cash management in hard times
DESCRIPTION
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.TRANSCRIPT
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”
Percentage of respondents
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?
Percentage of respondents
november © cfo publishing corp. 5
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6 November 2008 © cfo publishing corp.
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.
“ ”“ ”
november © cfo publishing corp. 7
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
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