Securing your present

Opportunities in adversity
In the wake of the worst global economic
and financial crisis of recent history, cash
management and release have risen to the top
of corporate agendas.
Diligent companies seeking to strengthen
balance sheets and maximize flexibility and
strategic options are scrutinizing balance sheets
and actively seeking out ways to release cash.
While markets remain fragile and uncertain,
a focus on cash protection is the safest way
companies can secure their present.

Securing your present: Opportunities in adversity

Overview
Cash is still king In the past six months, companies have moved swiftly to enact
cost reduction and restructuring measures. In a separate survey
Despite significant efforts from governments around the world to
of European chief financial officers (CFOs), only 6% said that
stimulate the economy and loosen the flow of cash and credit,
“securing the present” will be of lesser importance in six months
conditions in many major markets around the world remain
time. Cash preservation and generation issues continue to
tenuous. There are some recent indications that suggest the initial
dominate the time, focus and energies of CFOs and corporate
tightening in capital markets has given way to a resurgence in
management teams.
liquidity, primarily driven by government support and large
corporate bonds and rights issues. However, early hopes of a
recovery are not strong and the trends point to a fragile and Stress pendulum
uncertain environment throughout 2009. Many companies are still
grappling with how to secure their finances and operations and Cash flow Cash burn
monitor the security of their supply chains and customer bases.
nit ies
ortu Cou
opp rt supe
Changing focus on business activities ion

lvent
uisit n Ca rvis
ion
Acq tio pit
za a l re
ti mi Bu

Inso
sin str
o op u
ctu
74% o li es
ty rin

Stake
rtf su
nt

ili g
Po b
me

Securing the survival ta ent ni

Su

tc
rs
ss

of the present business lo

h
ie
cce

Ass
se

nagem

su
pl

older
re

Di
as

tal

p
Su

et i
ss

ve
65%
re

19%
api

sti
Cost reduction
et

Taking advantage of the

d
mana
ity ma
gc

tu

se
rk

pai

re
Ma

situation to pursue new

es
rkin

rm

tr
gem s
market opportunities Di
Liquid

ent
Wo

30%
ent

Do
wn
turn
d
January 2009 June 2009 Stresse

Source: Ernst & Young/EIU surveys conducted in January 2009 and June 2009
Shown: percentage increase
The priorities remain the same — a company’s ability to access
liquidity, manage and release cash and maintain cost controls is
essential to reducing overall risk from changes in market forces —
but the focus has become even more laser-like.

In January 2009, we surveyed over 300 senior, C-level executives

globally, and nearly three-quarters of respondents had increased
their focus on securing the survival of the present business.
That percentage has decreased somewhat in a more recent poll
conducted with 569 executives in June, with more companies
considering how to capitalize on new market opportunities.
However, the focus on cash is intensified in both these scenarios,
and that is irrespective of a company’s position on the stress
pendulum (see right). Many discussions with clients in recent
months have focused on cash as the pressure on management
has intensified. Our respondents agree: the number reporting that
cash is not an issue has declined from 26% to 18%.

Securing your present: Opportunities in adversity 1

Controlling cash
Why forecast cash? Which of the following cash management actions is your
company currently taking?
In today’s challenging times, effective cash flow forecasting can
increase a company’s ability to survive. CFOs are increasingly
relying on operating cash flow as a source of capital. In January, Top-down review of current cash
73
68% of respondents were undertaking top-down reviews of cash management and of cash flows
68
management and cash flow. That percentage has increased to 73% Considering possible assets that
32
in our June poll. can be turned into cash
36
24
Making an emergency plan
for additional cash release
Improve operational Agreeing an approach for 21
28

investing excess cash

performance. Strengthen (e.g., bonds, securities, etc.) 18

business management. Drive June 2009

cultural change. Enhance January 2009

Source: Ernst & Young Opportunities in adversity, June 2009.

external perception. Shown: percentage of respondents.

Cash flow forecasting provides real-time feedback on business

performance and supports scenario planning. This allows
management teams to make better informed decisions. Short-term
cash flow forecasting provides management teams with visibility
Key questions to consider
on immediate cash needs and early warning of emerging issues.
Cash flow forecasts are also used to proactively manage cash
improvements, enabling managements to identify appropriate cash
levers to pull.
Utilizing a robust forecasting process can create a “cash culture” in
a business. De-centralizing ownership and responsibility for cash,
and improving cash awareness through internal procedures and
policies, drives an increase in internal accountability and
responsibility.
These actions can result in enhanced public perception. Targeting
cash delivery ensures financial commitments and investor
expectations are met. Shareholders are confident in management’s
ability to manage and forecast cash. Analysts, who are increasingly
considering cash performance when setting valuation guidance,
can more accurately evaluate the company.
• Is cash tracked and planned short-, mid- and long-term?
Is there an emergency plan for additional cash release?
• Has there been any increase in cash consumption by
divisions or subsidiaries?
• Are the key performance indicators used to assess
short-term visibility in trading and cash flow performance
regularly monitored?
• Does the company forecast cash on a rolling weekly
basis? What is its forecasting accuracy? Is there a
detailed variance analysis?
• Are management incentives linked to meeting cash
forecasts/targets?

2 Securing your present: Opportunities in adversity

Managing debt What step is your company taking to maintain liquidity?

There is no question that businesses needing to refinance debt

facilities in the next 18 months will face major challenges as 62
Top-down review of current cash
lenders seek to reduce risk and improve margins. In our January management and of cash flows Not asked
2009 survey, 23% of respondents were considering options to Considering alternate sources 35
of liquidity (e. g. disposal of assets,
renegotiate debt covenants. That percentage has crept up to 28% shut down or sale of
segments/revenue streams) 43
in our latest poll. 34
Communicating with lenders, analysts
and rating agencies proactively
In the UK alone, loans raised by non-financial businesses in the first 29
Making an inventory of all 30
two months of 2009 fell 87% compared with the first two months debt covenants and monitoring
of 2008 1. Global capital markets lack liquidity and historic debt/ covenant compliance 35
29
leverage levels are no longer sustainable. Rapid falls in EBITDA Obtaining access to short-term
finance facilities/credit
(earnings before interest, taxes, depreciation and amortization) 33
25
and working capital issues are leading to covenant breaches in Considering options to
renegotiate debt covenants
credit agreements. 23
16
None of the above,
Consequently, companies are being forced to deleverage and cash is not an issue
26
restructure. Businesses requiring financial restructuring advice can
be at various stages in the underperformance curve, from stable,
June 2009
profitable and cash generative businesses requiring only
January 2009
refinancing advice, through to those more challenged businesses
requiring additional funding while a turnaround plan is put in place. Source: Ernst & Young/EIU surveys conducted in January 2009 and June 2009.
For distressed businesses, it is imperative for management teams Shown: percentage of respondents.

to identify the cash needs of the business, identify and realize cash
opportunities, drive short term costs out of the business and
develop a longer-term turnaround plan.
Once stabilized, companies need to develop stakeholder proposals,
including a robust business plan which is capable of standing up to
independent scrutiny and a credible financial restructuring plan
which addresses the issues of both the company and its
stakeholders. Increasingly, companies are recognizing the need to
communicate proactively with lenders, analysts and rating
agencies – 35% of respondents in June, compared with 29% in
January.

1. Source: Bank of England.

Securing your present: Opportunities in adversity 3

Guarding against business disruptions – know
your suppliers and customers
More and more companies are focusing on the health of both their
suppliers and customers. Unfortunately, the current levels of
financial turmoil are outside the parameters of most risk models.
Coupled with the rise of complex, integrated supply chains and
customer networks, the consequences of troubled suppliers and
customers can be severe for a company.
Thirteen percent of the executives surveyed had lost key suppliers
to bankruptcy, a 44% increase from January. Thirty-five percent
were broadening their supplier base to reduce the impact of a
failed supplier. The risk of these losses is more critical in some
sectors than in others. Automotive (35%) and real estate and
construction (25%) are hit hardest, with technology (6%) and
financial services (7%) relatively unscathed. Gaining an
understanding of the stability of your supply chain will help you
take the appropriate actions for your company.
Three essential elements for supplier stability
A stable supply chain can mean a competitive advantage in a
volatile economy. While historically, supply chain monitoring
focused on suppliers’ operations, in today’s environment, being
able to identify suppliers experiencing financial pressure has never
been more crucial. Financial difficulties can overwhelm suppliers in
weeks or even days. Existing approaches to risk and contingency
may no longer be sufficient in the current environment. It is critical
that companies take a fresh look at the nature of this risk within
their business along with their ability to monitor and respond in a
pre-emptive fashion.
Prudent executives have taken note of the rising number of failed
suppliers, and are initiating actions to assess and mitigate potential
near-term supply risks. Leading practices in supply chain stability
focus on three phases.
Three key elements for supplier stability
Early warning Troubled supplier Distressed
screening system risk assessment supplier advisory
4 Securing your present: Opportunities in adversity
First, an early warning screening system can help identify potential
risks to the supply chain. These systems segment a company’s
suppliers, identifying those most critical to success, and use a
combination of financial, commercial and operational metrics to
identify suppliers that pose a risk to operations. Teams establish
criteria to identify critical suppliers and tolerance levels indicating
the need to flag troubled suppliers.
Next, companies need to respond to these troubled suppliers
before the situation worsens. This means a more robust analysis.
Companies need detailed risk assessments, risk mitigation and
contingency planning in this phase. Audit provisions in supply or
purchase contracts should be leveraged. If these don’t exist,
information can be requested from suppliers. Suppliers which
refuse to provide insight into their companies can be seen as hiding
something.
Finally, managing distressed suppliers takes even greater flexibility
and creativity. Solutions are not always in line with conventional
thinking here and, for strategic suppliers or those with unique
goods, supply chain expertise alone may not be sufficient. At this
stage of the game, advisors with restructuring, bankruptcy,
acquisitions, integration and related transaction skills are needed
to help develop creative strategies.
Customer focus
In January 2009, 24% of respondents had already seen key
customers suffer bankruptcy, and the majority were experiencing
customers in distress, with deteriorating creditworthiness and
delayed payment on their orders. While the percentage of
respondents with key customers in bankruptcy has decreased,
companies are still concerned about the health of customers and
distribution networks. The financial crisis has clearly affected how
companies manage their approach to customers. Sixty-eight
percent of those surveyed had increased their focus on key
accounts. Nearly one-third of respondents indicated that they were
broadening their customer base – either by entering new market
segments or new geographic markets.
We expect to see a continued tight focus on customers and
suppliers – with more companies expecting to emerge from current
economic challenges to begin focusing on new market
opportunities.
Generating cash
Working your working capital
Companies continue to view working capital as a significant source
of untapped liquidity. Results from Ernst & Young’s annual working
capital management report for 2009, All tied up 2, do show that
companies have been taking more rigorous steps to drive cash and
cost out of working capital. More and more CFOs indicate that their
companies are implementing working capital optimization
initiatives. Forty-four percent of respondents to our survey had
built working capital measures into the performance objectives of
management. All of this signifies a mounting importance to the
success of effective working capital initiatives.
Yet, our annual working capital analysis has identified up to
US$1 trillion in working capital unnecessarily tied up in 2000
leading companies in Europe and the US. This equates to 6% of
total sales and an average of US$500million that can be potentially
released 2. A disciplined approach to managing account receivables,
inventory and account payables can free up much-needed cash.
Companies with a structured approach to working capital can often
achieve liquidity of up to 5% of annual sales.
The biggest challenge to the success of working capital programs is
implementation. To help enable implementation, there are a
number of key factors. Changes to working capital and cash
management should be sustainable and not focused on short-term
fixes. Working capital needs to be important to management and
the benefits communicated to the business — as mentioned earlier,
more executives recognize this and are building working capital
measures into the performance objectives of management. Cash
and working capital objectives should also be integrated into other
priorities of the business, with early engagement of business units
to help embed the changes. Finally, initiatives should be measured
and outcomes reported.
Companies can no longer afford to overlook working capital
management. It is a relatively easy and cheap way to release cash
that can secure a company’s current financial health, and could
provide the flexibility needed to capture unexpected opportunities —
positioning the company for strength in the future.
2. All tied up — Working capital management report 2009, Ernst & Young LLP, June 2009.
Securing your present: Opportunities in adversity
An effective working capital management strategy
focuses on a set of actions that offer the best
opportunities:
1. Appropriately incent management to improve cash
performance
2. Effectively manage payment terms for customers and
suppliers (with terms and conditions appropriate to the
current environment)
3. Improve speed and accuracy of billing and cash
collections and deal with disputes effectively
4. Use data captured for disputes to eradicate the root
cause
5. Increase billing frequency (noting, however, the extra
costs associated with this) and use of e-billing
6. Develop an agile supply chain that can be more
responsive to changing market conditions
7. Build greater linkage and closer collaboration among the
various participants of the working capital value chain
internally and externally focused around sharing of
demand signals and planned response down the chain
8. Maintain metrics that monitor the financial health of
customers and suppliers
9. Identify the key drivers of working capital consumption
and focus on improving them (forecast error, lead-times,
minimum lot sizes, supply variability, capacity
constraints, speed and accuracy of billing, customer
segmentation and appropriate collection strategies)
10. Identify, understand and quantify the trade-offs that need
to be made (e.g., order fill rates or inventory levels, early
payment discounts or longer payment for payables
optimization, larger batch sizes or inventory levels)
5
Uncovering cash in tax
Many businesses are including a review of their tax strategies to
reduce expenses and uncover cash. Cash savings may be achieved
through planning. Profit forecasts may be deteriorating and tax
installments previously made may now be overstated. Changes in
local, domestic and international tax policies can provide
opportunities for savings as well.
Recent fiscal stimulus packages include significant tax measures —
in fact, tax measures comprise a larger share of the overall
packages compared with spending measures. According to a recent
report from the Organisation for Economic Co-operation and
Development 3, tax measures represent 56% of the net effect of
fiscal stimulus as an average among OECD countries. A recent
Ernst & Young tax report, Worldwide fiscal stimulus – tax policy
plays a major role, focuses on the tax-related fiscal stimulus
measures in 24 jurisdictions where we are seeing particularly
robust stimulus activity. The report identifies themes that are
emerging as governments increasingly rely on their tax systems to
administer stimulus.
This tax-based approach to fiscal stimulus has included a wide
range of measures in categories such as:
• Accelerated depreciation programs
• Carryforward and carryback provisions for net operating losses
• Adjustments to corporate income tax rates
• Enhancements to research and development tax credits
• Indirect tax changes
• Tax measures affecting individuals
Cash tax
Assess Create
threats and additional
Reduce your
tax expenses
opportunities cash flow
3. Economic Outlook report, Organisation for Economic Co-operation and Development,
31 March 2009.
6 Securing your present: Opportunities in adversity
Key questions to consider
• What are you doing to monetize tax losses, optimize tax
credits, accelerate tax refunds and defer tax payments?
• What are you doing to manage your global tax liability and
facilitate cash repatriation to service your debt?
• What reviews have you put in place to ensure you are properly
computing your net operating loss utilization limitations?
• What are you doing to assess the tax efficiency of your
supply chain?
• What are you doing to address your corporate tax liability?
Employee tax liabilities?
• What type of strategies are you considering to reduce your
cash taxes in upcoming years?
• What are you doing to take advantage of some of the
opportunities offered in stimulus packages?
• What are you doing to optimize the productivity of your tax
department?
• What are you doing to prepare for future controversy and
audit management activities?
Review the company’s tax position
More and more companies are quickly developing an intense focus
on the part that tax can play in cost-reduction and how tax can
generate cash savings for the enterprise. As one of the largest
items on income statements, an effective tax strategy can have a
direct impact on EBITDA.
The range of cash tax savings that can be unlocked is extremely
varied and spans domestic tax planning (capital asset reviews, for
example), indirect tax issues, international tax issues, such as
transfer pricing, and many other areas of tax. Some of the figures
Protect your associated with these activities are significant — hence the link with
tax assets
EBITDA. In some cases, companies can achieve cash flow savings
of anywhere between US$100 million and US$600 million from
actions such as fixed asset reviews or look backs across local taxes.
An intense focus on cash taxes would be understandable during
any period of downturn in economic activity, but is even more
critical in the short term, because of the stimulus measures that
governments around the world are putting in place. These
measures have a defined timeline, though, with the majority of
measures designed to be temporary in nature.
Divesting in turbulent times – accelerated
10 golden rules for successful divestments in a downturn 4
divestments
1. Enable faster and more considered decision-making,
As a result of the current economic crisis, many companies are
through regular portfolio evaluation,
considering divestments as a strategy to generate cash in the short
2. Define the trade-off between time and deal value,
to medium term. In a global survey of 350 transaction leaders on
3. Customize the business case for each potential buyer,
divestment strategy, preparation and execution, more than half of
the respondents (53%) confirmed that recent economic events 4. Consider the role you may need to play in the buyer’s
make them more likely to consider divestments 4. financing,
5. Pursue multiple divestment options in parallel,
In order to secure their future or to take advantage of unexpected
6. Be aware that traditional financial due diligence may no
opportunities, companies need to be prepared to divest non-core
longer be sufficient,
or underperforming assets quickly. Managing a successful
7. Assume that sale processes will no longer be structured,
divestiture is demanding and complex. As companies move from a
strong cash position to one of cash burn, the focus shifts from 8. Deliver timely, regular communication to all stakeholders,
value to speed, and sellers have fewer choices. 9. Develop a detailed roadmap to guide operational
separation,
Accelerated disposals typically occur in situations where the
10. Strive to prevent material value shifts occurring during
underlying business is fundamentally strong, but the company
closing and post-closing.
needs to raise funds due to exceptional circumstances or to rapidly
dispose of an underperforming asset.

How do you balance the need to sell quickly with the accelerated
Principles for divesting timeframes and multiple challenges of today’s M&A market? The
scope of what gets addressed flexes to suit the situation, but the
areas that are imperative to cover are funding, robustness of
financials, the perimeter of the asset and structure of the deal,
current trading levels, potential balance sheet exposures and the
Control
impact of recent events on the business. The time available, access
• Over the business to management and buyers’ needs will dictate how other areas
being sold
• The divestiture process such as the business plan, a recession case assessment and
• Reduce uncertainty commercial and operational issues can be tackled.
• Release of deal-sensitive
information The need to move quickly does not change the basic principles of
divesting. In an accelerated process, ultimately, the seller’s focus
Value Speed must remain on maximizing value, retaining control and mitigating
• Identifying • To market risk.
• Preserving • To close
• Communicating • Reputation/credibility
• Maximizing

4. Divesting in turbulent times: achieving value in a buyer’s market,

Ernst & Young, March 2009.

Mitigating risk
• Liquidity risk
• Business risk

Securing your present: Opportunities in adversity 7

Continuing cost reduction and management Chart 1
Perceived opportunities for cost reduction
Companies were quick to implement cost reduction initiatives when
the downturn first hit. Eighty-six per cent of respondents in June 59
Operations
had accelerated cost reduction initiatives in the past 12 months. 56
Most areas have been open for review — with significant 48
Supply chain
opportunities for cost reductions identified from supply chain to 58
operations to sustainability programs. That is still the case today 47
Sales and marketing
with respondents to our June survey indicating that there were still 42
many perceived opportunities for cost reduction (see chart 1). 43
Information technology
A majority indicated that real estate and IT were areas where cost 42
reduction targets had not been achieved effectively, highlighting 34
Sustainability programs
additional opportunity for rationalization in these areas (see 27
chart 2). 33
Mergers and acquisitions
A key challenge when significant cost cuts are needed is to ensure 34
31
that reductions are consistent with the strategic direction of the Research and development
business and will not cause further value erosion. Another is to 33
22
measure effectiveness and ensure that the instituted programs Real estate
Not asked
deliver the expected benefits.
Previous Ernst & Young studies on cost reduction found that many June 2009
cost reduction programs do not deliver stated benefits, nor are January 2009
they able to sustain their benefits — primarily due to a lack of
effective measurement. Source: Ernst & Young Opportunities in adversity, June 2009.

Understanding what cost reductions need to be made, how quickly

Chart 2
they can be implemented, what the payback period is, and how
How effective have companies been in achieving cost reduction
long they can be sustained are all part of a well-managed program
targets?
that can respond to changing conditions and accurately report
improvements. Without this, stressed businesses could find 22% 45% 25% 7% 1%
themselves even more vulnerable to rapid market movements. Overall cost savings
17% 34% 35% 11% 3%
Headcount change

10% 37% 35% 13% 5%

Employee benefits rationalization

9% 22% 44% 17% 8%

Real estate rationalization

9% 41% 37% 9% 4%
Internal control rationalization

8% 40% 40% 9% 3%
Supply chain effectiveness

8% 25% 43% 16% 8%

IT rationalization

Very effective Not at all effective

Source: Ernst & Young Opportunities in adversity, June 2009.

8 Securing your present: Opportunities in adversity

Accelerating the change
Today’s ever-changing environment is not for the faint of heart. To
secure the present, it is imperative to focus on cash — managing it
tightly and uncovering ways to release it. Accurate and robust cash
flow forecasts, debt and financial restructuring, supplier stability
procedures and customer reviews will keep cash under control.
Pulling internal “levers”, such as working capital, accelerated
divestments and tax, can generate much-needed cash.
Act with speed, but proceed with caution. Rapid fluctuations in the
market can mean adversity for many, but also opportunity for
some.

Securing your present: Opportunities in adversity 9

How can Ernst & Young help?
Ernst & Young helps businesses balance their short-term needs
while engaging with the future and focusing on taking advantage of
opportunities in the market.
1. Dedicated restructuring team which can protect value
for stakeholders in a stressed situation. Our practical
advice to stabilize and improve cash flow management
helps delivers tangible results. Our experience working for
banks also provides insights on stakeholder positions and
how to negotiate to achieve the right solution.
2. Global expertise, depth of experience and hands-on
approach to provide results-driven working capital
management. The proven market leader, our work with
large multinational companies regularly identifies working
capital improvement opportunities.
3. Strong relationships with a wide variety of banks,
asset-based lenders, private equity investors and other
potential funders that enable us to help the business
develop an appropriate financial platform meeting cash
requirements.
4. A team of experienced professionals delivering hands-
on support, with insight into the range and structures of
funding available to companies.
10 Securing your present: Opportunities in adversity
5. Well-established global procurement and restructuring
teams that have been actively involved in advising our
clients on supplier stability.
6. Experienced due diligence and financial valuation
resources (including sell-side due diligence reporting and
buy-side diligence for private equity and corporate
clients), to identify and address topics that may not be
considered by management.
7. Integrated approaches drawing on a range of services
including restructuring, M&A, tax, real estate, advisory,
valuation and human capital services. Experienced in
running a sale process alongside the contingency
planning and cash management vital to enhancing value.
8. Significant experience in helping clients involved in
strategic change to validate, select and implement the
appropriate exit option for their non-core activities.
9. Proven credentials in assisting companies with strategic
and accelerated divestments to protect and enhance
shareholder value.
10. Effective cash tax management strategies across the
planning, provision, compliance and controversy stages of
the tax life cycle.
Securing your present: Opportunities in adversity 11
About this report
For this study, the Economist Intelligence Unit surveyed 569 C-suite and board level executives.
Respondents were drawn from across the world and across industry sectors. Over half the executives polled worked
for companies with an annual global revenue in excess of US$1 billion. The research was carried out in June 2009.
Responses are rounded to the nearest percentage.

In which region are you personally located? What are your company’s annual global revenues ?
(number of respondents) (number of respondents - in US dollars)

Western Europe 29% 27%

$10bn or more

Asia Pacific 27% 10%

$5bn to $10bn
24% 21%
North America $1bn to $5bn
11% 18%
Middle East and Africa $500m to $1bn
6% 24%
Latin America $100m to $500m

Eastern Europe 3%

What is your primary industry? What is your job title?

(number of respondents) (number of respondents)

22%
Banking and capital markets 9% Senior manager
18%
Manufacturing 9% CFO/Treasurer/Controller

9% SVP/VP/Director 16%
Technology
8% 12%
Consumer products Head of department

8% 7%
Power, utilities, oil and gas CEO/President/Managing director

7% 5%
Telecommunications CIO/Technology director
5%
Media and entertainment 6% Other C-level executive
5%
Asset management 5% Head of business unit
3%
Life sciences 5% Board member
1%
Government and public sector 5% Chief sustainability officer

5% 1%
Mining and metals Corporate development officer
5%
5% Other
Automotive
5%
Real estate

Insurance 4%

3%
Retail and wholesale
3%
Transportation

Agriculture and agribusiness 1%

Professional services 1%
2%
Other

12 Securing your present Opportunities in adversity

Ernst & Young

Assurance | Tax | Transactions | Advisory

About Ernst & Young

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© 2009 EYGM Limited.

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