crisis prevention: Why do cost reduction efforts fail?

The current economic crisis is unlike earlier downturns in that it has been neither quick in arriving nor consistent in its impact.

The financial services crash has spilled over the wider economy in different ways and at different times. No market is safe and no position secure. In this quickly changing economic environment, every business needs to continuously assess the potential impact of market conditions on the performance of its operations.

In an Ernst & Young survey of over 300 C-suite executives globally in January 2009 78% of respondents saw their companies placing increasing importance on protecting their assets.

Nearly 75% of respondents are finding ways to maintain liquidity in the current environment and 68% have implemented a top-down review of current cash management and cash flows.

According to Ernst&Young, companies need to secure their positions by identifying and resolving quickly critical issues to protect against value erosion, or to be well placed to take advantage of opportunities. A holistic review of a company’s ability to access liquidity, manage and release cash and control costs is essential to managing overall risk from changes in market forces. This review should extend beyond the business to include the health of both its supplier and customer base.

Each company must be aware and act upon warning signals such as profit warnings, breached debt covenants, major customers seeking alternative sourcing, unexpected boardroom departures or challenges retaining senior staff or a sharp increase in staff turnover.

Critical actions to focus on:

1. disposing of assets;
2. securing access to liquidity;
3. implementing cost reduction measures;
4. reviewing relationships with customers and suppliers
5. preparing for potential bids for the business;
6. managing cash effectively.