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."
Today, staying in good stead with a company's bankers often means providing even more information on the company's operations and performance. Fike's bankers, for example, have inquired about the financial health of the company's customers and the forecast for any upcoming significant expenses, Thompson says.
To answer the increasing volume of questions from both bankers and senior executives, accurate cash flow forecasts are needed. Thompson is requesting more detailed forecasts from the finance directors with the company's subsidiaries. "While a rough outline of receipts and disbursements might have been acceptable in the past, a more thorough, detailed analysis is now expected," he says.
The treasury group at PAREXEL, a $1 billion biopharmaceutical firm, also is working more closely with the company's divisional planning and analysis groups as they prepare cash forecasts, says Brad Gilbert, treasury manager for the Americas. They're examining the groups' calculations and confirming that the assumptions and data points used by both treasury and the business units are in sync.
To be sure, many treasurers' efforts to more accurately forecast cash flow have been hampered by the fact that requests for funding for treasury IT systems often have gone nowhere. As a result, even fundamental tasks like determining cash positions can eat up large chunks of time, leaving little for analysis work. One silver lining to the current crisis: Corporate checkbooks likely will open a little more easily for these projects, as senior managers recognize the costs of operating without accurate, timely cash forecasts, says Baldoni at Ernst & Young.
Even as bankers keep closer tabs on their corporate clients, the companies themselves are keeping a watchful eye on their banks. Thompson and his colleagues are more closely tracking the company's exposure to its banking partners, some of which are located outside the U.S. Daily, they check account balances and watch for any news stories reporting on significant changes to their banks' ratings or operations.
Most companies would benefit by pruning the numbers of their global bank relationships and accounts, says Baldoni. On the other hand, given the instability of many banking relationships today and the consolidation in the banking sector, treasurers don't want to leave their firms with just one or two banking partners. "You don't know what the financial landscape will look like," he says.
As with treasurers’ efforts to prepare more accurate forecasts, rightsizing a company’s fragmented banking relationships often is hindered by an underinvestment in technology that would help them manage their accounts, notes Melissa Cameron, principal with Deloitte’s regulatory and capital markets consulting practice. As a result, money often ends up sitting in various accounts, earning little, even as money is needed in elsewhere in the company. One remedy, she says, is to use SWIFT banking connectivity, along with a treasury management system, to efficiently view and control balances at most banks around the globe.
Not surprisingly, most treasurers seeking bank funding are finding costs higher than they were even 12 to 18 months ago, Booth notes. Bridge financing for AAA companies, for instance, is hitting 7 to 8 percent, or 500 to 600 basis points higher than a year ago, he says. "For everything companies do now, they have to consider the massive cost of capital versus a year ago."
PAREXEL was fortunate in that its current debt deal for $300 million closed in June 2008, ahead of much of the overall bad economic news, Gilbert says. The pricing would probably double or triple in the current environment, he estimates. Even with the loan in place, however, Gilbert and his colleagues are careful to avoid inadvertently violating a loan covenant. In this environment, any misstep, such as failing to provide a document within the deadline agreed to, gives a bank the ammunition it needs to extricate itself from a loan agreement, Gilbert adds. "We don't give them anything where they can come back and say, 'You were late by a day with this.'"
Still, not all companies are finding the debt markets expensive. Nighthawk, for instance, recently brokered an interest rate swap to lock in a $90 million loan for 4.9 percent for five years, Clegg says. The loan had been at LIBOR plus 250 basis points. With cash of $50 million on the balance sheet, it was prudent to take a small amount (about $2.6 million) and lock in a low rate, Clegg adds.
Boosting Efficiency
Given that most external financing right now is pricey and hard to come by, wringing more efficiency from the payment and receivables processes has become a hot topic in corporate financial circles, Booth says. "If you can do it, it's found money." The projects themselves may not be glamorous, Booth acknowledges, but bringing money to the bottom line, particularly in this environment, definitely is.
At Agilysys, Inc., a Cleveland-based IT solutions provider, cash on hand surged from $58 to $85.7 million between September and October 2008. Treasurer and vice president Curtis Stout credits the company's accounts receivable department, which cut days sales outstanding (DSO) from 80 to 70 days between 2007 and 2008. "This group is working the phones and seeing that we're paid in a timely manner," he says. While Agilysys hasn't raised credit standards for its customers, employees closely monitor customers, watching for any signs that their credit quality is slipping.
On the accounts payable side, companies are looking at methods of payment that let them keep their cash longer without violating their purchasing agreements with suppliers. Purchasing cards are one way to meet this goal, Gilbert says. PAREXEL is moving more and larger purchases to the cards -- "anyplace it can help with working capital or cash flow." The supplier gets paid quickly, yet PAREXEL still has several weeks before it actually hands over the cash. Over the next several years, the company plans to double the amount of purchases going to the cards.
More companies also are introducing internal performance metrics for cash, says Baldoni. When the economy was booming, money was a "free asset," he notes. Few firms rewarded divisions for generating cash or penalized them for consuming it. Today, executives are more willing to charge an imputed interest rate to divisions that use up cash.
Many of the companies fortunate enough to have cash to invest are reworking their investment policies. "We took our internal investment policy last fall and tore it apart," Thompson of Fike says. In a cautionary move, the policy now specifically prohibits investments in several types of securities, such as SIVs, or Structured Investment Vehicles, even though Fike wasn't invested in these, Thompson says.
While PAREXEL is a net borrower, any cash it invests is going into low risk, AAA-rated instruments, Gilbert says. "We're not sexy investors," he notes. "When we invest a million dollars, we had better get a million back."
In fact, a growing number of treasurers are leaving money in deposit accounts, where it can qualify for the earnings credit, Booth says. Given the minuscule returns on many investments right now, the earnings credit can be a better moneymaker. While calculations for the credit vary, it's usually tied to a moving average of the 91-day Treasury bill and earned on 90 percent of a company's balance.
Even as many of treasury’s tactical functions, like managing liquidity and counterparty exposure, have taken on added importance, treasurers still need to keep the company’s overall goals and direction in mind as they approach their positions, Cameron says. They can best apply their expertise and serve their companies by acting as strategic advisors to senior management and the business units, she adds. Treasurers who continue to focus only on operating issues, without looking at the bigger picture, will have a limited shelf life, Cameron says.
After all, even as the economy is pushing treasury to a more prominent and visible role within most organizations, the stakes also are correspondingly high, Jeffery says. "If you run out of liquidity, it can be game over."