Real-Time Payments

Many of you are probably familiar with near instantaneous money transfers using Venmo or Paypal. And while we discussed next-day ACH transactions in the textbook, in 2017, an interbank payment system was unveiled, the real-time payment (RTP) network. While only 130 banks out of the more than 9,600 financial institutions in the U.S. have adopted the system, these adopting banks cover 60 percent of demand deposit checking and savings accounts. Several challenges have prevented the adoption of the RTP system. For example, businesses do not seem to be concerned about speeding up payments by one day, especially in the current low interest rate environment. The biggest hurdle appears to be infrastructure, but expect this hurdle to be reduced when Jack Henry & Associates and Fiserv come online later this year. But the RTP system does provide other perks, including 24/7/365 access, instant confirmation, and settlement finality, meaning the sending bank can't revoke or recall a payment. 

GE Kicks Factoring

General Electric is serious about reducing the company's use of factoring. In 2018, the company factored about one-half of its receivables, but it expects eliminate all factoring in the near future. In 2016, the company even went so far as to sell receivables up to 5 years ahead of sales in order to increase the then current cash flow. A consequence of eliminating factoring is is that it will reduce cash flows this year. In fact, GE expects cash flows for 2021 to take a hit of $3.5 to $4 billion, but it will also reduce the interest paid on factoring. The elimination of factoring is also a signal that GE management is confident of future cash flows.  

Cash Balances Increase

The old expression "cash is king" is often followed by corporate treasurers, especially when the economic outlook is uncertain. In the 2019 Cash Management Survey, 42 percent of companies increased cash balances, while only 22 percent reduced cash. Additionally, 62 percent of companies are net investors, with only 38 percent are net borrowers, another indication of a fight to cash. One significant issue found in the survey was that more companies experienced a decrease in operating cash flow during 2019 compared to 2018, an indication of why corporate treasurers are becoming more conservative.

2018 Working Capital Survey

The Hackett Group has released the 2018 US Working Capital Survey. Overall, working capital management has improved, with the cash conversion cycle dropping to 33.8 days, a 4 percent improvement. Day's payable has increased from 53.5 days in 2016 to 56.7 days in 2017, while days' payables outstanding increased from 37.8 days to 39.5 days. The inventory period also increased slightly, from 50.7 days to 51 days.

2018 Alexander Hamilton Awards

The 2018 Alexander Hamilton Awards from Treasury & Risk have been announced. The gold award went to Herc Rentals, which set up a treasury group to sales for a billion-dollar company less than six months after its divestiture from Hertz. The silver award went to Avery Dennison which centralized its European treasury functions, resulting in significant savings, and improved foreign exchange processes. Finally, OpenText was awarded the bronze award for streamlining its treasury and setting up processes for the integration of future acquisitions.

Commercial Paper Issuance Falls

In March 2016, an average of 95 AA-rated companies issued commercial paper per day. On March 29, 2017, only six such companies issued commercial paper. The reason behind the dramatic decline in commercial paper issuance is regulations enacted by the SEC to reduce risk in money market mutual funds. Historically, all money market funds had a net asset value (NAV) per share of $1. If the NAV dropped below $1, it was known as "breaking the buck" and had only occurred a limited number of times. In 2008, the Reserve Primary Fund became the largest money market fund to break the buck. In an attempt to reduce risk, the SEC changed the rules for institutional money market funds that means the NAV of these funds will not be pegged at $1. The result was a flight from institutional money market funds, reducing the availability of these funds as customers of commercial paper. This has made it more difficult for companies to raise short-term debt.

2016 Working Capital Survey

CFO just published the 2016 working capital survey by REL Consulting. The 1,000 large U.S. companies included in the survey had about $1 trillion in excess working capital based on companies in the survey matching the top quartile performers. Overall, the cash conversion cycle increased by 2.5 days, although much of this was driven by the oil & gas sector. If this sector was excluded, the cash conversion cycle actually fell by .1 day.

The best performer in the cash conversion cycle was Murphy Oil a negative 463 days due to a payables period of 600 days! Some of the other top performers in the cash conversion cycle were Noble Energy (negative 295 days), ITC (negative 282 days), Anadarko Petroleum (negative 245 days), and Apple (negative 66 days). On the other end of the performance scale, some of the longest cash conversion cycles were at United Therapeutics (794 days), Zoetis (344 days),  Eli Lilly (277 days), and KLA-Tencor (246 days).

Companies Plan To Decrease Cash

In the second quarter of 2015, S&P non-financial firms held $1.4 trillion in cash. And the percentage of companies that increased cash and short-term investments was expected to increase in the fourth quarter of 2015. However, a recent survey indicates that more companies are expected to decrease cash in the first quarter of 2016 than companies that increase cash balances. Overall, Treasurers appear to be doing very little with cash, waiting to see what happens in October when the SEC's new money market rules take effect.

2016 CFO Goals

A recent survey by Proviti asked CFOs about top priorities for 2016. At the top of the list was margin and earnings performance. Next on the list was cybersecurity risks, strategic planning, periodic forecasting, and budgeting. Executives are also seeking more precision in cash forecasting, an often overlooked area. From a student's point of view, the list of priorities can indicate areas in which they could hopefully make an immediate contribution to their employer.

Apple's Cash Hoard Grows

Apple's cash balance, which has been enormous by any measure, topped $200 billion for the first time. Cash held internationally has reached 89 percent, or about $180 billion, of Apple's cash. Apple has been reluctant to repatriate the money back to the U.S. as it would be forced to pay the full 35 percent corporate tax rate on the repatriated money. In an effort to pay investors, Apple has issued $50 billion in debt in various currencies around the world.

2015 Working Capital Survey

CFO just published the 2015 working capital survey by REL Consulting. The 967 large U.S. companies included in the survey had $1.0541 trillion in excess working capital. However, low interest rates appear to have led to a level of apathy in working capital management as very little improvement has been seen in the past year. Overall, the companies in the survey have increased total debt by 62 percent since 2007, and the cash balance at these same companies reached $932 billion, a 74 percent increase since 2007. Even with cheap debt, days' sales outstanding increased by one day, from 37.4 days to 36.4 days, although much of this was a one-time improvement in the gas and oil industry.

The best performer in the cash conversion cycle was Anadarko Petroleum with a negative 346 days due to a paypables period of 397 days! Some of the other top performers in the cash conversion cycle were Deere (negative 29 days), Southwest Air (negative 17 days), Intuit (negative 81 days), and SunEdison (negative 52 days). On the other end of the performance scale, some of the longest cash conversion cycles were at Toll Brothers (770 days), Boeing (202 days). FLIR systems (207 days), and Tiffany (494 days).

Months' Payables Oustanding

Days' payables outstanding is frequently used to determine if a company pays its bills slowly, yet for for some companies, months' payables outstanding may be a better measure. CFO recently discussed 45 publicly traded companies that had an average days' payables outstanding of 212.3 days. The longest had a days' payable of 585.9 days, or almost 20 months!  Although the article touts a long payables period as beneficial because "the company is able to deploy cash to other uses," it is also forcing the company's suppliers to finance part of the company's operations.

2014 Working Capital Survey

CFO just published the 2014 working capital survey by REL Consulting. The report indicates that the average days working capital decreased only .2 days over the past year. REL's analysis indicates that the 1,000 large U.S. companies included in the survey could reduce payables and receivables by $266 billion and $331 billion, respectively. While efficiency in short-term financial operations will help profitability, the lack of improvement in working capital management in recent years is likely due to the low interest rate environment. Some of the better performers in day's working capital outstanding include Murphy Oil (negative 60 days), Linn Energy (negative 50 days), Anadarko Petroleum (negative 45 days), and Dell (negative 23 days).

2014 Alexander Hamilton Awards

Treasury & Risk has announced its annual Alexander Hamilton Awards, named after the first United States Secretary of the Treasury. The awards  are given to companies that best improve working capital performance. For example, CoreLogic received the award for streamlining tax payments and improving the management of its cash balance. General Motors also received accolades for better pooling its cash balances. Honeywell's treasury department's award was for better financing subsidiaries in China. To listen to this year's winners describe their projects, you can follow this link to Treasury & Risk's webcast.

Cash Management And Transfer Pricing

Now that you know all about cash management, you are ready to pool the cash from the divisions of your company, even if they operate in different countries. One thing you must consider first is transfer pricing. Transfer pricing is the cost charged by one division of a company to another division of the company for goods or services. The transfer price is the price that would be charged by an outside, or arms length, entity. If the transfer is between divisions in the same country, the tax implications (other than state and/or local taxes) are minimal. However, if the divisions are in different countries, transfer pricing becomes important with regards to taxes. A recent article in Treasury & Risk  highlights some potential pitfalls in cash pooling for divisions in different countries. Cash management transfer pricing presents problems because cash pooling generally results in a higher interest rate earned on the combined deposits than the rate that would be received on on individual deposits. Similarly, any borrowing is generally less expensive. Additionally, there is the fact that the parent company should receive compensation for the time, effort, and expenses put into pooling the cash. As you will read, a number of factors affect transfer pricing when pooling cash from divisions in different tax jurisdictions.

A/R For Private Companies

It is difficult to find reliable information on private companies, but a recent survey indicates that private companies across all industries have to wait an average of 40.3 days on receivables, the longest receivables period since it was 40.9 days in 2009.

2013 Working Capital Survey

CFO just published the 2013 working capital survey by REL Consulting. The 1,000 large U.S. companies included in the survey had more than $1.1 trillion in excess working capital. Given the recent attention to large cash balances, this is not surprising. But, what may be more surprising is that 43 percent of the excess working capital is tied up in inventory. Net working capital increased 6 percent over the past year, and has increased 25 percent over the past three years. Only 16 companies in the 1,000 were able to avoid a 5 percent decrease in efficiency over the past three years in at least one of the important metrics: day's sales outstanding, day's inventory outstanding, or day's payable outstanding. Some of the better performers in day's working capital outstanding include Linn Energy (negative 63 days), Noble Energy (negative 54 days), Dell (negative 22 days), and Apple (negative 22 days).

Receivables Factoring

Many small business are strapped for cash. Banks are often reluctant to lend money to a company with an unproven track record and few assets, and while venture capital may be available, it is generally expensive. For online advertiser EQAL, the choice was to factor receivables. Even in the factoring market, EQAL faced problems because many factors like recurring receivables, which the company did not have. Fortunately, EQAL was able to find a factor that was comfortable enough with its business model. The cost of factoring for EQAL is a more than a bank loan, but less than venture capital, and has given the company access to cash flow.

DSO Interpretation

While the textbook discusses a cross sectional comparison of the components of the operating and and cash cycles, a recent article discusses a method to examine accounts receivable (AR) and days' sales outstanding (DSO) in a time series. For example, if AR is growing more quickly than DSO, the company could be offering credit terms that are too generous, or is attempting to book sales at the end of the quarter to make its performance look better. The examination of health care education company Healthstream in the article indicates neither of those. Two things we would like to point out in the article: The author points out that he likes to use end-of-quarter numbers rather than average receivables in his calculations. Remember, ratios can be calculated a number of different ways, and each has its own interpretation. So, if you are using ratios calculated by someone else, make sure you know how the ratio was calculated. Second, the author cautions that an investor should look into the root causes of the changes in ratios, which is always an important step any time you are examining financial ratios.

When Receivables Rise

One way that many companies have increased cash conversion cycles is to increase the accounts payable period. While this helps the company, it also means that the supplier now has a longer accounts receivable period. Large companies will often unilaterally inform small suppliers that they will increase the payables period. For small companies, the resulting increase in the receivables period can be devastating. During the recent recession, many small suppliers accepted the new terms forced on them because they were afraid of losing business. But many small suppliers are starting to fight back. For example, when one company was informed by a customer that they would be increasing the payables period from 30 days to 45 days, the supplier stated that their quote was based on 30 days, not 45 days. An increase in the payables period would have to result in a 10 percent price increase. The payables period went back to 30 days. Although many small suppliers feel trapped by large customers, there are often ways to reach a compromise that satisfies both parties.