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The New Cash Managers

With their companies stung by the credit crunch, finance chiefs are buying software to seize control of their cash and gain leverage with their lenders.
David M. Katz, CFO.com | US
November 23, 2009

Driven by the downturn, CFOs and treasurers are increasingly switching their companies' financial yardsticks from earnings to cash. As a result, they're tracking the flow of cash into and out of every nook and cranny of their companies' operations. And the cash-management buzzword of the day is "visibility."

But many companies have been ill-equipped to "see" into the bank accounts of their far-flung subsidiaries. Alerted by the disastrous credit crunch that's only now starting to recede, the difficulty in getting any yield at all for their investments, and the volatility of the U.S. dollar, treasurers and senior finance executives are reaching for more control of their cash management. One step: buying computer tools to be able to view subsidiaries' cash positions on the executives' desktops.

Indeed, companies such as Samsonite, the well-known, privately held luggage vendor, have dived into the market for cash-management computer systems. "Everybody wants to know where their cash is. Historically, this company used to have to wait for a monthly close to get a view on cash. But that's not quick enough anymore. You really need to know on a weekly basis, and part of your culture is making sure everybody understands where their cash is," says Kyle Gendreau, the company's CFO. Samsonite's U.S. retail unit is set to emerge from Chapter 11 protection by the end of this month.

Last November the downturn began to cut into the revenues of the travel industry on which Samsonite depends. With the company facing the likelihood of liquidity problems, it changed its guiding metrics from earnings and earnings before interest, taxes, depreciation, and amortization to cash flow. "We effectively shifted everybody's focus to cash management and cash forecasting. So at a certain point, your cash flow becomes a more important measure when you're in a crisis than a p&l," says Gendreau. "A lot of companies made that shift."

In tandem with the change in culture came the installation of new cash-management processes. Speaking to CFO from Luxembourg earlier this month, Gendreau said the company has integrated the cash management of the entire company, largely by setting up a 13-week cash-forecast system with weekly reporting. "It's become an encompassing way of how we operate today," he said of the system.

Although at first the tool supplied data in the form of Excel spreadsheets, the company is moving toward more automated software. Samsonite is replacing the spreadsheets with Cognos TM1, a Web-based tool that enables users to easily view forecast updates on a weekly basis. "As we put in this automation tool, it will take a little bit out of the busy work out of putting this stuff into Excel, and it will allow people to focus on the qualitative pieces" of managing cash, said Gendreau.

Similarly, spurred by volatile global financial conditions, Norsk Hydro, a New York Stock Exchange–traded Norwegian aluminum and renewable-energy giant, is integrating its treasury systems. "The increased volatility of [the U.S. dollar] has increased Hydro's focus on currency risk and currency management. Also, forecasting of cash reserves and managing counterparty risk are increasingly important," Peik Norenberg, the company's senior vice president of corporate finance, said in an e-mail.

Shedding cost is another factor. Set up in 1994, Hydro's custom-made cash-management system is costly to maintain and run, said Norenberg. And times have changed: the company has become more streamlined, unhitching itself from its fertilizer business and oil-and-gas activities. What's more, "significant changes have taken place in the financial market (e.g., introduction of the euro, improved European clearing systems, and bank solutions reducing transaction costs)," he wrote.

The company wants to bring its cash-management system up-to-date with those changes. Thus, it's switching to an application service provider supplied by Wall Street Systems, a treasury-services firm. The new system will run Hydro's banking, liquidity management, treasury, and portfolio management.

In the company's previously cumbersome centralized treasury system, it handled accounts payable and receivable on behalf of its subsidiaries. The new ASP-based system, in contrast, "is based on decentralized payment processing, where the different subsidiaries will be fully in charge of payments, collections, and bank account reconciliation," said Norenberg. Under the new system, he added, "global receivables and payables data are retrieved to improve the quality of short-term liquidity forecasts."

Long Time Coming
Counter to the widespread cost-cutting trend in Corporate America, quite a few finance chiefs have decided to spend money on cash-management innovations. For relatively modest dollars spent up front, they expect to get a grip on their cash that will help them invest it better, avoid unnecessary spending, and keep an eye on their counterparties in these treacherous times.

For some, it's a no-brainer. At Samsonite "it was a need do; it wasn't a discretionary kind of decision," said Gendreau. "There weren't massive amounts of costs associated with changing our internal process."

At other companies, tech spending on new treasury and cash-management systems is coming only after years of laborious deliberation — sometimes over a period in which the existing software grew clunky and out of date. As part of Hydro's cost-benefit calculations, Norenberg and other executives looked at bank-transaction fees, float, spread, and cost of manual operations.


Their finding: the business case for the new system was "definitely attractive. The changes have an up-front project cost, but keeping the old application would have required significant IT upgrade and maintenance cost in the next years," according to Norenberg. "The implementation furthermore triggers other simplifications within payment processing internally and externally."

Besides the economic downturn, cash-management renovations are being triggered by internal factors — a hiatus, say, after a long spate of merger activity. "We're a company that grew by acquisitions and mergers, so we're just starting to meld ourselves together on a back-end basis," says Stacy Cordier, assistant treasurer of Thermo Fisher Scientific, a $10 billion (in 2008) multinational scientific products and services company.

After all those mergers, Thermo Fisher wants to consolidate its global banking relationships to streamline its finance function, boost visibility into its bank accounts, and grab more control over cash. In line with that, the company has placed its cash management, trade services, lending, and global markets with HSBC across nine markets: Australia, China, Hong Kong, India, South Africa, Malaysia, Mexico, New Zealand, and Singapore.

Under the arrangement, HSBC will provide Thermo Fisher with a suite of cash-management services, including account services, daily transaction services, liquidity pooling structures, cash investment options, and outsourcing services.

Based in Waltham, Massachusetts, the company is a "hybrid" of centralized and locally managed cash operations, according to Cordier. On one hand, she has groups in Pittsburgh and the United Kingdom that manage the company's cash in the United States and parts of Europe, respectively, "on a very centralized basis." Those units benefit from real-time reporting and the ability to tote up cash balances each week.

On the other hand, employees in the Asia-Pacific time zone have no online access to the company's central cash systems at midnight U.S. time, according to the treasury executive, who notes, with some humor, that such employees "could call me; they've got my home phone number" if they're really desperate to cover a corporate expense. "We're working to ensure that we have visibility into all the various banking systems and can provide that hands-on support when it's needed," she adds.

Sometimes it's a new finance chief with a fresh pair of eyes that moves a company to start managing its cash in a focused way. Three-and-a-half years ago, Robert Schriesheim became CFO of Lawson Software, a large provider of enterprise-resource-planning-systems that operates in 30 countries. He discovered that, like many cash-rich software companies, "we really didn't have a cash-management system that provided us [with] the visibility that we needed in order to accurately manage our cash flow."

Systematic cash management and a strategic approach to capital-asset allocation were practically nonexistent. "If you walked in and said, I'd like to see our cash-flow forecasts for the next month, or two months, or three months, or a year — that type of discipline didn't exist," he says.

Schriesheim and his team proceeded to introduce Lawson to that type of discipline. On any given month, he says, he can get a forward 12-month rolling cash-flow forecast "so we know where the cash flows are going to be generated and where they're going to be consumed, by geographic region." The software vendor has also consolidated much of its cash management with one bank, JP Morgan Chase.

In the still-tight market for corporate credit, however, many finance executives are looking to buy cash-management services with another use in mind: as a bargaining chip to induce the bank to smile favorably on the company as a potential borrower. Thermo Fisher's Cordier says that was one of its purposes of its deal with HSBC. Throughout the company's history, she adds, "we've always told our crediting banks that if they supported us on their balance sheet, that we would offer them fee business wherever that opportunity arose."

About three years ago, the company negotiated its current credit agreements. Under current conditions, the low interest rates that Thermo Fisher's banks charged it in the boom times have left them with a pittance of revenue from the company. While that puts the company in a better position compared with its banks, Cordier says, the company wants to practice what it preaches when it says it will throw services business to banks that have provided it with credit. "And we're following through on that commitment," she adds.

 




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