To maintain low balance, every night Wickes outlets deposit cash receipts in more than 100 local banks. The following morning, a standing order empties those accounts by sweeping the cash into a central account at Fleet Bank, where it reduces revolving credit balances. “We pay 1.75 percent over LIBOR for money,” says Hopwood. “The first objective has to be to drive that [balance] down as fast and as far as I can.” Policy appears to correlate with performance. In calendar 1999, Wickes garnered a 14.5 percent return on its invested capital. Competitor Wolohan Lumber Co., with 11 days of DOEHIC, barely chalked up a 9 percent return.
Likewise, at Haverty Furniture, CFO Fink prefers solid bank commitments to hefty balance sheets. “You don’t have to worry about predicting short- term fluctuations in cash flow,” he says. On an average day, Haverty owes about $50 million under the revolving credit agreement, but a peak day can require $80 million. “You just need lenders that will cover peak needs,” he notes. The arrangement, he says, allows him to spend more time thinking about inventory levels, capital expenditures, and other matters of strategic significance.
Substituting credit for cash balances, however, may be perilous, says Samuel L. Hayes III, finance professor emeritus at the Harvard Business School. “There is nothing new about saying cash is a drag,” he declares. “The cash you carry has a very low return. But you have to temper that observation. In a perfect world, you can always get money. But this is an imperfect world, where you have to make sure you have a couple of reserve triggers to pull if you get into trouble. Credit is one; cash is another.” Disdaining managers who live on credit, Hayes votes for constant scenario stress testing and sufficient cash protection on the downside.
Where Do We Go from Here?
What constitutes sufficient cash is still an individual company decision. Still, there is evidence that even the staunchest supporters of cash cushions have their limits. At Ford, treasurer Malcolm “Mac” MacDonald and CFO Wallace resist being pinned down on optimal cash levels, but recently conceded that a $24 billion coffer is more than required. That is hardly surprising. With so much cash on hand, Ford would be vulnerable to a takeover bid if the Ford family didn’t control so much stock.
To lighten the coffers by some $10 billion, Ford unveiled a novel recapitalization plan in April. The so-called Value Enhancement Plan will let shareholders exchange existing shares for new Ford shares plus, for each existing share, $20 in cash or an additional investment in new Ford shares. If shareholders behave as expected, they will shrink Ford’s cash to $15 billion. This sum is sufficient, Wallace believes, to sustain manufacturing and research and development through any foreseeable downturn.
The trend in optimal cash levels, however, seems to be personified at such companies as Bell Atlantic, where every nickel of cash flow eventually finds its way to its facility in Cranford, New Jersey. Whether generated by the domestic telephone business, foreign telephone subsidiaries, or fast- growing wireless operations, cash not earmarked for daily operations or a specific strategic goal is used to reduce the company’s short-term debt. As a result, Bell Atlantic sits with the leanest cash level among 11 telecom companies in the Optimal Cash Scoreboard. The company posted just 10 days of DOEHIC; WorldCom Inc. was next in line with 12 days. And a tight lid on cash levels has not prevented a string of acquisitions since 1998, when Bell Atlantic agreed to exchange stock then worth $53 billion for GTE Corp. (now valued at $65 billion; at press time, the companies were on the verge of completing the merger). Lowering cash levels at GTE, with 20 days of DOEHIC, will be a challenge as the merger proceeds, according to CFO Salerno.
Such diverse philosophies about optimal cash levels will continue to defy conclusion. Still, at Bell Atlantic today, the rules are clear: operating units may not accumulate cash. “We had to jam it a bit at first,” Salerno says. But persistence prevailed, and operating managers are convinced. “If they can execute their business plans,” Salerno declares, “it does not matter where the cash comes from.”
S.L. Mintz is New York bureau chief of CFO.