Which is more valuable, gold or beryllium? John Grampa's answer — gold — probably won't surprise you, but his reasoning might. Gold is worth more than beryllium to his company, Brush Engineered Materials, not because it can fetch more in the metals market but because products made from it can be turned into cash more quickly.
By the time the company extracts beryllium ore from a mine in Utah, sends it to a plant to be treated, ships it to a manufacturer of electronic connectors in Asia, and collects payment, nine months have gone by. But the company might need a mere 10 days to obtain gold bars from a bank, melt them, fabricate the molten gold into thin strips, ship those to a manufacturer of diabetes test equipment, and get paid.
Several years ago Grampa, the company's CFO, and his fellow executives took a hard look at the brisk supplier-to-manufacturer-to-customer cash cycle for gold and other "advanced materials" and realized that it far outpaced that of beryllium, copper, and similar industrial construction materials. That insight was a key factor in the company's strategic shift to high-tech markets. "We focused on the fastest-growing applications in fast-growing markets, where the cash-to-cash turn was also the fastest," he says.
The move has helped Brush ride out the economic downturn, in part by enabling it to eliminate fixed assets that drain cash. To supply beryllium, for instance, the company must maintain a mine, a chemical-extraction facility, and a big melt shop. The production of gold strips requires much leaner facilities. "Our business fell the least in those new markets that have lower fixed- and working-capital commitments and a higher intellectual-property commitment," he says, "meaning that we were able to generate more cash than we otherwise would have."
The credit freeze of 2009 prompted other CFOs to lessen their need or broaden their search for cash beyond banks or capital markets. When credit was more readily available, companies would tap it "in anticipation of needing it later," according to Chris Kuehl, the economist for the National Association of Credit Managers. Now, with debt hard to come by, money wrung from supply chains has become a highly desirable commodity.
As a result, finance chiefs now study supply chains not merely with an eye toward cutting costs via layoffs and plant closings, but also for their potential as lucrative acquisition targets or as a way to serve a customer base that yields a better payoff. For instance, Eaton Corp., a $15.4 billion industrial manufacturer, has reduced its production of basic auto components in favor of more-sophisticated engine parts that improve fuel economy and reduce emissions. "The reason to move into the higher-tech spaces is because, fundamentally, the margins are higher and that translates into more cash," says Richard Fearon, the company's vice chairman and chief financial and planning officer.
But employing any of these strategies is not simple. Particularly tricky is choosing which industries to invest in based on how efficiently they might spawn cash. Finance executives should be wary of applying a single standard to different kinds of businesses — or even parts of the same business — warns Fearon. One industry, for instance, might enjoy high turnover for many products but need to warehouse certain legacy items for years. In contrast, another sector might produce a much narrower range of products, but ones that all have speedy turnover.
Nevertheless, some industries generate cash more quickly than others. If your customers are fast-paying supermarket chains, for instance, you don't have to worry much about receivables, says Robert Cantwell, CFO of B&G Foods, a marketer of foods that have a long shelf life. Such quick bill payment from customers may have a domino effect, buttressing the ability of food producers to pay their bills on time.
And companies within high-performing industries often outperform their enviable industry averages. With few anxieties about accounts receivable, B&G was able to boost its cash efficiency by 247% and knock a day off its days payable outstanding between the third quarters of 2008 and 2009, according to the 2009 Credit Risk Benchmarking Report from CFO Financial Benchmarks, making it one of the most desirable credit risks in its category. The company filled its cash reserves by outsourcing about a third of its manufacturing, according to Cantwell.
Of course, companies in industries that perform less well can still pursue strategies to generate cash more effectively. Lodged within the sluggish metals and mining business, which saw its third-quarter cash generation sink by 8%, Brush Engineered Materials nonetheless scored a 375% rise in cash efficiency. Those improvements are "anything but accidental," says CFO Grampa. "It's something we actually sought to achieve, and expect of ourselves."
Before Brush plunges into a market or takes on a major new customer, it assesses the fixed- and working-capital commitment needed. It then ranks the opportunities in terms of their long-term cash benefit to the company — and often opts for the ones that are most efficient.
On the other hand, companies can take advantage of the inefficiencies of a merger target to squeeze extra cash out of the revenue it acquires. "Often when we buy a company we have opportunities to take down its working capital," says Fearon. "And that, of course, becomes a cash inflow to us." Of the $1.6 billion of operating cash flow that Eaton recorded in 2009, about 50% came from reductions in working capital.
Once a company is integrated into a supply chain, the parent can cut costs by tying supply shipments more closely to the fluctuating needs of customers. TriMas, a packaging and machine-parts company, pores over historical order patterns for each of the company's five business units. "As you understand customer demand," CFO Mark Zeffiro observes, "you can then streamline your production, fulfillment, ordering, and ultimately your supply chain at large in terms of its shipment costs."
Armed with such understanding, the manufacturer has been able to slim down its inventory. Sometimes that requires thinking outside the box — literally. On Chinese docks, for instance, workers pry open containers from many supply points and pack an assortment of as many as 10 different products into a single 40-foot box. That repackaging results in shipments that contain smaller volumes of more products, which "will more likely meet customer needs than ordering lots of the same things in each container," Zeffiro says. "As a result, we don't have such large stocks in our U.S. warehouses."
David M. Katz is New York bureau chief for CFO.