In an effort to determine just how the recession and stubborn credit environment have impacted treasury operations at organizations around the country, Business Finance magazine initiated an online survey of its readers this summer. One of the most prominent findings is the degree to which the recession is prompting financial officers and treasurers to focus on their organization's cash flow and working capital. As Jim Kraus, controller with U.S. Axle, Inc., in Pottstown, Pa., says, "It all has to do with 'cash is king.' You have to manage working capital."
Financial officers also shared their thoughts about the current cost and availability of capital, extending credit to new customers in an iffy economy, counterparty risk, and their approach to accounts payable and receivable, among other issues. On the positive side, at least a few financial executives indicated that the profiles of their departments have risen as the financial environment has become more treacherous and volatile.
The Never-Ending Crunch
Respondents aren't just reading about the credit crunch. Instead, many are living it. About half the survey participants -- 49 percent, to be precise -- either strongly or somewhat agreed with the statement, "Over the past year, my firm has had a more difficult time obtaining bank credit." Similarly, 52 percent of respondents indicated that bank credit had become more expensive. The breakout: Bank financing had jumped 200 basis points or more for 13 percent of survey participants. It was up between 100 and 199 basis points for 15 percent of respondents. And, one-quarter of respondents said bank credit had risen by up to 99 basis points.
The increase in the cost of capital respondents that experienced varied with the sizes of their firms. Somewhat surprisingly, a higher percentage of those from firms with revenues of $500 million or more were slightly more likely to say that capital was more expensive and harder to get. Fifty-four percent of respondents from the larger firms said that they were having more difficulty accessing capital; this compares with 45 percent of survey participants from smaller firms.
Similarly, 62 percent of respondents from $500 million-plus companies said that their cost of capital had risen. This compares with 48 percent of those responding from smaller firms.
The results may reflect the fact that credit for smaller firms already was more expensive and less accessible than it was for larger firms, notes Craig Jeffery, managing partner with Strategic Treasurer in Peachtree City, Ga. In addition, banks are limiting their exposure to both industries and individual firms. Thus, larger firms in some industries are taking a double hit, he adds.
Banks aren't the only ones that have become choosier when it comes to whom they're doing business with. More than a few respondents are taking a harder look at new customers. Nearly one in ten are turning down a higher percentage of applications from new customers, and 37 percent require a stronger credit profile before they'll extend credit to new customers. Three percent have switched to cash-on-delivery with new customers.
At Cover-All Technologies, Inc., a Fairfield, N.J.-based provider of software for the property and casualty industry, management has tightened up on the upfront payment required with new license deals, says Ann Massey, chief financial officer. While the company has long required half up front, at times management would allow 30 percent. Management again is more strictly enforcing the 50 percent requirement.
An anonymous survey respondent said that his or her company is making greater use of retainers when doing business with new customers. Another indicated that his or her firm is modifying contracts with new customers to facilitate the filing of what is known as the UCC-1, or Uniform Commercial Code Form 1. These forms are filed, typically with the secretary of the state in which the debtor or customer is incorporated, to show that the supplier has a security interest in the customer's property.
When it comes to monitoring and protecting against counterparty risk, many respondents have made several changes, as indicated by the multiple answers that respondents provided. Just over one-fourth of survey participants are more frequently monitoring their business partners' financial status, and 19 percent are limiting their firms' exposure to any single counterparty. Another 13 percent are making greater use of technology to monitor counterparty risk, and one in ten has initiated discussions on counterparty risk with their business partners. Just under half of respondents said that their firms hadn't changed their approach to counterparty risk.
Several anonymous comments highlighted the other changes that companies are making. We've "reduced counterparty limits by market value and hedge contract amount," said one respondent. Another said, "We are adding FX counterparties to spread the risk."
Many of the financial officers responding to the survey also indicated that their organizations are reevaluating their investment policies and practices. Larry Dicke, executive vice president and chief financial officer with the California Chamber of Commerce in Sacramento, said that his team spends more time analyzing investments than was the case in the past. "It was easier when rates were high and triple-A companies were out there. In the last couple of years, we'd have two or three conversations before we settle on where to invest," Dicke says.
Another respondent indicated that his or her organization had moved to safety: "Every dollar invested is in the U.S., all with FDIC-backed or Fed instruments. All others have been disposed of."
The recession also has affected respondents' tactics regarding both accounts payable and accounts receivable. On the AP side, a little more than one-third are making greater use of electronic payment technologies. The percent of companies doing this rises to 54 percent of those with revenues of $500 million or more and drops to 26 percent of companies whose top lines fall below $500 million. About 11 percent of both large and small firms are centralizing their firms' accounts payable function.
Respondents appear split when it comes to the question of vendor payments. While 29 percent are taking longer to pay vendors, 17 percent are paying suppliers more quickly in order to take advantage of early payment discounts. The difference between larger and smaller firms when it comes to extending payments is pronounced. While 35 percent of respondents with firms having revenues of less than $500 million said that they're taking longer to pay vendors, only 14 percent of those with larger firms are. Conversely, nearly the same proportion of both smaller and larger firms -- 18 and 16 percent, respectively -- are paying vendors more quickly in order to capture more discounts.
On the accounts receivable side, 61 percent said that their customers are taking longer to pay their bills. Just 3 percent have seen an increase in customers paying early in order to take advantage of early payment discounts.
The California Chamber has been affected by many companies' shift to longer payment times. The Chamber sells books, posters, and other materials that help employers to stay abreast of changes in legislation, such as modifications in unemployment law. These are sold to both members and nonmembers. "Everyone is stretching payments to 45 or 60 days," Dicke says. Even with the help of a collection agency, write-offs doubled over the previous year. Fortunately, the organization's conservative approach to finance and healthy cash reserves should see it through this downturn, he adds.
Cover-All Technologies hasn't seen significant number of nonpaying customers, because the company can easily take steps to counter any late payments, Massey notes. Given that customers subscribe to Cover-All's technology, Cover-All can turn off its service if a client becomes delinquent.
Most of U.S. Axle's customers are large, multibillion-dollar manufacturers, Kraus notes. As a result, the company hasn't had much trouble with customers not paying. However, a handful of clients that had been paying in 40 days have stretched that to 60, he adds.
Several anonymous comments highlighted the lengths to which companies are working with customers to ensure that they pay up. One said, "We have spent more time reminding partners when payments are due and have managed our payables by reaching out to vendors and discussing unique payment plans." Another respondent notes, "We spend much more time on accounts receivable collection activities, and new clients must pay all fees due to us up front."
Even as respondents indicate that they're making greater use of electronic payment and receivables systems, spreadsheets remain a mainstay of many treasury and finance departments. In fact, nearly nine in ten of companies with more than $500 million in revenue use spreadsheets. This is more than use electronic payment systems (78 percent) or cash management software (46 percent).
Perhaps the clearest indication of the impact of the recession can be seen in the focus on cash flow and working capital management. The single topic that generated the greatest percentage of unsolicited comments was cash flow and forecasting. As one respondent said, "Before this economic meltdown, we didn't really need to look at cash flow too much. Now, we look at cash all the time. I spend more of each day monitoring cash in our organization than ever before." Another said: "Cash is extremely visible and important in our organization."
At the California Chamber of Commerce, Dicke's first step each morning is to check the Chamber's cash position.
Kraus of U.S. Axle says that he now receives sales projections and develops cash forecasts on a weekly basis, rather than monthly -- as he did a year or two ago. At the same time, he is keeping a close eye on incoming raw materials with the goal of minimizing the time in which any orders are started, only to languish in work-in-process. "If you pay for raw materials, you don't want it to just sit in work-in-process, where it's not earning any money." Through his efforts, WIP dropped by several hundred thousand dollars over the past year.
To be sure, managing incoming raw materials and cash flow is a balancing act, Kraus notes. At times, prudently building ahead can provide flexibility. If, for instance, a customer decides to accelerate an order, having some work already done makes it easier for U.S. Axle to accommodate the client. In addition, the company may be able to capture expediting fees. On the other hand, keeping a large number of products in inventory is expensive. The goal is to continually watch and reduce the order-to-cash cycle, Kraus adds.
Yet another survey participant indicated that his or her firm is spending more time reassuring its bankers that the firm will weather the financial crisis. "Banks not only are looking at the financials and covenant compliance, but also are interested in getting insight into managerial philosophies and strategies to determine whether the company will weather the financial crisis."
Even as bank credit has become more difficult to obtain, most respondents say that their organizations are sticking with the banking partners they've had before. In fact, nearly two-thirds indicated that they had not changed either the number of their banking partners or the number of bank accounts that they maintained.
Cover-All is one example, as it's remaining with the bank that it has had for several years. The bank is familiar with the company, its strategy, and its management team, Massey says. So far, Cover-All hasn't seen an increase in its lending costs. Massey and her team did close several smaller, little-used accounts that Cover-All had opened several years ago, when it was trying to get lines of credit.
The story is similar at U.S. Axle, Kraus says, as the firm has remained with the same bank for at least five years and met all of its obligations. He credits the ongoing relationship and U.S. Axle's strong repayment history for helping to keep the firm's cost of financing steady over the past year.
To be sure, both Massey and Kraus say that they will keep an open mind when it comes to solicitations from other bankers. Given how quickly the lending environment can change, even for companies with strong banking relationships, it makes sense to stay in touch with a few bankers.
Along with consolidating bank accounts and relationships, corporate clients are doing their homework, asking questions, and reviewing banks' financial statements when deciding which one to use, says Glenn Gray, president and chief executive officer with $315 million Sunwest Bank in Tustin, Cal. "They want a safe, sound bank."
Although they're in the minority, a few respondents tweaked their banking structures. About one in five cut the number of banking relationships they maintained by up to about half. A similar number reduced the number of bank accounts -- again, by up to half.
Excelline Food Products LLC, Chatsworth, Cal., was able to change to a new bank this spring, says controller Gerry Staub. "We were disappointed with our previous bank. They got big and kept shuffling officers back and forth." Excelline, a manufacturer of frozen Mexican foods, is one of the fortunate few in that it has benefited from the recession. "People aren't going out as much. Instead, they're staying home and planning meals." A growing number of these meals include Excelline products, Staub says.
About two-thirds of respondents maintained their approach to protecting their firms against fluctuations in commodity prices, foreign currencies, and interest rates. However, 15 percent are making greater use of hedging instruments and 13 percent have scaled back their exposure to foreign currency fluctuations. One respondent said that his or her firm had "reduced counterparty limits by market value and hedge contract amount."
The myriad changes and extra scrutiny imposed upon the treasury department as a result of the recession and credit crunch have resulted in additional work and challenges. "We've learned to get the job done with less staff," wrote one, while another said, "We're working longer, harder hours."
This said, even the economic upheaval has a bright side. Massey notes that the CFO's role has become more strategic over time. She is more involved in analyzing potential deals, such as merger and acquisition candidates. "The role has evolved over time as the business and economy have changed."
Indeed, many respondents said that recognition of the treasury and finance function has risen. Forty-two percent of respondents indicated that recognition of their department had risen within their companies; 21 percent said that it had risen with outside business partners, such as banks and investors, and 15 percent said that its profile with the board of directors was up.
Additionally, at least a few respondents expressed confidence that their firms are poised to do well in the recovery. As Dicke of the California Chamber of Commerce notes, "We've weathered the storm, and I think that we're well positioned to take advantage of the rebound."
Survey Methodology
Early in July, invitations to participate in the survey were e-mailed to subscribers and partners of the print and online versions of Business Finance and BPM magazines. About 120 recipients responded. The largest share of respondents -- about one-fourth -- work at organizations with revenues of $20 million to $99.9 million. Approximately one-fifth hail from companies whose top lines range from $100 million to $499 million. Another quarter are from companies that are $500 million or larger.
About one-fourth of respondents work for manufacturing companies; 16 percent are in finance, insurance, or real estate; 13 percent in business services; and 11 percent are in wholesale or retail trade. The remaining respondents split between medical and legal services; construction, mining, and agriculture; transportation and utilities; and several other categories.
When it came to titles, about one-fourth go by "CFO." Thirteen percent are treasurers, and 22 percent were either directors of finance, finance managers, or vice presidents of finance. Titles varied somewhat with the size of the organization. Respondents with companies that have annual revenues of $500 million or less were more likely to have a senior title, such as CFO. Respondents from companies with revenues of more than $500 million tended to have titles specific to treasury. For example, 19 percent of these respondents indicated that they were treasurers and 3 percent said that they were treasury analysts. On average, respondents' treasury departments contained 10 employees.