Treasurers in Treatment

Ever since the U.S. economy peaked in December 2007, the numbers of unemployed have swollen to 3.6 million, the Dow Jones Industrial Average has sunk from about 14,000 to 8,000, and such venerable names as Lehman Brothers, Wachovia, and Merrill Lynch have been obliterated or bought out. "This is not business as usual anymore," says Bob Baldoni, head of global treasury advisory services with Ernst & Young. "We're clearly in territory that we've not walked before, and we're managing under uncertainty."

That said, financial executives are gradually learning to navigate through the new world. "It's not so much a shock anymore. Treasurers are hunkered down and in survival mode," says William Booth, senior vice president with PNC Financial Services Group. They're finding ways to cut costs and boost cash by divesting assets and introducing efficiencies in AP and AR. They're improving their visibility into global cash flows, rightsizing banking relationships, and double-checking that customers can pay their bills. When investing cash, they're emphasizing safety and liquidity, with yield a distant third. To be sure, many treasurers already were doing these things. Now, however, their efforts have taken on added urgency.

Consider Nighthawk Radiology Holdings, Inc., a provider of radiology solutions to hospitals and clinics that’s based in Coeur D’Alene, Idaho. In early fall, the company divested its marketable securities, which consisted primarily of VRDNs, or variable rate demand notices, says Andrea Clegg, vice president of finance and treasurer. While the VRDNs were issued by municipalities and backed by letters of credit from banks, with concerns about the banking sector growing, Nighthawk moved its holdings to federally insured money market funds, and now has about $50 million in safe, liquid assets on its balance sheet. “Right now, it’s about preservation of capital, with an eye to yield,” says Clegg.

Capital preservation also is prompting treasurers to zero in on customer credit. Fike Corporation, a 700-employee manufacturer of fire protection and detection systems, has "definitely set the bar a little higher for new customers," says Len Thompson, treasury analyst with the Blue Springs, Missouri--based firm. For instance, 18 months ago, a new customer with a respectable Dun & Bradstreet profile and adequate trade references probably would have qualified for an initial credit line of $10,000 to $20,000. That's changed. "Now, we probably would ask for a letter of credit or payment in advance," says Thompson. In other moves to conserve cash, management postponed an expansion and upgrade of the company's manufacturing facilities, with ground-breaking now expected later this year, Thompson says.

As companies focus on liquidity, executives are finding that they need to manage to the cash flow statement, rather than the P&L, says Rich D'Amaro, chief executive officer with consulting firm Tatum LLC, Atlanta. Their goal is to ensure that they'll have the funds their firms need to ride out the recession, he says. Admittedly, this forces a greater emphasis on the here-and-now rather than the long term. "Managers, as a general rule, tend to think about how to maximize earnings over a year without worrying about capital costs or the cost of borrowing in the short term. Today, this financing may not be available, and protecting liquidity is the mantra for business leaders."

Of course, one way to protect liquidity is to maintain good working relationships with the company's bankers. The current economy highlights the importance of diligently nurturing banking relationships over time, rather than trying to jump-start the process when a firm's bank accounts are just about dry, says Craig Jeffery, managing director with consulting firm Strategic Treasurer, Atlanta. "If you need funding right then and there, it's almost mission-impossible."