Cash Management

Finance Execs Adjust Cash Strategies

The financial crisis has forced quick action by finance departments concerned about their access to capital.
Sarah JohnsonOctober 1, 2008

In just one month’s time, businesses of varying sizes and industries have seen their access to short-term credit dwindle, forcing their finance executives to quickly rejigger cash strategies.

Nearly two-thirds of companies have taken at least one action to address their diminished ability to borrow, according to an Association for Financial Professionals survey of 366 treasurers and CFOs during the past week.

The most common measures include moving most or all short-term investments to bank deposits and U.S. Treasuries (41 percent), reducing capital spending (37 percent), and shortening the duration of their investment portfolios (29 percent), the AFP said. Roughly one-quarter of companies have stopped or slowed hiring.

In some cases the strategies — such as moving funds to more secure investments — were undertaken because finance executives could do so quickly. For the most part they didn’t change larger business strategies that would entail input from departments outside of finance, such as staff cutbacks, which could increase if the credit crisis continues, explained AFP managing director Jeff Glenzer. “Some treasurers view their job as chief liquidity officer, and keeping their business liquid is job number one,” he told “The crisis has brought home the need to respond quickly.”

Indeed, during the shaky economic environment, not many people would question treasurers for making preemptive moves away from risks to their liquidity or loan agreements. “They can literally overnight begin a major shift toward more liquid investments and more secure investments,” Glenzer said.

A quarter of AFP survey respondents who have made preemptive changes amid the credit crisis have drawn down their credit lines. Companies have tapped their revolvers in recent weeks to ensure they’ll have access to instant cash as financing has become harder and costlier to retain following the collapse of Lehman Brothers and pricey government rescues of other financial institutions.

For instance, Sally Beauty Holdings recently drew down $75 million of its $400 million credit line, a move its CFO, Mark Flaherty, called “a prudent measure, given where our financial markets are. It wasn’t out of concern for own liquidity. It was for the preservation of our financial flexibility and was in the best interest of our shareholders.”

Until early September, finance departments had experienced little change in their access to short-term credit over the past two years, AFP says. Of course, that changed when Lehman tanked, American International Group was given an $85 billion government-backed lending hand, and the tight credit market constricted even further.

Forty percent of finance professionals told AFP they have less access to short-term financing than they had at the beginning of last month. Their most favored methods for grabbing fast cash — secured and unsecured lines of credit, commercial paper, and asset securitization — were harder to come by.

Larger companies were especially feeling the pinch: 53 percent of the executives who work at organizations with revenues over $1 billion said they have less access to short-term credit, compared to only 29 percent of those at smaller businesses.

AFP hasn’t yet studied the reason for that discrepancy, but Glenzer speculated it’s because large companies’ credit needs are more complex and require help from more than one financial institution. Smaller businesses often meet their financing needs through one regional bank.

To be sure, large organizations are more likely to have responded quickly to the credit crisis, according to AFP. Sixty-eight percent of respondents at larger organizations reported doing something already as opposed to 57 percent at smaller businesses.

If the short-term credit situation doesn’t improve by year-end, more companies are likely to make changes to retain cash, AFP predicted. At the top of their contingency list: reduce capital spending (61 percent); freeze or reduce hiring (42 percent); draw down credit facilities (33 percent); and tighten trading partners’ credit standards (27 percent).

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