KPMG Cyprus is introducing the “Cost Optimisation” concept to the Cyprus market as the best medicine for corporations to protect themselves from the negative effects of the global credit crisis now playing havoc with financial markets.
Cost optimisation is essentially a market-tested tool to manage costs now that these are rising and there is a squeeze on the sales side, Andreas Christofides, KPMG Managing Partner told the Financial Mirror.
What companies in Cyprus will notice soon is rising borrowing costs as banks raise their lending spreads and higher payroll expenses. On the other hand, service sector companies will see a squeeze on their sales, some directly related to the slowdown in the financial industry abroad.
“Company CEOs will need to revisit their costs,” Christofides said.
Unlike other cost-cutting exercises, which are mostly short lived and the gains achieved disappear after a while, the new cost optimisation concept designed by KPMG works to decrease the over-reliance on cost avoidance rather than cost efficiency.
“The response so far from corporations, especially the well organised ones is tremendous, as they are likely to benefit most from the cost optimisation concept that for the last six months has been rigorously checked and tested in Europe by KPMG.”
Christofides said KPMG Cyprus, having identified potential services sectors that will most likely require such a service, sent its people to Europe to enhance their training in order to be more effective when dealing with customers.
HOUSEHOLD SQUEEZE
Christofides believes individuals in Cyprus are more exposed to the risk of rising borrowing costs rather than corporations, but is quick to add that a likely belt tightening for individuals will mean lower consumer spending, which in turn will hurt businesses from all sectors.
“We did not experience major M&A deals financed with extreme debt. On the contrary, many Cyprus firms were bought out by foreign investors, especially those from Greece at rich valuations, which means not too many companies are overly exposed or leveraged.”
According to Christofides, even the property sector that is now experiencing a slowdown and lower prices is not likely to hurt the developers, as most of the them have been trimming exposure and cutting down on risk.
“The other area of major investments was in build-operate-transfer (BOT) deals, but here as well, the over-leverage is minimal since the debt is covered by a guaranteed flow of income,” said Christofides.
In the worst case scenario, where property prices dive and borrowing costs keep rising, then the number of problematic loans will increase, forcing commercial banks to increase doubtful debt provisions.
“Cyprus banks have lived through that before and this time are even better prepared to overcome possible short term effects from rising payment difficulties by extending the repayment periods,” says Christofides.
The spotlight thus returns to the medium to large corporations that need to proceed with steps to achieve cost efficiency in order to overcome possible short term effects from the credit crisis now playing havoc with financial institutions which were unprepared.
