Know Your Levers

Readers comment on working capital, the euro, investing cash, and more.


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Interestingly, the days-working-capital metric that improved the most in 2009 was days payable outstanding (DPO), which was up 11.4% as a result of longer supplier payment terms ("Working It Out," June). The challenge with increasing supplier payment terms, however, is ensuring these actions don't destabilize the supply chain and that costs aren't simply shifted back to the "buyer" in the form of higher prices. Further, DPO may be the working capital lever most susceptible to backsliding as the economy recovers, suppliers regain some leverage, and the focus on working capital wanes.

One of the best ways to address these issues and support a "sustainable working capital program" is by using supply-chain finance to allow suppliers to get paid whenever they choose. With SCF, suppliers can access low-cost financing on demand over the Web, thus eliminating the negative cash-flow impact of a terms extension. Costs are reduced and cash flow improved throughout the supply chain rather than simply shifting the burden from buyer to supplier. Through this type of collaboration, working capital improvements can be sustained, whether the lever in question is DSO, DIO, or DPO.

Bob Kramer
Vice President, Working Capital Solutions
PrimeRevenue Inc.



Good-Bye to All That?

The euro always was an experiment ("A Big Fat Crisis Averted?" June). Can you have monetary union without political union? History is negative on that. Currency unions have a long history of falling apart when parties find they don't have the same interests.

I would not say that if the Eurozone had acted more decisively at the beginning there would be no crisis now. Quite the opposite might have happened, with investors panicking over the size of the package. How bad could things really be if they need a package that big?

Remember Henry Paulson and his "bazooka?" Most thought it big at the time, but did it bring stability to Fannie Mae and Freddie Mac? No.

Responses to the present global crisis rely on the idea that this is a financing crisis. This always was, and remains, a solvency crisis. Government policy-makers, anxious to prolong the boom, encouraged unsustainable buildups in debt, particularly among financial firms and consumers with housing.

Responses from governments and central banks have been Japan-like: refinance bad assets at ever lower rates and transfer the debts from private to public hands. That forestalls a financial crisis, but may lead to a series of sovereign crises.

It's true that there will be a lot more exchange-rate volatility, but there may be bigger risks if we have sovereign defaults. Good CFOs need to think outside the box here, and not assume that the Eurozone — and freely floating currencies — will continue to exist in the future.

David Merkel
Independent Risk Consultant,
Ellicott City, Maryland



It's All about Options

I really enjoyed your article "Weighing Your Next Move" (May). I am the managing director of SVB Asset Management, the registered investment advisory arm of Silicon Valley Bank. For our 300 corporate clients, we are definitely seeing a move toward getting more return than funds can offer, and we encourage that. For the given level of risk they are comfortable with in their money funds, they are unquestionably leaving money on the table using only funds.

The question they all seem to have is how to do it, and your article touches on all of the available options. Our additional thoughts on each:

CDARS, etc. We have real concerns about their utility, especially given their yields today. In a nutshell, for the liquidity and transparency sacrifices one must make using these vehicles, to say nothing of the investment policy exceptions most firms would have to make, very established and liquid alternatives seem superior.

Money funds. The new rules definitely will diminish the return these funds will garner going forward at any given level of interest rates. That is a good thing. Money market mutual funds go back to their original and valuable use as a very liquid but very modestly earning investment vehicle. We aren't quite sure that the stability risks have been diminished. Now that they are allocated exclusively to Tier-1 investments, their risks have become much more correlated. What is the risk? As Lehman proved, you need only one entity to fall for the entire vehicle to risk collapse.

Separate accounts. We are admittedly biased, but this really is the remaining option. You have to get comfortable with the quality of the credit research your manager makes. Firms simply can't and shouldn't do it in-house. As the yield curve steepens, more firms will find the duration available only via individual credit investment; for this you need an asset manager with a real credit team and a tool like Clearwater.

Adam Dean
SVB Asset Management
San Francisco


Guess I just don't get it. If I were a CFO/treasurer and earning money-market rates on millions of dollars of idle cash, I should be fired. My clients' idle corporate funds are earning 4.2% with liquidity and an extremely high degree of safety. If you can't figure out how to accomplish that, then you're not much of a CFO/treasurer.

David Lightweis
Trinity Consulting Group International
Via e-mail



Saving a Reputation

The best way to think about "reputation" is to understand its role in a brand's value-proposition/value-delivery system ("What's a Reputation Worth?" May). Toyota didn't just take a hit to the esteem in which it was once held; its brand proposition was undermined. Toyota's value proposition rests squarely on reliability. It is the chief reason consumers were willing to pay more for a Toyota, and why its resale values were higher versus its competition.

Now that Toyota's management has put its core benefit to consumers at risk, the brand will never regain the position it once held in the minds of consumers. Being slow to respond was bad enough, but that wasn't the key problem. The key problem was that the Toyota value-delivery system was also undermined, which was probably more important than the safety issues themselves. That is, a reliable brand can be counted on to advise its customers of a potential problem before it becomes an issue. Instead, some idiots rolled the dice with the company's most important asset — the brand's key reason for being. Not only did they undermine reliability, they made Toyota untrustworthy.

The monthly sales gain mentioned in the article is nothing to get excited about, because it was achieved with incentives. This is the point of measurement. Reputation is measured every day in terms of market share, revenues, and profits. It's the only measurement that matters.

Robert Miller
Via e-mail


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