It’s amazing how much information can be crammed onto the tiny chips in credit cards, ID badges and mobile phones these days. For the companies that make the chips, it’s also amazing, and frustrating, that prices for these products decline year after year, often steeply. For this reason, explains Jacques Tierny, CFO of Gemalto, a €1.7 billion smart-card manufacturer in Amsterdam, “we cannot live with high inventories.”
Many other CFOs now feel the same, and inventory is far from the only thing keeping them awake at night. “Everyone has to tighten the rules on receivables,” Tierny notes, “due to the higher cost of money and rising risk of defaults.” Last month Moody’s reported that the default rate for speculative-grade borrowers in Europe doubled in the first quarter of this year, to nearly 5%. And that’s only the beginning. The agency’s forecasting model predicts a year-end default rate of more than 21%, according to Kenneth Emergy, director of default research.
As a result, cash — making it, collecting it and hanging on to it — abounds on the list of CFOs’ top concerns, according to the latest poll of more than 1,200 senior finance executives by CFO Europe, Tilburg University and Duke University. Worries about the stability of banks, scarcity of credit and health of counterparties all now rank near the top of CFOs’ top external and internal concerns in Europe, Asia and America. (See “Top External Concerns” and “Top Internal Concerns” at the end of the article.)
In Europe, counterparty risk rose the fastest up the list of internal concerns, displacing “attracting and retaining talent.” The risk of customer defaults is certainly cause for concern for Michael Samonas, CFO of Sidma, a €300m steel processor in Athens. With around 2,500 customers struggling with the sharp slowdown in industrial activity, “you can never be sure about the current position of a counterparty,” he says. Like Tierny, the CFO is overhauling “how we sell, to whom and how to make sure we collect the money.” A recent €2m charge on the depreciation of inventories focused the mind on getting a tight grip on working capital.
To explain the deterioration of results in the latter months of the fiscal year, Sidma cited a litany of cash management headaches, including a “radical” decrease in bank financing, a rise in borrowing costs and a reluctance on the part of insurers to cover clients with “sufficient” limits of cover. Not so long ago, Samonas says, it was common to sell double the amount covered by credit insurance to key clients. Now he’s insisting on a policy of selling “at or a little bit above” the limits agreed with insurers, which themselves have been falling in recent months. A recipe for losses? “Right now, the priority is to be safe on the liquidity side,” the CFO insists, “and not worry about accounting results this year.” In fact, the company recorded positive operating cash flow of nearly €10m in its latest results, compared with a negative cash flow of nearly €8m the year before.
For companies that keep a close eye on cash, notes Tierny of Gemalto, “there are more opportunities than pitfalls,” despite the economic gloom. For example, given some firms’ desperate quest for liquidity, “if your cost of money is different from your suppliers, sometimes you can pay them in advance with a nice discount,” he says. That’s definitely something he can live with.
Jason Karaian is deputy editor at CFO Europe.