CFOs dash for cash


Perhaps it's human nature, but most chief finance officers have spent the past year being way too optimistic about their cash-flow forecasts, with the result that they are now spending large parts of their days madly scrambling to renegotiate credit and payment terms.

A survey of CFOs by consultancy KPMG and specialist magazine CFO Europe has found finance departments, perhaps unsurprisingly, are spending much of their time and effort at the moment putting in place "short-term fixes" to relieve the pressure of the credit crunch.

These included nearly half admitting to negotiating longer payment terms with their suppliers and tightening credit terms.

More than nine out of 10 also said customers were attempting to stretch payment terms, while 87 per cent were seeing suppliers demand earlier payment of invoices.

The poll of more than 500 U.S, British and European CFOs looked at how CFOs could better balance their short-term need to raise cash against the more long-term need to build a sustainable business model when it came to working capital.

Roger Bayly, partner with KPMG Restructuring, said: "Although it may not feel like it now, the credit crunch represents a chance to push through reforms of working capital systems, and not just rely on 'quick fixes' which aren't sustainable in the long term.

"The call to action is for businesses to install the processes and procedures which will lead to continual improvements to long-term working capital performance," he added.

Just 14 per cent of the CFOs polled said their cash flow forecasts were on target during the past 12 months, while a worrying five per cent said they did not attempt any form of cash forecasting at all.

More than four out of 10 said the credit crunch had had an adverse or extremely adverse impact on their access to credit and on the cost of credit.

Yet cash management remained the number one priority for just under a quarter of respondents, although six out of 10 described it as one of their top five priorities.

Half acknowledged that there had been a significant increase in stakeholder pressure to improve cash generation.

Other factors of concern at the moment included increased lead times, cited by a fifth of those polled, because of having to source more goods and services from low-cost foreign markets.

The best performing businesses tended to be those that linked working capital performance to managerial incentives, yet almost a quarter of firms had not established a relationship between working capital and pay.

Companies that provided incentives had fared better over the past three years and expected to suffer less over the next three, with more than seven out of 10 saying that they were slightly or very important to the success of a capital improvement initiative.

The key message for many businesses therefore was to instil a culture of executive sponsorship and effective communication of the importance of working capital across the business, argued KPMG, with six out of 10 of the poll sample agreeing this was "very important".

"It's crucial not to overlook the human element in driving forward a better capital management program. Businesses need to have visibility and the control of cash is a vital step to creating the right framework for managing cash," said Bayley.

"Clearly cash remains high on companies 'to do' list. By releasing it, it gives companies both the flexibility and the opportunity to embed cash into the culture and maintain a healthy balance between cash and earnings once economic prosperity returns," he added.

This focus on cash was echoed in research last month by consultancy Towers Perrin, which found that improved risk management was now the number one priority for chief finance officers and board-level senior managers.

Its poll of 125 U.S finance executives, found that, while just four per cent felt the crash would have a severe effect on their own financial prospects, the majority acknowledged it would almost inevitably dampen profit expectations.

Nearly three quarters also admitted they were worried about their own organisation's risk management practices and ability to meet strategic plans.