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Liquidity shortages: Only a minority of companies have taken early action

"Zombie companies" could trigger domino effect

Liquidity shortages: Only a minority of German companies took early action in 2022 / "Zombie companies" could trigger domino effect

The multiple threats this year can overwhelm even robust companies. In the event of interest rate hikes, expiring state aid and further economic slowdown, a domino effect can arise from short-term insolvencies. Only a minority of companies have prepared for this since the beginning of the year with liquidity-oriented measures. One possible reason is that many problems were anticipated months ago – but not to the drastic extent that they are hitting the economy today. This is the result of the current Resilience Barometer 2022, in which the management consultancy FTI Consulting surveyed 3,314 decision-makers from companies in the G20 countries.

  • Almost one in five companies already under pressure at the start of the year
  • 24 percent have identified global energy shortages as a threat
  • One in three companies has already started optimizing cash flow management

"While they were recently almost forgotten again in the public debate, the so-called 'zombie companies' could cause great strain on national economies, especially Germany's, in the next few months," says Ralf Winzer, Member of the Board of FTI-Andersch, the consulting unit of FTI Consulting in Germany that specializes in restructuring, business transformation and transactions. "Zombie companies" are called companies that are unable to pay their interest from operating earnings for three consecutive years, according to the OECD.

"Lending has not only become demonstrably more expensive," says Ralf Winzer. "We are also seeing more restrictive lending on the part of financiers. Following a decline in insolvencies in recent quarters, this picture could change in the short term."

 

Energy prices and inflation were seen as major threats – though not by the majority

At the same time, companies have started 2022 on a rather cautious note. In the FTI Resilience Barometer 2022, just over half of companies worldwide stated they would grow again – in Germany, the figure was exactly 50 percent. Almost one in five German companies (17 percent) said they were already under pressure at the start of the year (worldwide: 7 percent). Thirty-nine percent of the companies surveyed said they were less profitable because of the pandemic.

Even before the Ukraine war, rising energy prices were the biggest concern of German companies: 37 percent had stated this. One quarter (24 percent) even had a global energy shortage on their mind. The same percentage had already classified inflation as a major issue rather than a temporary one at the beginning of the year. 13 percent named excessive government debt as a challenge.

Ralf Winzer says: "The figures make it clear that the problems, some of which are now drastic, were already named before the Ukraine war. However, by a minority of companies – no problem was identified by a majority. Accordingly, minorities in each case have also made early liquidity-oriented arrangements. In our observation, the majority of companies are actively trying to find a new modus vivendi after the pandemic – but in a much more complicated world situation."

 

Thinking outside the box

Thirty-one percent of the companies surveyed in the FTI Resilience Barometer have improved their cash flow management, while a quarter each have reduced capital expenditure, cut staff and divested non-core areas of the business. 24 percent have had to reduce their supply, while 21 percent have gained breathing room in servicing their liabilities.

"During the pandemic, some people had certainly hoped that everything would be easier again," says Ralf Winzer. "Those who did not believe this and decided to further adapt their own business and the processes behind it are at a distinct advantage in the current tense situation."

"Companies should pay particular attention to the extent to which they are acting as buyers or suppliers to severely distressed companies, the zombies," Winzer says. "The last few months have highlighted just how interdependent everyone is today in tightly networked supply chains. If a central supplier fails because it can no longer meet its payment obligations, the existence of several other companies in the same supply chain is often quickly threatened. We therefore recommend that companies and financiers not only look at their own companies in isolation, but also approach suppliers and customers now when they identify major problems and work out joint solutions. This is the only way to mitigate the risk of a major failure."

 

About the “FTI Resilience Barometer®”:

FTI Consulting surveyed 3,314 decision-makers worldwide from companies with annual sales of more than up to 3 billion US dollar about current trends and risks for their own business.

The full study can be found here: https://ftiresiliencebarometer.com/

 

About FTI-Andersch:

FTI-Andersch is a management consultancy that supports its clients in the development and implementation of sustainable future/performance and restructuring concepts. FTI-Andersch actively supports companies that have to deal with operational or financial challenges and change processes – or want to align their business model, organization and processes for the future at an early stage.

Our clients include, in particular, medium-sized companies and corporate groups that operate internationally. FTI-Andersch is part of the international FTI Consulting Group (NYSE: FCN) with more than 6,700 employees.