Managing cash in a capital drought.

Author:Milligan, Jack
Position:Cover Story

Weak earnings, tight credit and poor investment results have put cash at a premium. Treasury experts offer suggestions on what companies can do to make the best of a bad situation

It's no fun being a corporate treasurer these days. The double whammy of a weak economy and tight credit are placing maximum pressure on cash flow, forcing treasurers to take a hard look at how their organizations use working capital. It's a time for tightening up -- and in some instances, changing how their companies operate internally.

"Treasurers today have a tough job," says Jim Sagner, senior managing partner at Sagner/Marks, a White Plains, N.Y.-based consulting firm that works closely with corporate treasurers. "It's much tougher than it was 15 years ago."

Most U.S. companies have seen their earnings whacked by a schizophrenic economy that seems to be growing modestly one moment, and then tottering on the edge of a double-dip recession the next. And, the decline in corporate earnings has shriveled corporate cash flow with the fierceness of a Death Valley sun at high noon.

Worse yet, many U.S. banks have retreated from the commercial lending market -- depriving treasurers of a key source of capital just when they need it most. Technology companies that rely on venture capital firms to help finance their operations have seen those funds evaporate as well. And the commercial paper market, long an important short-term capital source for big companies, has become harder and more costly to access -- sometimes almost prohibitively so.

"Capital is the driest I've seen in years," says Dan Jones, area managing partner for Dallas/Fort Worth for Tatum CFO Partners, a consortium of chief financial officers that provide consulting services to middle market companies. "Banks don't have an appetite for lending right now."

While companies will always be subject to the ups and downs of the business cycle, the reluctance of large commercial banks to make unsecured loans at favorable rates and terms may be a more permanent change. To be sure, asset quality problems throughout the industry are a big reason why banks have turned off the credit spigot. When banks get into trouble by lending too aggressively -- as they did in the late 1990s, during the waning days of the previous economic expansion -- their first reaction is often to rein in their lending officers.

But there are systemic factors that also explain why banks are more reluctant to provide thinly priced working capital loans to corporations, beginning with their recognition that credit-only relationships don't provide the kind of financial returns that are apt to make Wall Street happy.

Many banks are now insisting upon an extensive relationship that not only includes credit, but other services as well, including such things as cash management, merchant processing and 401(k) administration. "They almost look at the loan as a loss leader," explains Ken Parkinson, a managing director at Treasury Information...

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