6 tips from CFOs to free up money and fight inflation: McKinsey

Dive brief:

  • CFOs faced with mounting wage pressures and rising wholesale prices can mitigate the damage caused by high inflation by reviewing the company’s assets and liabilities and unlocking cash, according to McKinsey.
  • The CFO’s strategies for freeing up liquidity range from disposing of underperforming assets and analysis of receivables and debts, to tightening credit support and accelerating returns on partnerships, McKinsey said in a report.
  • Financial executives typically focus on an income statement to reduce debt ratios, increase profitability and improve resilience, McKinsey said. “Few companies give much thought to the assets and liabilities of a balance sheet that can open up lucrative opportunities. “

Dive overview:

This year, CFOs had to quickly adapt their businesses to the biggest price hike in 30 years.

The consumer price index rose last month to a 6.2% annual rate, according to the Ministry of Labor. The Federal Reserve’s preferred measure of price gains – the basic personal consumption expenditure price index – increased 3.6% in September.

The producer price index for final demand, a measure of what suppliers charge businesses, climbed 8.6% in October from a year earlier, according to the labor department. This was a record leap in a series of data first published in 2010.

“Help Wanted” signs go unanswered, prompting CFOs to raise salaries. The exit rate, or the number of workers who left their jobs as a percentage of total employment, rose 3% in September, the highest rate in data dating back to 2000, the Labor Department said on Friday. There were 1.4 job vacancies for every unemployed person.

In response to the labor shortage, many companies have increased their compensation. The proportion of small businesses that raised their wages last month hit a 48-year high, with a 44% net increase in compensation and a net 32% planning to do so in the next three months, the report said. National Federation of Independent Business (NFIB) last time. the week.

CFOs can reduce some of the inflation, McKinsey said, by taking six steps to free money on their balance sheets:

1. Examine receivables and payables

By finding process flaws in the previous year’s receivables and debts, CFOs can shake up the cash available for investments, debt reduction, dividend payments, and mergers and acquisitions, McKinsey said. .

Slow billing, weak collection policies, prepayments to vendors, inefficient payment processes, and out-of-market conditions can all slow down the cash conversion cycle and tie up money, McKinsey said.

A thorough analysis “usually reveals process deficiencies, unfavorable and unnecessary conditions with customers and suppliers, and other near-term opportunities to improve working capital,” McKinsey said.

2. Sell or “reimagine” underperforming assets

By identifying the returns – or losses – of property, plant and equipment, equipment and other long-lived assets, a CFO can select underperforming assets for sale or reassignment.

“These assets can then be sold or reallocated, improving results by freeing up cash by deploying assets to higher-value businesses and delaying planned capital spending,” McKinsey said.

3. Collect “trapped” money

Liquidity can lie dormant among joint venture partners or foreign affiliates that do not have an operationally or tax efficient way to deploy it. Dividends from partnerships may only arrive after a certain lag. An in-depth review of the balance sheet helps identify partners with unpaid bills.

Plus, by streamlining overall cash management, a CFO can reduce the number of urgent money transfers in a year, McKinsey said.

For example, a telecommunications company discovered that half of the cash on its balance sheet was inaccessible due to restrictions on local accounts. The company freed up cash and reduced its reliance on external funding by updating its bank account structures and overall cash management practices.

4. Continue smart credit support

CFOs who use cash collateral, letters of credit and surety bonds as credit support for business or regulatory purposes can end up misallocating cash, McKinsey said.

A CFO and treasurer, working with legal counsel, can often improve a company’s liquidity by confirming quarterly that all credit support is still needed.

For the support still needed, a CFO must identify the most capital efficient way to do it. In some companies, that may mean replacing the cash collateral with a letter of credit or letter of credit with a bond that does not require additional collateral, McKinsey said.

5. Find alternatives for the financing of pensions

CFOs of companies with significant defined benefit obligations can improve their prospects with one or more options: liability-driven investing, modifying existing defined benefit plans, freezing the plan, and converting to a contribution plan. defined, or adoption of a cash balance plan.

For example, a large US retailer eliminated billions of dollars in pension obligations for 30,000 employees by transferring the obligation to an annuity provider. Retirees saw no reduction in benefits, and the retailer avoided volatility and future funding needs.

6. Reduce long-term liabilities

A CFO who reduces long-term environmental and other responsibilities can build up a cash reserve to invest in high-performing business ventures to distribute to shareholders. The assumptions underlying some environmental compliance may no longer be valid, or compliance may be managed more effectively.

For example, a US utility company discovered during a review that its balance sheet did not take into account completed reclamation and remediation. It worked with regulators to review its environmental obligations and reduce required credit support.

“Companies that plan for robust and regular reviews of their balance sheets can increase their working capital and convert underperforming assets and capital-hungry liabilities into accessible cash,” McKinsey said. “Together, these changes can fund mergers and acquisitions, research and development, and capital spending; build resilience; and increase distributions to shareholders.

Comments are closed.