Cash challenges for CFOs


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Cash-poor companies may need to make more fundamental decisions about their business model.

While investment-grade corporates are amassing formidable balance sheet positions, those at the other end of the cash spectrum would no doubt regard this as a nice problem to have.

After a period of four years in which banks have tightened credit and reduced lending, thousands of companies across Europe remain in a precarious cash position. Although many banks are now on a h3er footing, their willingness to lend, particularly to small and medium-sized enterprises (SMEs), remains low.

Credit conditions may have improved compared with the darkest days of 2008, but net new lending remains well below pre-crisis levels.

With their 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. SMEs or companies rated below investment grade have few options because, unlike larger companies, they have limited access to capital markets and syndicated lending facilities.

With a sharp upturn in the global economy looking increasingly unlikely, the outlook for lending remains bleak, particularly for SMEs. This means that cash-poor companies may need to make more fundamental decisions about their business model, and adapt it for a low-growth, low-cash environment.

Below we list five strategies for CFOs confronted with this scenario:

Build trust with banks and other finance providers

Although overall credit conditions remain poor, particularly for SMEs, 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.

For Caroline Ross, Director of the Key Executive Program at EY, UKI, this starts with having a transparent, open relationship with banks.

"You have to maintain a very close dialogue with banks and ensure that there are no surprises at any time," she says. "It’s essential to have absolute clarity on the numbers and to be able to communicate that regularly to finance-providers."

Move from tactical to operational working capital improvements

In the immediate wake of the financial crisis, cash-poor companies were forced to try every approach going to strengthen their balance sheet and ensure survival. Working capital management was a key source of focus as many companies had let their discipline slip while times were good.

After several years of this tactical approach to balance sheet management, companies now need to adopt a more strategic stance.

"Companies have realized that these tactical changes to working capital take a huge amount of effort and often don’t actually lead to better earnings," say Jon Morris, EMEIA leader of EY’s Working Capital Services.

Turn to the tax department

Tax is no longer an island. There is a growing acceptance that h3er links need to be forged between the tax function and the business to optimize the company’s tax position and uncover inefficiencies.

"Although it is below the line, tax has an immediate impact on cash," says Herwig Joosten, Managing Partner Tax at EY, Belgium. "As a result, CFOs are increasingly pushing tax directors to manage cash taxes and generate up-front benefits and many of their KPIs are being established around these goals."

Explore non-bank sources of debt

Put simply, the banking sector will increasingly struggle to meet the demand for credit in the economy. This is because it needs to de-leverage and because it faces more stringent regulation, which is aimed at strengthening the capital position of the sector as a whole.

"Under the new Basel rules, banks will be unable to lend profitably relative to the amount of capital that they have to hold against certain categories of loans and risk-weighted assets," says David Barker, EMEIA Head of Transaction Advisory Services for Financial Services at EY.

In the past couple of years, a number of different non-bank sources of finance have started to emerge, including private equity, asset managers, pension funds and even sovereign wealth funds.

Rethink the supply chain and business model

Uncertain patterns of demand and a volatile economic environment have increased the need for close collaboration between suppliers and their customers. Traditionally, suppliers have been unable to get a clear picture of demand, because the end customer will not deal directly with them.

To address this lack of visibility, many suppliers and customers are now working more closely together to understand when peaks and troughs of demand might occur.

"If companies can think of themselves as being part of an overall supply chain rather than focusing on their own internal issues, they will be much more efficient at predicting and managing demand," says Morris.


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