Cash is King

London’s Park Lane Hilton hotel on 30 June was the setting for the opening event in a new season of FDE breakfast briefings. While previous briefings addressed primary finance concerns such as creating business impact through BPO and controlling the financial supply chain, this latest set of seminars tackled a maxim that has taken on particular resonance during the economic downturn: ‘Cash is King’.

Attendees included senior executives from some of the world’s largest companies, including BAE Systems, BG Group and BHP Billiton. They had convened to hear a talk from Philip de Klerk, CFO of the olefins and polymer business in Europe at INEOS, the largest division of the biggest privately-owned company in the UK. The chemical giant has seen its sector hit badly by the financial events of the past two years.

The combination of a covenant waiver request and a major competitor declaring Chapter 11 bankruptcy saw its credit rating downgraded twice in the space of six months. Rising costs and a slowdown in sales have forced the group into taking some tough decisions in an extremely short timeframe and de Klerk was in town to discuss how his organisation had addressed these challenges head-on.

Andrew Groth, senior vice-president and head of business development Europe at Genpact, co-sponsors of the event alongside Santander Corporate Banking, introduced the keynote speaker. He put the theme of this series into context, citing the Aberdeen Group’s finding that companies with efficient processes improved DSO over their competitors by 25 to 40%.

"Take a company in the financial services sector with $50bn of assets under management," Groth explained. "They can improve their losses ratios by $500m to $700m. The importance of looking at all areas around cash and cash management, regardless of the business we’re in, cannot be overstated."

De Klerk agreed, saying that during times such as these cash has a particular resonance because of its value as an objective measure of a company’s health. "We used to focus on EPS or EBITDA and cash was more or less a second thought," he explained. "But it is truly measurable. Some companies choose operational or free cashflow, but at Unilever [de Klerk’s previous employer] we changed the meaning of free cash flow every other year. Cash is the most objective measure you have for gauging how a business is doing."

But financial events have made accessing and maintaining liquidity a major challenge for the CFO. A more risk-averse climate has seen suppliers demanding changes in payment terms, with INEOS losing €200m of credit as a result. A steep decline in orders from September onwards has also forced the group to make some drastic decisions. A cash fixed cost reduction of 10% was made in the fourth quarter of 2008, with a further 10% planned for 2009. Cash available for CAPEX fell from €600m to €250m virtually overnight. Working capital, particularly in regards to stock levels, was reduced by a further 25% in the first quarter of this year. Reporting, measuring and forecasting techniques were overhauled and investment was made in a new ERP system.

"There are trade offs," de Klerk told the delegates. "Can we maintain levels of customer service with lower stocks? Do we want to invest in working capital or spend on growth? The challenges are constant."

One area where de Klerk was insistent upon compromises not being made was in the search for new customers. He cited the example of a large potential partner seemingly severing its ties with a previous supplier and approaching INEOS for business. Payment terms of 45 days were agreed only for it to become clear that after 44 the new client had financial problems.

"You need to be really careful these days when selecting your customers," de Klerk explained. "Some of our sales guys are eager to explore this new customer base and that makes it difficult for those of us in finance to tell them to hold off a while. Yes we need cash, but if they can’t pay we have nothing."

Such an approach is counterbalanced through the way in which trusted customers are treated. While de Klerk admitted that he studies the overdues every week, firing off calls and emails to ensure that the people responsible are aware events are being closely monitored, he also encourages a more holistic approach. He told the room of his regular conversations with the CFOs of his top ten or so customers, managing expectations and ensuring both parties were fully up to speed with developments, and the compromises for those in difficult positions. "We know some of our customers are having the same problems in regards to relatively low supplier credit and the like," de Klerk said.

"We ask whether there’s anything we can do to help. For simple things such as covenants, some may need more cash in the bank at the beginning of June than they do in September. You can do a bit of wheeling and dealing and try to manage proactively. People are very appreciative that we’re going the extra distance."

This sentiment encapsulated a major theme of de Klerk’s address: the importance of trust and its erosion as a result of the financial crisis. "I am a great believer in the value of trust and as we emerge from this cycle suppliers, customers and banks are going to need each other more than ever," he said.

"Open, transparent relationships are vital and I like to share the information I have on the company and our plans. INEOS is privately owned and hasn’t always been as open as it should have been in the past, but we’re getting there.

"Those companies that have been honest with their stakeholders will emerge stronger. We can’t live with everyone on prepayment and it’s therefore vital that levels of trust are re-established as soon as possible."

There followed a short presentation by Genpact’s vice president of business process re-engineering, Lester D’souza, on the key levers for optimising cash across receivables, payables and inventory. We then returned to a Q&A session with the keynote speaker, conducted by Andrew Morris, director at Santander Corporate Banking.

Much of the discussion concerned how de Klerk incentivised a cash-savvy mindset at a time when his company had imposed a payment and bonus freeze. "You need constant communication," the CFO responded. "When you go through a cash-reduced cycle people become very concerned about the future and you must put a lot of work into keeping them onboard. This can’t be entirely finance-driven; all stakeholders need to be aligned. Everyone now recognises the need to be cash-tight and emerge from this cycle in better shape than we entered it. Ensure the relationship between sales and finance is strong and that you’re both after the same thing."