Businesses must be wary of companies that relied on cost-cutting to
survive the recession
MONTREAL, April 6 /CNW Telbec/ - Businesses that are back on track after
the recession still face potential risks when dealing with clients and
suppliers that didn't fare as well post-crisis, cautions Ernst & Young.
"Many businesses relied on cost-cutting as their key method for getting
through the economic downturn," says Deborah Conroy, Transaction
Advisory Services Leader at Ernst & Young in Montreal. "But those
companies will now find themselves at a significant competitive
disadvantage compared with those that survived through creative
strategies. Weak suppliers and clients could hurt even robust
organizations that do business with them."
Businesses that deal with weak companies face risks such as disruptions
to their supply chain and liquidity issues. That's why it's important
for organizations to look out for key signs indicating that their
business partners are experiencing challenges. Some of these signs
include consistently maxing out or exceeding existing financial
availability, poor cash management, high employee turnover rates,
delays in producing financial information or an unusual reluctance to
share business information. These signs warn of troubles ranging from
weak management to a need for an overall restructuring.
"While none of these potential indicators is catastrophic on its own,
they are signals that an organization is experiencing difficulties,"
says Martin Rosenthal, Transaction Advisory Services Partner at Ernst &
Young. "Companies that cost-cut their way out of the recession have
likely exhausted their reserves. Businesses that come across these
signs in their clients and suppliers must carefully review whether they
are adequately addressing and reacting to these risks."
In addition to these well-recognized signs of challenges, increased
globalization means businesses must also look at significant changes in
international markets, and any possible impact that such changes can
have on their clients. For example, the strengthening Canadian dollar
compared with the US dollar may considerably affect manufacturers,
importers and exporters.
Businesses should also pay attention to clients and suppliers that
recently underwent workforce or salary reductions. These cost-cutting
tactics can expose companies to more instances of employee fraud if
adequate controls are not implemented. As well, failure to invest in
new technology or upgrade existing systems can leave more and more
companies vulnerable. As technology advances, organizations that are
unwilling to adopt modern methods of doing business risk falling behind
Leaders who suspect their clients or suppliers are experiencing
challenges can still make the most of the situation. Possible win-win
options include the following:
Helping them understand the long-term cost savings of efficient cash and
Assisting them with seeking new financing alternatives to help improve
Advising them to work with professionals to salvage the viable business
and get out from under excessive debt loads
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