Weak suppliers and clients can spell trouble for businesses: Ernst & Young
(Montréal – 6 April, 2011) 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 their competitors.
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 capital management
- Assisting them with seeking new financing alternatives to help improve their situation
- Advising them to work with professionals to salvage the viable business and get out from under excessive debt loads
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