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Liquidity Should Be Treasury’s Top Priority in 2016

  • By Bruce Lynn, CTP
  • Published: 12/11/2015

puzzle1In today’s environment, some corporate treasurers see themselves as “co-CFOs.” But perhaps treasurers should think of rebranding themselves as “chief liquidity officers (CLOs)”, rather than co-CFOs. After all, there is no sense in picking a fight with the “real” CFO.

But regardless of whether a treasurer is called a co-CFO or CLO, without an ability to measure success, the treasurer will not gain access to the C-suite, which could jeopardize their ability to rise to the challenge. And make no mistake—liquidity will be a tough challenge in 2016 and beyond.

With interest rates set to rise over the next few years, the cost of a mistake in matching sources and uses of funds will increase. For example, when LIBOR goes back to normal, (20 times today’s rates, based on history) companies with variable rate debt will see their interest expense double. Even fixed rate debt will become more expensive.

If interest rates and economic factors rise unevenly (i.e., faster in the U.S. than elsewhere) then FX rates will also show volatility with a stronger USD versus the euro or other currencies. This possibility became real early this year, causing many companies to miss their EPS targets due to FX gains/losses. Hedging or hedge accounting treatments can minimize volatility but cannot make it go away in a global economy.

Looking forward to 2016 and beyond, treasury will need to consider a series of “best” decisions around liquidity and risk, where the answers could constrain a company’s financial performance, usually measured by an EPS metric:

  • Access to external sources of funds: Banks no longer lend to anyone for any reason due to new regulations. Such constraints could limit access to external funding.
  • Access to internal funds: Past tax decisions (i.e. cash flow and profits are outside of the U.S.) and/or lack of metrics which permits cash to remain idle can constrain a company’s ability to allocate its funds to best uses.
  • Rising impatience from investors: Many companies across multiple industries have found themselves being questioned by activist investors over the best use of funds. As a result, stock buyback programs have increased, leaving less cash “left over” for operating or capex-type needs.
  • Debt repayments: While many companies refinance their debt, extending maturities, the debt is still there, requiring a future use of cash.

Reaching the best decision around issues of profitability, liquidity and risk would become easier if companies were to adopt more meaningful metrics, especially around liquidity and risk (e.g., operating cash flow metrics, financial leverage ratios, days cash on hand, etc). As many AFP surveys have made clear, about 50 percent of treasury departments have no metrics.

Bruce Lynn, CTP, is managing partner, The FECG.

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