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A Crash Course in Working Capital

Karen Daniel, CFO of privately held Black & Veatch, is a stickler for GAAP and wants every manager to understand how their daily tasks affect corporate working capital.
Marie Leone, CFO.com | US
October 28, 2009

Black & Veatch CFO Karen Daniel got started early in finance. As a high school student, Daniel, now 51, worked for the Internal Revenue Service helping to process tax returns. Maybe that's why she likes the idea of mentoring employees in the ways of finance, right from the start.

Indeed, as part of its ongoing management training, Black & Veatch, a privately-held global engineering and construction company, requires managers to attend a session that focuses on value creation. Daniel points to Steve Stark, a project manager with responsibilities for engineering, procurement, construction, and now working capital. "When I took the ... training it helped me understand the bigger picture of how the financial elements of a project fit into the overall company's financial objectives," says Stark. He adds that the training expanded his perspective on how meeting project goals can affect the company's bottom line "beyond the profit/loss metric typically monitored at the project level." For instance, Stark says his "value-based management" training covered how cash flow directly affects the company's working capital, and how "timely cash management" helps fund general operations and investment in other parts of the business.

As CFO, who heads a 200-person finance department, Daniel believes that driving the "value creation" message to all levels of the company helps keep the employee-owned Black & Veatch on track.

Daniel, who started her career at KPMG Peat Marwick before moving to Black & Veatch's internal audit group in 1992, points out that her company has very little debt on its balance sheet and has a credit facility if needed. But like many businesses, Black & Veatch, which generates $3.2 billion in revenues annually, has been affected by the global financial crisis. Yet, while its revenues and earnings were down in 2008, the company remains profitable. (Daniel shared net income and change in revenue numbers with CFO.com on the condition that the private-company metrics would not be published.)

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"Our metrics are basic — earnings and cash — but they have a significant impact … what's most important is that every project team has the responsibility of understanding and performing against their working capital position" — Black & Veatch CFO Karen Daniel

CFO.com talked with Daniel about heading the finance function at a private company, making her way through the current financial crisis, and giving everyone a smidgeon of corporate finance training.

The whole economy sunk and took corporations with it this year. What affected Black & Veatch's numbers most?
I think you see there is the reflection of rising costs in our industry around the equipment and various other things that we use to execute our projects, as well as rising labor costs.  The slight dip in revenue is, I'm sure, the reflection of the economy beginning to slow down a bit in 2008.

Do you your numbers for 2009 look stronger?
If you're defining 'stronger' as more profitable, yes. In 2009, I think you will continue to see top line declines in our industry to some extent. But companies like ours that focus on profitability have found ways to increase profitability compared to last year by operating more efficiently.

Can you give an example?
We always strive to execute our projects well, and whatever state the economy is in does not change that. As for operational efficiency, that goes all the way from leveraging our resources around the globe through to our integrated global workforce, and through to gaining efficiencies through technology. We are in a continuous improvement mode, despite the economic conditions, and that really has allowed us to continue being profitable. 

To capture operational efficiencies, how is your finance department structured?
We have what we call a decentralized finance organization that works hand-in-hand with corporate finance. There are five business lines — energy, water, telecomm, government, and enterprise management solutions, which is our consulting division. Each of those operating units has a senior finance officer who has a dual reporting relationship to the [corporate] CFO and their division president. When it's most efficient and effective for work to be done at the corporate level, we do all of that. For example, tax and treasury is all done in the corporate finance group. But the activities where it's important for us to be close to our projects are handled by the unit CFOs, such as project accounting support and certain planning and budgeting activities.

Where does your internal audit function report?
It has dual reporting responsibilities as well. Internal audit reports to me as [corporate] CFO for administrative purposes and to the chair of our audit committee [for functional purposes.] Our board is comprised primarily of independent directors as defined by the Securities and Exchange Commission. The audit committee is comprised solely of the independent directors


As a private company, the independent board makeup and internal audit structure are voluntary measures. Why do it?
It's a really important model for us. We are employee owned and promote best practices. In this case, we think the best practice is to have independent directors making up the majority of our board. The board also includes executive directors — myself, the presidents and CEOs of our largest businesses, energy and water, plus our CEO, who is our chairman and president. We also ask for quarterly certification of financial results from our operating units, which publicly-traded companies are required to do under the Sarbanes-Oxley Act. All of our certifications are passed to our audit committee for review. We feel like it's an additional means of engaging our leadership ... and as an employee-owned company we think [that type of governance] is really part of the company's fiduciary responsibilities.

I know you work with a bank consortium. Did the credit crisis change your banking relationships in anyway?
No, we have a credit-facility arrangement that covers an extended period of time, so we have not really had any significant issues with our banks. We typically do not use our credit facility for borrowing, so there haven't been any issues in that regard. There are 10 banks in the group and we have a lead bank that facilitates and coordinates, but we have individual relationships with each of the banks. Our disbursements — payroll, accounts payable, for example — are negotiated or arranged separately from the consortium — although with members of the group. The consortium's primary function is to provide us with a credit facility — which really gives us the ability to borrow — and letters of credit, that we use to provide support our projects.

Is there anything about the credit crisis that keeps you up at night?
Trying to predict the implications tied to a lack of availability of credit for our clients. Many of our clients, at some level, depend upon the credit market returning so that larger projects can be funded. We are trying to understand when the credit market will come back, and to what degree. Then we can determine how we might help our clients position themselves for new projects. So we stay very, very close to our clients. But I think all CFOs are looking at predicting the severity and the length of the recession; it has been a daily process.

Do you worry about the financial condition of your vendors?
We have processes in place to evaluate their financial wherewithal. It's important to be mindful of the financial condition of business partners in general. We evaluate our business partners and really try to develop fair terms and conditions.

As a private company that focuses on a project portfolio, is the debt on your books project debt?
No. The debt that you may see really is associated with lease obligations and such, for computers and things of that nature. It's not really debt for projects. If you are looking at current liabilities, those items really have to do with projects, our payables due and what we call our billings in excess [on costs and estimated earnings for uncompleted contracts.] It represents billings that we've sent to our clients based on milestones, which is typical in our industry.

That's part of the construction industry's accounting methods, right?
Yes, so it is not debt in a traditional sense, but rather liabilities associated with the progress on our projects and payables. We don't really carry much debt. With regard to our project finance, each project stands on its own. But none of the projects are off-balance sheet. As an engineering/construction firm, we have a steady stream of costs that we're incurring that we owe and pay to people. Depending on the progress of our projects, you're either [recording that] in the billings-in-excess or costs-in-excess.

Black & Veatch files its financial resulting using U.S. generally accepted accounting principles, but as a private company you are not required to do that.
Yes we are.

What do you mean?
We file in GAAP because we are an employee-owned company, because of our bankers, because our shareholders. I can't imagine not using U.S. GAAP. Now if you're segueing to the [international financial reporting standards], that's a different story. But yes, we use generally accepted accounting principles because they best reflect where we are financially.

What about IFRS?  Do your projects outside of the country make it necessary for you to use IFRS?
There are certain parts of the world where we file statutory statements that differ from U.S. GAAP, but our consolidated statements are filed in U.S. GAAP. In some way, IFRS will potentially close the gaps in reporting between some of our foreign statutory entities, but those are really on a case-by-case basis.

Do you have a strong feelings, one way or the other, about the United States mandating IFRS?
I think in some ways it is a good idea to have one set of accounting rules and practices. But I have to qualify that by saying some of the more controversial questions about IFRS have not yet been decided, and I wouldn't want the U.S. to mandate something before we get those issues worked out. It's important to make certain that we are moving in a direction that's going to give us the outcome we originally desired. 


Tell me a little more about your employee "value creation" training.
In finance, we have taken the lead to ensure that everyone understands how our clients view value and how we are responsible to create value for them, and us. We run sessions as part of the management training that, depending upon your level and responsibilities, can last the whole day. For the most part, those classes are taught by our treasurer. If you've been away from it and you want a refresher you can go back. In 2008, for example, we had probably 10 of those courses around the globe. We try to make sure our employees [Black & Veatch has 9,000 worldwide] have the business acumen to understand our relationships with our clients.

How so?
It's really being able to connect how your decisions help your stakeholders, clients and business partners be successful. Our metrics are basic — earnings and cash — but they have a significant impact. As a result, everyone knows how to monitor and manage the working capital positions of their projects. We use traditional metrics to measure working capital, like days sales outstanding — the DSO of our projects. We carefully monitor our invested balances for liquidity and return. Again, what's most important is that every project team has the responsibility of understanding and performing against their working capital position.

Are there certain cash-flow red flags that you keep watch over?
We have metrics around the aging of receivables that we keep a close eye on. So receivables would be the primary one, given that most of our assets are committed in the execution of projects. It's a basic metric, but it has a powerful impact when everybody understands and is committed to monitoring it.

In 1999, Black and Veatch became an employee-owned company. Why the switch from the partnership model that was used for nearly a century?
Research indicated that companies that are owned by their employees tend to have greater success and profitability, and part of that is because everyone is rowing in the same direction.




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