VideoTreasurers have lowered return targets for cash investments, in fact, from 4.9 percent to 3.7 percent over the past 12 months, according to Greenwich Associates. CFOs who opt for direct obligations of the U.S. government are happy with even lower returns. At ETS, Gatti is stashing cash in maturities of under 30 days and not even considering government-agency issues. The investment policy is unlike anything he has ever instituted in his 10 years as a CFO. The problems in the capital markets are "so complicated that we're not in a position to sort it out," says Gatti.
Companies in growth mode have to make some tough decisions. AdmitOne Security, a yet-to-be-profitable venture-funded firm, has cut back on selling, general, and administrative costs but not research and development. "If you burn through all your cash and haven't hit a certain [revenue] growth curve [by the time of your next funding], then you're in a world of hurt," explains Chris Dukelow, CFO of AdmitOne.
The company publishes a variety of metrics in an effort to motivate employees to save money. To limit travel expenses, for example, it discloses the average monthly travel cost per field employee. "People start paying attention to what they're spending," Dukelow says. The company also publishes a quarterly metric of what percentage of new employees came from recruiters, because that's a costly way to find talent, one that the company tries to limit to 25 percent of its hires.
What goes down will come up, of course. If only companies knew when. While irrational exuberance hardly seems like something companies will fall prey to any time soon, Wallace says CFOs should avoid the tendency to approach liquidity preservation and cost cutting under the assumption that the downturn will be short-lived. "The hope of a quick turnaround is really something that has to be watched," he says. To paraphrase Milton, they also thrive who only save and wait.
Vincent Ryan is a senior editor at CFO.
Staying Liquid
Tips for managing cash during a downturn
Check and recheck the assumptions and data in the cash-flow forecast, to ensure the accuracy of the information. In a recession, for example, "sales forces hate to admit that they are not going to make their quotas," says Jeff Wallace, managing partner at Greenwich Treasury Advisors.
Demand a detailed variance analysis when actual cash flow falls short, says Bob Baldoni, a partner and head of Ernst & Young's global treasury advisory services. Was it because of slower collections? Milestone problems in a couple of large contracts? In addition, ascertain whether the shortfall will be made up next quarter.
Encourage quicker payment of accounts receivables by (1) not compensating salespeople until an order is paid for, (2) calling overdue customers when a bill is one day overdue rather than seven days overdue, and (3) using stop shipments with customers who haven't paid.
Pool transaction banking accounts, says Lisa Rossi of Deutsche Bank. A large corporation that may have 300 demand-deposit accounts can aggregate them into one or more groupings under a "master" or "header" account. Matching accounts that are consistently in a debit position with those in a credit position reduces overdraft charges, Rossi explains.
Consider investing in money-market funds that adhere to the Securities and Exchange Commission's 2a-7 regulations, because their objectives — safety, liquidity, and yield, in that order — match up with current investment goals, says Robert Deutsch, head of global liquidity at JPMorgan Funds. If rated by the rating agencies, such funds must have a weighted average maturity of 60 days or less.
Companies should invest in themselves by paying down revolver debt instead of storing cash in low-yielding instruments, says Wallace. That avoids "negative carry," because the return on any investment will probably be less than the interest owed on the debt. — V.R.
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