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Lean Green Machines: The 2000 Optimal Cash Scorecard

When it comes to cash balances, lots of companies are keeping low profiles.

To judge which companies are carrying too much cash, Wright says, “look across the various metrics of cash levels in a given industry. If a company tends to carry more cash than its peers, it deserves scrutiny.”

Where the Gaps Are

To increase that scrutiny, the Scoreboard examines cash gaps between actual levels of cash maintained over 20 quarters and a statistical model that computes estimates of minimal required levels. If less cash sits on the balance sheet than might be needed in a crunch, it implies that a company relies on its bankers to cover shortfalls. If the gaps are positive, the excess cash means that a company is most likely operating with a cushion.

Such gaps partially reflect managers’ faith in the banking system. Companies operating with less cash than necessary signal their confidence that banks will lend to them in good times and bad. A large positive cash gap, on the other hand, flags companies whose management fears being left at their bankers’ mercy, either because of onerous terms or curtailed lending.

Here again, the discrepancies in the industry sectors are revealing. In the steel business, for example, Oregon Steel Mills is not the lowest and WHX is not the highest. Instead, average cash balances at Kaiser Aluminum Corp., with six days of DOEHIC, fall short of average requirements by 76 percent, or $105 million. Meanwhile LTV Corp. has the largest positive cash gap, $409 million, more than two and a half times its target level. WHX sits next, with a $317 million cash cap, about twice its target level.

Still, cash gaps seldom get much larger, in dollar terms, than at Procter & Gamble Co. Despite the company’s stable cash flow and lofty AA senior unsecured credit rating from Standard & Poor’s, the Scoreboard records a $1.8 billion positive cash gap.

Using such a sum to reduce short-term debt would add $47 million to P&G’s bottom line, assuming that the giant household-products maker pays 4 percentage points more to borrow money than it can earn on Treasury securities, and a marginal tax rate of 35 percent. Multiplied by the company’s prevailing price/earnings ratio in early June, the fillip in net income would add $1.2 billion to its market capital.

Trust in Bankers

One company that keeps its gap exceedingly wide is Wickes Inc., in Vernon Hills, Illinois. The gap is negative 98 percent, meaning that cash on hand represents only about 2 percent of the sum needed to cover cash flow shortfalls since 1994, the period covered by the Scoreboard. While ringing up sales in excess of $1 billion, the specialty retailer of lumber products maintains about $1 million in cash — just enough to ensure that all transaction costs are covered — and its goal is to get cash as near to zero as possible.

Wickes treasurer Jim Hopwood says the zero target and low cash gap reflect his philosophy that banks should provide cash, not balance sheets. “We work really hard at developing credit relationships,” Hopwood says. “We have a credit revolver if we ever need it. To me, a company has a great relationship with a bank group if it is signed up to get ready to lend.” The company’s current cash facility extends to June 2003. And thanks to a high turnover rate, solid receivables, and progress in reducing debt, Hopwood is confident that lenders won’t vanish when it comes time to renew.

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