Cash Management In Hard Times


Published on

In November 2008, CFO Research conducted a
survey among mid-size companies in the United
States on the actions that senior fi nance executives
are taking to ensure adequate capitalization to support
their companies’ growth over the next year.
We collected 129 responses from qualifi ed senior
fi nance executives.

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Cash Management In Hard Times

  1. 1. No Stone Unturned STRATEGIES FOR CASH MANAGEMENT IN HARD TIMES A report prepared by CFO Research Services in collaboration with American Express
  2. 2. ABOUT THIS REPORT BACK TO THE BASICS In November 2008, CFO Research conducted a In the face of tight credit markets and a shrink- survey among mid-size companies in the United ing economy, finance executives tell us that the States on the actions that senior finance executives core finance activities of funding the company and No Stone Unturned STRATEGIES FOR CASH MANAGEMENT IN HARD TIMES are taking to ensure adequate capitalization to sup- ensuring liquidity are becoming more imperative port their companies’ growth over the next year. even as they become more challenging. We collected 129 responses from qualified senior finance executives. This research program finds that finance execu- tives are refocusing their attention in these diffi- cult times on wringing cash from their businesses wherever they can find it. And in the vacuum Respondent Titles created when lenders suddenly stopped lending, These executives work finance is looking beyond conventional improve- for companies from a Other ments in working capital management to make broad distribution of 11% industries; no single sure that no opportunity for keeping the company Director industry represented well funded goes unexplored. of Finance more than 15% of 12% total responses. “ VP of CFO Respondent 57% Finance Titles 12% We are generally being more conservative as we cannot make the Controller 13% assumption that the normal forms Nearly all respondents ” (95%) were from mid-size of liquidity will be there for us when companies with revenues of between $10M and $2B. we may need them. -CFO, financial services company Mid-market companies: Our survey revealed a shift in focus among finance Action-oriented and nimble executives as their companies prepare for the Fully 95% of the respondents in our survey changing times. In recent years, as companies grew come from mid-size companies with between with the economy, so too did the scope of CFOs’ $10 million and $2 billion in revenues. These responsibilities. Performance consultant, business companies typically are the backbone of the strategist, compliance steward, risk manager, in- business world—numerous, nimble, with high vestment manager, M&A expert—these and more growth trajectories and high expectations. are the roles that senior finance executives have played during recent years of economic growth. Many of them also are positioned at a tipping point between the small, focused, hands-on Then the world changed—the subprime bubble organization that they started out as, and the burst, credit markets froze, and the economy began large, complex, and widespread operation they to grind down. The growth-oriented business and are growing to be. Their growth may, in fact, financial strategies formed at the beginning of the be outpacing their infrastructure, and they are year suddenly became yesterday’s news, and execu- becoming more aware of the need for more tive management began to call on their colleagues robust systems and more formal processes in finance to refocus their attention on liquidity that will help them manage that growth. and to reformulate their plans for the year ahead. The current economic turmoil can only add In response, many finance executives are now to these companies’ growing pains. Up until leading a movement to get “back to the basics,” now, market growth may have fueled their as one respondent noted. But it’s not that finance organizations. Faced with a no-growth executives are being called on to do less—instead, environment, finance executives must develop they are re-sorting their priorities to uncover every and deploy a different skill set, focused on keep- opportunity to manage expenses and bolster work- ing their companies lean and conserving cash. ing capital. 2 November 2008 © cfo publishing corp.
  3. 3. PROTECTING Figure 1. Is your company more likely THE BOTTOM LINE to focus on increasing top-line revenue or bottom-line profits in the next We asked finance executives how they 12 months? would focus their actions in the coming 59% of all year, whether on top-line revenue growth respondents or bottom-line profits. In CFO Research Focus on surveys over the past several years, responses top-line to this type of question generally have revenue, 25% either tipped toward revenue growth or yielded a 50/50 split, with half of the com- Focus on No-Growth bottom-line panies responding that they focus on the Companies profits, top line and half on the bottom line. 75% This current survey, however—taken as the eco- nomic tide has begun to turn—reveals a change in focus. What had been in the past a 50/50 split has now tilted 60/40 in favor of the bottom line. Finance executives are starting to adapt their financial strat- 41% of all egies to fit the times. respondents But our survey also reveals a split in outlooks among companies. We asked finance executives about their prospects for short-term revenue Focus on Focus on growth. Almost 6 out of 10 (59%) predicted that bottom-line top-line Growth their companies would see either no growth or profits, revenue, Companies 49% 51% actual declines in revenue; only 41% replied that they expect their companies’ revenues to grow next year, despite the general slump in the economy. In contrast, more than 90% of respondents in a 2006 CFO Research survey foresaw substantial or modest top-line growth in the two years ahead. Percentage of respondents Given such a fundamental difference in outlook, we then examined survey responses through these two lenses: those respondents who are from “growth” companies and anticipate some revenue growth Not surprisingly, companies that expect to see no in the year ahead; and those who are from “no- revenue growth over the next year are even more growth” companies and are outfitting themselves focused on maintaining what profitability they for flat or declining revenues. can. Three-quarters of finance executives from “no-growth” companies say that they will seek to increase bottom-line profits more than top-line { revenue. Finance executives from “growth” compa- Nearly 6 out of 10 finance nies show a more typical 50/50 split between a focus on the top line and a focus on the bottom line. (See executives expect revenues to stay Figure 1.) flat or actually decline in the coming year. Clearly, more and more finance executives have begun turning their attention inward in an effort to increase shareholder value—or at least preserve it. 3 november  © cfo publishing corp.
  4. 4. Nearly three-quarters of the finance executives CRITICAL FOCUS: overall tell us that streamlining operations and WORKING CAPITAL reducing non-operating expenses will be more important this year than last year. Other types of In the wake of the financial crisis, actions—partnering with other businesses, invest- No Stone Unturned finance executives’ top priority STRATEGIES FOR CASH MANAGEMENT IN HARD TIMES ing in technology, pursuing mergers and acquisi- has become managing their tions, and outsourcing—all take a back seat to companies’ cash flow more reducing costs and preserving profits. aggressively to keep their businesses going. { Faced with a no-growth economic Asked to rank the importance of liquidity environment, finance executives management activities in light of recent changes across the board are changing in the financial markets, the executives in our survey overwhelmingly pick improving working course and actively pursuing capital processes and forecasting cash flow as their efficiencies in both operations number-one priorities. Negotiating business terms and the back office to with creditors is viewed as moderately important, although not a top concern. Securing loans— protect profitability. whether long-term or short-term—is consistently ranked as the lower priority in these times. (See Table 1.) This pursuit of efficiency takes on the proportions of a mandate for the “no-growth” companies in our survey. More than 80% of finance executives Table 1. finance focuses on Working Capital from these companies say streamlining operations is more important for their companies than a year { 1. Improving internal ago. (See Figure 2.) Nearly the same proportion tells business processes that us that reducing non-operating expenses is also Top Priorities: affect working capital more important this year than last. Internal Liquidity Management 2. Forecasting company Becoming leaner is important even at the growth cash flow companies. More than 60% of finance executives from companies expecting some revenue growth 3. Negotiating business terms with creditors in the year ahead still say that controlling costs is more important to them than it was a year ago. { 4. Securing short-term (See Figure 2.) Belt-tightening is the order of the day. borrowing from Bottom Priorities: commercial lenders External Credit 5. Securing long-term borrowing from commercial lenders Figure 2. Belt-tightening is the order of the day. This is not to say that credit is any less important to “More important than a year ago” 100% companies now. Only a handful of the respondents in our survey say that they plan to spend any less time strengthening their company’s credit rating 83% 82% 62% 62% or securing short-term financing. Rather, the large majority simply tell us they don’t plan to spend any more time on those activities this year than they did 0% last year. (See Figure 3.) Reducing non-operating Streamlining expenses operations The opposite is true when it comes to cutting costs, No-Growth Companies Growth Companies getting better at planning and forecasting, and Percentage of respondents improving cash management. Across the board, 4 November 2008 © cfo publishing corp.
  5. 5. Figure 3. Over the next year, do you expect your finance team will spend more or less time on the following activities, compared with a year ago? 100% 40% 80% 44% 81% 83% 60% 85% 40% 60% 56% 20% 19% 17% 15% 0% Cutting cost of Improving cash Developing better Strengthening credit Securing short-term operations management processes budgets, plans, and rating or balance sheet financing forecasts Less time or no change More time Percentage of respondents 8 out of 10 finance executives say they expect their Table 2. Turning to Cash “ finance team to spend more time on these activities Management in Hard Times over the next year. (See Figure 3.) Finance execu- tives say they are ready to put their money where Reduce days sales outstanding and better their mouths are. cash flow projections as well as reduce capital spending Keeping a close eye on cash flow is no longer just a Slow payments, aggressively collect AR matter of management philosophy—it has become an imperative for survival. Finance executives are Improve DSO, DPO, and inventory turn turning away from financing schemes and getting back to basics—taking costs out, running lean and Tighten cash management/forecasts efficiently, optimizing working capital, and overall keeping closer tabs on financial performance. Aggressively reduce working capital (inventory/receivables) Finance executives appear to recognize that the Exercise tighter control over working time has come to take matters more into their own capital components hands. Credit markets remain tight, and the outlook for economic growth remains bleak. Managing cash Audit billing and collection processes flow requires much more focused attention now than in flush times. Rein in extended terms to customers We invited finance executives to offer other meth- Adhere to benchmarks better ods they expected their companies to use to meet ” Tighten AR and drop poor paying liquidity requirements over the next year. The customers largest number of responses center on standard working capital management maneuvers—such as Reduce G&A aggressively managing accounts receivable, stretch- ing out payments, and working down inventories to maintain their cash position. (See Table 2.) 5 november  © cfo publishing corp.
  6. 6. But finance executives aren’t stopping there. They are opening up the financial toolkit for whatever A Broad Vision for Growth: One Example tools they can find to ensure their companies from the Health Care Industry maintain the cash flow needed. (See Table 3.) A “We intend to increase revenue slightly in core good number of respondents tell us that they are businesses by accepting new contracts more No Stone Unturned STRATEGIES FOR CASH MANAGEMENT IN HARD TIMES exploring more creative, “one-off ” types of actions selectively while growing revenue more aggres- to reduce liabilities and free up cash. Many say they sively in newer business lines by investing wisely plan to sell off less productive or short-term assets, in sales people and relationships. while others are looking to alternative financing arrangements—such as refinancing and leasing— In addition, we will tighten the operating costs to allow them to increase liquidity and optimize in our core business by minimizing additional cash flow. headcount and move our new businesses to operating profit with cash management of these newer businesses being more important than ever. In other words, we will endeavor to reduce Table 3. Opening Up “ spending ahead of the revenue curve. the Financial Toolkit We will also manage our expectations with Sell unused assets ample margin for missing optimal financial targets. Seek overseas markets As a peripheral strategy, we are chasing regulatory support to protect our business lines.” Refinance equipment over longer term to utilize cash Look to make long-term assets more liquid via agreements or putting LEAVING NO STONE UNTURNED certain assets up for sale In the face of an economic upheaval unprecedented Equity round in our lifetimes, finance executives are working Release cash by selling assets already even harder to protect the bottom line. The outlook on the balance sheet for growth becomes cloudier by the hour, and so finance is pursuing every opportunity to keep costs Lower leverage of balance sheet by down and cash flowing. selling short-term investments They are holding the line on costs in both opera- Explore all options with tions and back-office functions. They are relying less potential lenders on the easy credit of the past to fund growth, and are aggressively controlling expenses, selling down Sell assets not contributing to ROIC inventory, stretching payments, and tightening Shareholder funding accounts receivable. They are also looking further afield for new and creative ways to make sure they Increase tactical programs to have the cash they need to keep going. improve revenue streams ” A CFO in the transportation industry says bluntly, Lease financing “We are not looking for growth, rather we are con- centrating on the core business.” Turning its gaze Divest low-margin lines inward, finance is taking up all the tools they have of business, layoffs available to keep their companies on course through turbulent times. 6 November 2008 © cfo publishing corp.
  7. 7. SPONSOR’S PERSPECTIVE In this challenging economic environment, mid-mar- ket companies are increasingly focused on pursuing efficiencies and maintaining profitability. Manag- ing cash flow, securing financing, cutting operating costs—these are just a few of the activities that are consuming more of the attention of senior financial executives in these hard times. And it’s no surprise that they have a heightened desire to control expenses. A confident outlook: Opportunities for growth When asked about growth strategies in the At American Express, we partner with mid-size face of a challenging credit market, nearly companies to better understand the challenges and three-quarters of executives who responded opportunities they face. In the current climate, our cli- to the question—including many from ents are using our products, services, and expertise to “no-growth” as well as “growth” companies help them manage cash flow, monitor spending, drive —say they will pay more attention to the savings, and improve process efficiency. We work with “” customer: them to help them achieve their short- and long-term expense management objectives in a number of ways: Organic growth through improved customer relations • Interpret spending data to make smart busi- ness decisions. Our analyses give companies Continued customer contact and service insight into spending across their organizations, which they then use to monitor compliance, ana- Focus on our core business, lyze spending trends, enforce policies, and iden- leveraging existing relationships tify savings opportunities. Customizable spending limits and liability options also help companies to maximize control over business expenses and Interestingly, a substantial number of contain costs. respondents say they are looking to grow • Automatic supplier savings. Our clients realize market share, largely by targeting weakened “ company-level savings on everyday business expens- competitors: es at preferred suppliers through programs such as the Savings at WorkSM program and the American Aggressively attack weaker competitors Express®/Business ExtrAA® Corporate Card. who are facing cash/credit challenges • Cardmember benefits and services. Our Picking off weak competitors Corporate Card program can help to increase em- ployee compliance, convenience, and satisfaction. Taking advantage of distressed Whether this means additional assistance when ” acquisition opportunities on the road, Corporate Platinum Card® benefits such as airport lounge access, or enrollment in our More customer-facing award-winning Membership Rewards® program, activities to take share companies can provide services that increase em- ployee productivity, safety, and security. These financial executives continue to have confidence in their own companies and their For information about American Express’ expense own ability to pull through, and perhaps management solutions for mid-size companies, please even gain an advantage in the down economy. visit Even as they strive to rein in costs and manage Sanjay Rishi cash, they are looking toward the horizon to Executive Vice President, come out stronger on the other side. U.S. Commercial Card American Express Company Note: Terms, conditions, and exclusions apply. Savings at Work terms and conditions apply and may be found at 7 november  © cfo publishing corp.
  8. 8. No Stone Unturned: Strategies for Cash Management in Hard Times is published by CFO Publishing Corp., 253 Summer Street, Boston, MA 02210. Please direct inquiries to Jane Coulter at 617-345-9700, ext. 211, or CFO Research Services and American Express developed the hypothesis for this research jointly. American Express funded the research and publi- cation of our findings. We would like to acknowl- edge Bartholomew Baptista, Megan Freiler, and Janet Lee for their contributions and support. At CFO Research Services, David Owens directed the research and wrote the report, and John Fischer designed the report. CFO Research Services is the sponsored research group within CFO Publishing Corp., which pro- duces CFO magazine in the United States, Europe, Asia, and China. CFO Publishing is part of The Economist Group. November 2008 Copyright © 2008 CFO Publishing Corp., which is solely responsible for its content. All rights reserved. No part of this report may be reproduced, stored in a retrieval system, or transmitted in any form, by any means, without written permission.