cash management in hard times

No Stone Unturned

STRATEGIES FOR

CASH MANAGEMENT

IN HARD TIMES

A report prepared by

CFO Research Services

in collaboration with

American Express

ABOUT THIS REPORT

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 sup-

port their companies’ growth over the next year.

We collected 129 responses from qualifi ed senior

fi nance executives.

Respondent Titles

BACK TO THE BASICS

In the face of tight credit markets and a shrink-

ing economy, fi nance executives tell us that the

core fi nance activities of funding the company and

ensuring liquidity are becoming more imperative

even as they become more challenging.

Th is research program fi nds that fi nance execu-

tives are refocusing their attention in these diffi -

cult times on wringing cash from their businesses

wherever they can fi nd it. And in the vacuum

created when lenders suddenly stopped lending,

fi nance is looking beyond conventional improve-

ments in working capital management to make

sure that no opportunity for keeping the company

well funded goes unexplored.

Our survey revealed a shift in focus among fi nance

executives as their companies prepare for the

changing times. In recent years, as companies grew

with the economy, so too did the scope of CFOs’

responsibilities. Performance consultant, business

strategist, compliance steward, risk manager, in-

vestment manager, M&A expert—these and more

are the roles that senior fi nance executives have

played during recent years of economic growth.

Th en the world changed—the subprime bubble

burst, credit markets froze, and the economy began

to grind down. Th e growth-oriented business and

fi nancial strategies formed at the beginning of the

year suddenly became yesterday’s news, and execu-

tive management began to call on their colleagues

in fi nance to refocus their attention on liquidity

and to reformulate their plans for the year ahead.

In response, many fi nance executives are now

leading a movement to get “back to the basics,”

as one respondent noted. But it’s not that fi nance

executives are being called on to do less—instead,

they are re-sorting their priorities to uncover every

opportunity to manage expenses and bolster work-

ing capital.

Respondent Titles

CFO 57%

Controller 13%

VP ofFinance12%

Directorof Finance

12%

Other11%

These executives work for companies from a broad distribution of industries; no single

industry represented more than 15% of

total responses.

Nearly all respondents (95%) were from mid-size

companies with revenues of between $10M and $2B. “ ”

We are generally being more conservative as we cannot make the assumption that the normal forms of liquidity will be there for us when we may need them.

-CFO, fi nancial services companyNo

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Mid-market companies: Action-oriented and nimbleFully 95% of the respondents in our survey come from mid-size companies with between $10 million and $2 billion in revenues. These companies typically are the backbone of the business world—numerous, nimble, with high growth trajectories and high expectations.

Many of them also are positioned at a tipping point between the small, focused, hands-on organization that they started out as, and the large, complex, and widespread operation they are growing to be. Their growth may, in fact, be outpacing their infrastructure, and they are becoming more aware of the need for more robust systems and more formal processes that will help them manage that growth.

The current economic turmoil can only add to these companies’ growing pains. Up until now, market growth may have fueled their organizations. Faced with a no-growth environment, fi nance executives must develop and deploy a different skill set, focused on keep-ing their companies lean and conserving cash.

2 November 2008 © cfo publishing corp.

{

No-GrowthCompanies

Focus on top-line revenue, 25%

Focus on bottom-line

profits, 75%

GrowthCompanies

Focus on bottom-line

profits, 49%

Focus on top-line revenue, 51%

PROTECTING

THE BOTTOM LINE

We asked fi nance executives how they

would focus their actions in the coming

year, whether on top-line revenue growth

or bottom-line profi ts. In CFO Research

surveys over the past several years, responses

to this type of question generally have

either tipped toward revenue growth or

yielded a 50/50 split, with half of the com-

panies responding that they focus on the

top line and half on the bottom line.

Th is 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 fi nancial strat-

egies to fi t the times.

But our survey also reveals a split in outlooks

among companies. We asked fi nance executives

about their prospects for short-term revenue

growth. Almost 6 out of 10 (59%) predicted that

their companies would see either no growth or

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.

Given such a fundamental diff erence in outlook, we

then examined survey responses through these two

lenses: those respondents who are from “growth”

companies and anticipate some revenue growth

in the year ahead; and those who are from “no-

growth” companies and are outfi tting themselves

for fl at or declining revenues.

Nearly 6 out of 10 fi nance executives expect revenues to stay fl at or actually decline in the coming year.

Figure 1. Is your company more likely to focus on increasing top-line revenue or bottom-line profi ts in the next 12 months?

Percentage of respondents

Not surprisingly, companies that expect to see no

revenue growth over the next year are even more

focused on maintaining what profi tability they

can. Th ree-quarters of fi nance executives from

“no-growth” companies say that they will seek to

increase bottom-line profi ts more than top-line

revenue. Finance executives from “growth” compa-

nies show a more typical 50/50 split between a focus

on the top line and a focus on the bottom line. (See

Figure 1.)

Clearly, more and more fi nance executives have

begun turning their attention inward in an eff ort to

increase shareholder value—or at least preserve it.

59% of all respondents

41% of all respondents

november © cfo publishing corp. 3

Top Priorities: Internal Liquidity Management

Bottom Priorities: External Credit

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Faced with a no-growth economic environment, fi nance executives across the board are changing course and actively pursuing effi ciencies in both operations and the back offi ce to protect profi tability.

{

100%

0%Reducing non-operating

expensesStreamlining

operations

No-Growth Companies Growth Companies

83%62%

82%62%

Nearly three-quarters of the fi nance executives

overall tell us that streamlining operations and

reducing non-operating expenses will be more

important this year than last year. Other types of

actions—partnering with other businesses, invest-

ing in technology, pursuing mergers and acquisi-

tions, and outsourcing—all take a back seat to

reducing costs and preserving profi ts.

Th is pursuit of effi ciency takes on the proportions

of a mandate for the “no-growth” companies in

our survey. More than 80% of fi nance executives

from these companies say streamlining operations

is more important for their companies than a year

ago. (See Figure 2.) Nearly the same proportion tells

us that reducing non-operating expenses is also

more important this year than last.

Becoming leaner is important even at the growth

companies. More than 60% of fi nance executives

from companies expecting some revenue growth

in the year ahead still say that controlling costs is

more important to them than it was a year ago.

(See Figure 2.) Belt-tightening is the order of the day.

Figure 2. Belt-tightening is the order of the day. “More important than a year ago”


CRITICAL FOCUS:

WORKING CAPITAL

In the wake of the fi nancial crisis,

fi nance executives’ top priority

has become managing their

companies’ cash fl ow more

aggressively to keep their

businesses going.

Asked to rank the importance of liquidity

management activities in light of recent changes

in the fi nancial markets, the executives in our

survey overwhelmingly pick improving working

capital processes and forecasting cash fl ow as their

number-one priorities. Negotiating business terms

with creditors is viewed as moderately important,

although not a top concern. Securing loans—

whether long-term or short-term—is consistently

ranked as the lower priority in these times.

(See Table 1.)

Table 1. fi nance focuses on Working Capital

Improving internal 1. business processes that affect working capital

Forecasting company 2. cash fl ow

Negotiating business terms with creditors3.

Securing short-term 4. borrowing from commercial lenders

Securing long-term 5. borrowing from commercial lenders

Th is is not to say that credit is any less important to

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

or securing short-term fi nancing. Rather, the large

majority simply tell us they don’t plan to spend any

more time on those activities this year than they did

last year. (See Figure 3.)

Th e opposite is true when it comes to cutting costs,

getting better at planning and forecasting, and

improving cash management. Across the board,

“

”

8 out of 10 fi nance executives say they expect their

fi nance team to spend more time on these activities

over the next year. (See Figure 3.) Finance execu-

tives say they are ready to put their money where

their mouths are.

Keeping a close eye on cash fl ow is no longer just a

matter of management philosophy—it has become

an imperative for survival. Finance executives are

turning away from fi nancing schemes and getting

back to basics—taking costs out, running lean and

effi ciently, optimizing working capital, and overall

keeping closer tabs on fi nancial performance.

Finance executives appear to recognize that the

time has come to take matters more into their own

hands. Credit markets remain tight, and the outlook

for economic growth remains bleak. Managing cash

fl ow requires much more focused attention now

than in fl ush times.

We invited fi nance executives to off er other meth-

ods they expected their companies to use to meet

liquidity requirements over the next year. Th e

largest number of responses center on standard

working capital management maneuvers—such as

aggressively managing accounts receivable, stretch-

ing out payments, and working down inventories to

maintain their cash position. (See Table 2.)

Table 2. Turning to Cash Management in Hard Times

Reduce days sales outstanding and better cash fl ow projections as well as reduce capital spending

Slow payments, aggressively collect AR

Improve DSO, DPO, and inventory turn

Tighten cash management/forecasts

Aggressively reduce working capital (inventory/receivables)

Exercise tighter control over working capital components

Audit billing and collection processes

Rein in extended terms to customers

Adhere to benchmarks better

Tighten AR and drop poor paying customers

Reduce G&A

15% 17% 19%

56% 60%

85% 83% 81%

44% 40%

0%

20%

40%

60%

80%

100%

Cutting cost ofoperations

Improving cashmanagement processes

Developing betterbudgets, plans, and

forecasts

Strengthening creditrating or balance sheet

Securing short-termfinancing

Less time or no change More time

Figure 3. Over the next year, do you expect your fi nance team will spend more or less time on the following activities, compared with a year ago?



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But fi nance executives aren’t stopping there. Th ey

are opening up the fi nancial toolkit for whatever

tools they can fi nd to ensure their companies

maintain the cash fl ow needed. (See Table 3.) A

good number of respondents tell us that they are

exploring more creative, “one-off ” types of actions

to reduce liabilities and free up cash. Many say they

plan to sell off less productive or short-term assets,

while others are looking to alternative fi nancing

arrangements—such as refi nancing and leasing—

to allow them to increase liquidity and optimize

cash fl ow.

Table 3. Opening Up the Financial Toolkit

Sell unused assets

Seek overseas markets

Refi nance equipment over longer term to utilize cash

Look to make long-term assets more liquid via agreements or putting certain assets up for sale

Equity round

Release cash by selling assets already on the balance sheet

Lower leverage of balance sheet by selling short-term investments

Explore all options with potential lenders

Sell assets not contributing to ROIC

Shareholder funding

Increase tactical programs to improve revenue streams

Lease fi nancing

Divest low-margin lines of business, layoffs

A Broad Vision for Growth: One Example from the Health Care Industry“We intend to increase revenue slightly in core businesses by accepting new contracts more selectively while growing revenue more aggres-sively in newer business lines by investing wisely in sales people and relationships.

In addition, we will tighten the operating costs in our core business by minimizing additional headcount and move our new businesses to operating profi t with cash management of these newer businesses being more important than ever. In other words, we will endeavor to reduce spending ahead of the revenue curve.

We will also manage our expectations with ample margin for missing optimal fi nancial targets. As a peripheral strategy, we are chasing regulatory support to protect our business lines.”

LEAVING NO STONE UNTURNED

In the face of an economic upheaval unprecedented

in our lifetimes, fi nance executives are working

even harder to protect the bottom line. Th e outlook

for growth becomes cloudier by the hour, and so

fi nance is pursuing every opportunity to keep costs

down and cash fl owing.

Th ey are holding the line on costs in both opera-

tions and back-offi ce functions. Th ey are relying less

on the easy credit of the past to fund growth, and

are aggressively controlling expenses, selling down

inventory, stretching payments, and tightening

accounts receivable. Th ey are also looking further

afi eld for new and creative ways to make sure they

have the cash they need to keep going.

A CFO in the transportation industry says bluntly,

“We are not looking for growth, rather we are con-

centrating on the core business.” Turning its gaze

inward, fi nance is taking up all the tools they have

available to keep their companies on course through

turbulent times.

A confi dent outlook: Opportunities for growth When asked about growth strategies in the face of a challenging credit market, nearly three-quarters of executives who responded to the question—including many from “no-growth” as well as “growth” companies—say they will pay more attention to the customer:

Organic growth through improved customer relations

Continued customer contact and service

Focus on our core business, leveraging existing relationships

Interestingly, a substantial number of respondents say they are looking to grow market share, largely by targeting weakened competitors:

Aggressively attack weaker competitors who are facing cash/credit challenges

Picking off weak competitors

Taking advantage of distressed acquisition opportunities

More customer-facing activities to take share

These fi nancial executives continue to have confi dence in their own companies and their own ability to pull through, and perhaps even gain an advantage in the down economy. Even as they strive to rein in costs and manage cash, they are looking toward the horizon to come out stronger on the other side.

SPONSOR’S PERSPECTIVE

In this challenging economic environment, mid-mar-

ket companies are increasingly focused on pursuing

effi ciencies and maintaining profi tability. Manag-

ing cash fl ow, securing fi nancing, cutting operating

costs—these are just a few of the activities that are

consuming more of the attention of senior fi nancial

executives in these hard times. And it’s no surprise

that they have a heightened desire to control expenses.

At American Express, we partner with mid-size

companies to better understand the challenges and

opportunities they face. In the current climate, our cli-

ents are using our products, services, and expertise to

help them manage cash fl ow, monitor spending, drive

savings, and improve process effi ciency. We work with

them to help them achieve their short- and long-term

expense management objectives in a number of ways:

Interpret spending data to make smart busi-•

ness decisions. Our analyses give companies

insight into spending across their organizations,

which they then use to monitor compliance, ana-

lyze spending trends, enforce policies, and iden-

tify savings opportunities. Customizable spending

limits and liability options also help companies

to maximize control over business expenses and

contain costs.

Automatic supplier savings.• Our clients realize

company-level savings on everyday business expens-

es at preferred suppliers through programs such as

the Savings at WorkSM program and the American

Express®/Business ExtrAA® Corporate Card.

Cardmember benefi ts and services.• Our

Corporate Card program can help to increase em-

ployee compliance, convenience, and satisfaction.

Whether this means additional assistance when

on the road, Corporate Platinum Card® benefi ts

such as airport lounge access, or enrollment in our

award-winning Membership Rewards® program,

companies can provide services that increase em-

ployee productivity, safety, and security.

For information about American Express’ expense

management solutions for mid-size companies, please

visit www.americanexpress.com/corporate.

Sanjay Rishi

Executive Vice President,

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 www.savingsatwork.com.

“ ”“ ”


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 [email protected].

CFO Research Services and American Express developed the hypothesis for this research jointly. American Express funded the research and publi-cation of our fi ndings. 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.

cash management in hard times

Economy & Finance