By Daniel Hunter

Whether they are cash-rich or cash-poor, CFOs currently face significant cash management challenges according to a report released by Ernst & Young.

The uncertainty in the economy over the last few years has meant there are many CFOs finding themselves in both these situations. The report identifies the complexities at both ends of the liquidity spectrum and assesses the opportunities and considerations to help CFOs steer their company through this challenging economic environment.

The report Drought or drowning? Cash challenges for CFOs at both ends of the liquidity spectrum highlights that cash hoarding is a problem both for governments searching for ways to stimulate growth and smaller companies desperate for finance. In the Eurozone, corporates overall hold around €2 trillion, in the UK the FTSE100 are holding £750b, according to Ernst & Young’s Item Club, and US corporates hold more than US$2 trillion.

Les Clifford, Partner and Chair of Ernst & Young’s CFO Program in the UK and Ireland, comments, “Cash-rich CFOs may be the envy of CFOs at the other end of the spectrum but they face their own raft of cash management challenges in today’s volatile economy. Cash accumulation can be a prudent strategy if you are nervous about tying up your money in long-term investments that will help pursue a growth strategy. But even many traditionally secure short-term investments have become more risky. And cash that is left idle earning tiny returns in low-interest instruments creates a significant opportunity cost, which can be a competitive disadvantage."

Conversely, thousands of companies across Europe remain in a tight cash position. With access to new finance constrained, cash-poor companies can do little more than roll over existing debt packages and hope for credit conditions to improve. For SMEs rated below investment grade, the options are especially limited and are creating a barrier to return to global growth.

Dougald Middleton, Ernst & Young’s Global Capital and Debt Advisory Leader, says “The outlook for the global economy as a whole is flat however business can succeed through careful cash management, identifying and using a wide range of capital sources and focusing on being the best in the market at what they do.”

The following points are the top cash management tips for CFOs identified in Ernst & Young’s report Drought or drowning? Cash challenges for CFOs at both ends of the liquidity spectrum:

Cash-rich CFOs

- Invest, pay out, or buy back: Ultimately, cash-rich companies face a choice. Either they can invest their surplus cash and put it to productive use, or they can return it to shareholders in the form of dividends or share buybacks.

- Articulate the rationale for your cash-rich position to investors: The rationale for holding large quantities of cash on the balance sheet will vary from company to company. However, the market may not understand of a strategy which prioritizes cash over growth, unless the rationale is convincingly communicated.

- Lock in finance at record rates in a golden era for bonds issuance: While it may be counter-intuitive for cash-rich companies to issue bonds that will further bolster their cash reserves, some CFOs of cash-rich companies are doing just that, in order to lock in finance at historically low rates.

- Develop a clear treasury risk management strategy: No longer are treasury professionals focusing on finding ways to create wealth and profits. Instead, they are identifying and mitigating risks.

- Support your supply chain: Many large companies are reliant on a small number of key suppliers, and many of them are finding the current economic climate difficult. We discuss a range of approaches that cash-rich companies can implement to help strengthen their supply chain, and reduce their own risk exposure.

- Keep your eyes open to M&A opportunities: There is currently little sign of a major uptick in corporate M&A activity. But this cycle will eventually turn, and the cash-rich companies will be the ones best placed to move quickly and acquire prime assets.

Cash poor CFOs

- Build trust with banks and other finance providers: Banks are still willing to lend to companies with the right management team, strategy and processes. CFOs of cash-poor companies may have to work harder than ever to convince banks to finance them, but the funding is there for companies that have the right story to tell.

- Move from tactical to operational working capital improvements: After several years of a tactical, panic-driven approach to balance sheet management, a growing number of companies are trying to move to a more sustainable approach. This may involve making operational, business model and strategic changes.

- Turn to the tax department: There is a growing acceptance that stronger links need to be forged between the tax function and the business to optimize the company’s tax position and uncover inefficiencies.

- Investigate non-bank sources of debt: The banking sector will increasingly struggle to meet the demand for credit in the economy, as it de-leverages and responds to more stringent regulation. We discuss different non-bank sources of debt that have started to emerge, and some of the benefits and risks.

- Rethink the supply chain and business model: There may be considerable savings to be made by rethinking your business’ supply chain and business model. This may be through increased cooperation between suppliers to understand peaks and troughs of demand, or reviewing how your supply chain impacts your working capital.

Les concludes, “The CFO’s contribution to navigating the complexities of the current economic climate successfully is crucial because their role in cash management dictates whether a company can grow or even survive. CFOs have a big responsibility to ensure that business decisions are grounded in sound financial criteria, key finance initiatives support overall strategic goals, and that the organization’s progress on strategic goals is clearly communicated to external stakeholders.”

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