Numbers don't tell CFOs and treasurers the whole story about a bank, though. That's why Cypress Semiconductor holds monthly calls with its banks and money managers, a practice its financial-services partners willingly submit to. "I like to hear their voices. In these times you need to talk to people," says CFO Buss.
Top-flight treasury departments do more than simply communicate with their banks — they also leverage the relationship. Some companies are choosing to help shore up the balance sheets of upstream partners, for example, by aiding them in obtaining credit, says the NACT's Liebert. In such instances, the supplier transfers the customer's receivables to a bank, which then provides lower-cost financing to the supplier based on the customer's credit rating. "That can help the business and banking relationship while improving the working-capital management of the higher-grade company," explains Liebert.
Prospecting for Cash
The management of working capital is an area in which many treasury departments can be more active. Uncovering extra cash in this economy is like finding gold. World Fuel Services, a $13 billion seller of marine, aviation, and ground-based fuels, has spent several months reeducating its global team on working capital's impact on cash flow and overall return, says CFO Ira Birns. "It makes even more sense as record-breaking crude-oil prices earlier in the year resulted in an increase in our net working-capital investment," he says. The company set internal targets for working-capital performance by business segment and is including such targets in its incentive compensation schemes. The heightened discipline paid off in increased margins and a decrease in the company's net trade cycle in the third quarter, he says.
At specialty chemicals maker Ashland, the $3 billion purchase of Hercules in November 2008 turned the firm from a net investor with $1 billion on the books to a net debtor ($2.6 billion debt, $200 million cash). "It's a huge change for us," says J. Kevin Willis, the company's treasurer. In addition, the installation of an enterprise resource planning system caused working capital to rise a couple of percentage points.
The ERP system payback, however, including demand forecasting and inventory control, supported a comprehensive strategy to generate cash and pay debt. Together with an initiative tying 40 percent of variable pay to working-capital levels, it resulted in reducing working capital by 3 percent of sales ($260 million) last year. "We're managing a debt load, so we have to ensure our business performs optimally," Willis says.
"Working capital represents a tremendous opportunity for treasury," says Peter Pinfield, a partner at Treasury Alliance Group, because business units and treasury are often working at cross-purposes. "When capital was plentiful, production people never wanted to run out of stuff, and buyers wanted to order in large quantities to get economies of scale," Pinfield says. What's more, overseas sourcing, with its longer lead times, increased many industries' inventory levels.
Still, businesses lowered inventories by $29.1 billion (2 percent) last September, after reducing them $50.6 billion in the previous quarter. Inventory-to-sales ratios for manufacturers, retailers, and merchant wholesalers have been dropping steadily since 1992, when the Census Bureau started collecting such data.
If the announcements of some very large organizations are to be believed, there is still fat to be cut. Last quarter, Bristol-Myers Squibb CFO Jean Marc Huet announced a working-capital initiative to free up $750 million to $1 billion cumulatively through 2011. It will do so through better management of payables, receivables, and inventory. The $19 billion company is negotiating terms with vendors and partners, for example, and going through product and plant rationalizations to reduce inventory. "If you have a product with seven different dosages, and 90 percent of the demand is for two of those, why do you need the others?" asks Brian Henry, a spokesman for the company.
Other large drugmakers are tying up cash with sloppy inventory practices, according to a report by Ernst & Young. Because of the industry's high operating margins and strong balance sheets, "a cash culture never developed," says the report. "Inventory levels were not kept low, because companies did not want to run the risk of disrupting patients' lives and missing a profitable sale." Combined, 16 of the largest drugmakers could free up $17 billion to $35 billion in cash from working capital through better inventory management, E&Y estimates.
"Agonizing" Decisions
Across the board, companies have slammed the brakes on capital spending to minimize the outflow of cash. Capex increased 18 percent in 2006 but just 3 percent in 2007 among a sample of 300 companies, according to management consulting firm PRTM. But a smart treasury department, which determines the present value of a project and how it will be financed, has to raise the bar even higher for capital investment during a recession. "CFOs and treasurers are postponing projects with a long time frame or stopping projects that have a low payback," says Dennis Hoyt. "They are also revisiting assumptions like interest rates and sales to be generated." Echoes the NACT's Liebert: "You really have to take into consideration the delay in cash flow that might occur because of the global economic slowdown. You have to look at those return calculations."
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