Private companies and the financial crisisTo survive, companies should reduce risk and preserve cash |
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The impact of the current market turbulence extends far beyond that of publicly traded companies. Private companies are learning, often the hard way, that the global financial crisis affects them in numerous ways, from their cash positions to the availability of financing. Much like executives of public companies, owners and managers of privately held companies should take decisive action to reduce their risk, preserve cash and protect their businesses in today’s environment. While valuing equity and debt in publicly traded companies is a straightforward process — thanks to market transparency and clearly established regulatory guidelines — the view into privately held companies isn’t nearly as clear. The net result: many of them may not understand the true value of their assets, which can compromise their debt-equity ratios. "Private companies must proactively review all areas of their business. Aggressive due diligence around financial issues and a focus on key success drivers are critical in these economic times." Why does this matter so much now? Because the global financial crisis has simultaneously increased the cost of credit and constrained its availability. This tightening makes cash management — and preservation — much more critical. Owners of private companies must consider their financing needs and address them swiftly to avoid facing a cash crunch. Private companies are affected because their customers are affected Canadian companies that buy materials, products or services abroad may face interruptions as suppliers wrestle with economic challenges in their countries. Whatever the source, “business as usual” has become unusual in this environment, and Canadian private companies must tighten the reins. Reduce risk, control costs and preserve cash “Business discipline and internal controls are critical in this environment,” says Bryan Tannenbaum, leader of the Private Company Services group for Deloitte’s Financial Advisory practice. “While companies may not have paid attention to certain areas in the past, they must now proactively review all areas of their business. Aggressive due diligence around financial issues and a focus on key success drivers are critical in these economic times.” Tannenbaum says private companies should follow the lead of the public market by requiring periodic financial statements, such as cash-flow projections, aged accounts receivable and payable listings. Financial frameworks give leaders the timely information they need to spot any troubling trends and address potential issues before they become fatal. Controlling costs is also critical in this new environment. For instance, if disbursements aren’t necessary or protective, they shouldn’t be paid out. Cash remains king. Companies that maximize their cash positions and minimize debt are better protected than more highly leveraged firms. Don’t lose sight of the big picture It’s only a matter of time before the situation stabilizes. When it does, private companies that tighten their operational processes and actively seek acquisition-based growth opportunities stand a better chance of thriving than those that haven’t. Visibility drives agility, which in turn drives competitiveness. The opportunities are there for private company owners and managers who are willing to adapt the way they do business. |
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