The Cypriot business landscape has long faced deep-rooted challenges that hinder sustainable growth and profitability. Despite the resilience of many enterprises, critical structural issues need to be addressed for these businesses to boom in the modern global market. In this article, we explore Cypriot companies' most pressing problems and offer actionable solutions to ensure long-term financial stability and success.
The Key Challenges:
Liquidity Crunch
One of the primary issues plaguing Cypriot businesses is the liquidity problem. Many companies are burdened with disproportionately high debtors in relation to their sales. This forces them to rely on short-term borrowing solutions such as bank current accounts and loans, leading to higher interest costs and diminishing profitability. The root cause lies in poor receivables management and over-reliance on external funding to cover operational gaps.
Insufficiency of Own Funds
A significant number of large enterprises in Cyprus lack equity capital. The issue stems from low initial contributions by shareholders and frequent withdrawals of profits for personal consumption or non-productive investments. This creates a fragile capital structure, where companies operate without sufficient buffers to weather financial downturns or invest in growth opportunities.
Over-Lending and Excessive Borrowing
Many companies' overdependence on foreign loans has resulted in unsustainable debt levels. Relying on short-term borrowing to finance long-term needs has exacerbated liquidity issues, making it difficult for businesses to service their liabilities effectively. High-interest payments further strain profitability, pushing companies into a vicious cycle of financial instability.
Low Profitability
Many Cypriot businesses continue to struggle with low or negative profitability. Improper operating cost management, inefficient inventory control, and high financing costs due to over-borrowing are key contributors. In addition, a significant portion of funds is directed toward non-productive investments, which hampers long-term growth prospects.
Moving Toward Financial Stability
Addressing these issues requires a two-pronged approach: improving capital adequacy and enhancing operational management. By adopting the following measures, Cypriot businesses can build resilience and ensure sustainable growth.
Capital Increase from Own Resources
Companies must prioritize building a stronger equity base through reinvestment of profits. This includes restoring withdrawn funds and refraining from excessive withdrawals for non-business-related purposes.
Emphasizing Liquidity Management
Improving liquidity requires better management of trade debtors and inventories. By adopting advanced accounting systems, companies can improve cash flow monitoring, optimize stock levels, and reduce the reliance on short-term borrowing. Investing in technology to streamline financial management is essential for boosting efficiency and reducing operational costs.
Rationalization through Mergers and Acquisitions
Consolidating the market by encouraging mergers and acquisitions can improve profitability and strengthen financial structures. By pooling resources, companies can achieve economies of scale, better manage risks, and compete more effectively globally.
Appointing Competent Financial Controllers
Enhancing financial oversight is critical to improving profitability and reducing risk. Businesses should invest in hiring skilled financial controllers and general managers who can provide strategic guidance and ensure that management accounts are regularly reviewed. This will allow for more accurate financial forecasting and better decision-making.
Focusing on Project Viability
Before launching new projects, companies should focus on the venture's viability and performance. They should strongly emphasize the ability to repay debts and meet profitability targets. Risk management practices should be improved, especially when selecting new customers, with credit risk being a central focus.
The Road Ahead:
Cypriot businesses must adopt a forward-thinking approach to succeed in an increasingly competitive global economy. By improving their financial soundness and addressing liquidity and profitability challenges, these companies will be better equipped to handle fluctuations in the business cycle. With the right strategies, Cyprus can enhance its standing as a hub for resilient and sustainable enterprises.
In summary, strengthening internal capital, optimizing liquidity, and improving overall management practices are critical for Cypriot businesses to ensure long-term profitability and growth. The future is bright for companies willing to adapt, innovate, and build the foundations for financial stability.
Source: Written by Dr. Stelios Komis (Senior Credit Risk Manager), InfoCredit Group - 11/09/2024
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