From the February 2005 issue of Treasury & Risk magazine

The Hurdles Aren't Midsize

Tales from middle market treasuries

The funny thing about being in the middle market these days is that the problems don't feel that much less complicated than those being confronted by the largest companies. From compliance, to globalization, to terrorism, to automation, finance executives

at midsize companies tackle these challenges with less staff and limited budgets. Perhaps that's why in recent years midsize companies are recruiting finance managers more frequently from larger cohorts, and middle market executives are adopting best practices and benchmarking that once were the province of only the biggest. Here are a few stories of how exemplary middle market executives are confronting the challenges of automation, globalization and rapid expansion.

Sarah Burton was given a unique opportunity when she came to The Relizon Co. as its treasurer four years ago: She got to build a treasury from the ground up.

Relizon, a document, marketing and billing services operation based in Dayton, Ohio, had just been sold by its parent, Reynolds and Reynolds Co., to The Carlyle Group, a private equity firm, and was losing the use of the Reynolds treasury. "My job was to go in and figure out what kinds of skill sets were needed, what kinds of jobs would be needed and then go out and hire those individuals," says Burton. One catch: She had to finish the project in 120 days.

Given the company's size--which had been close to $1 billion in revenues until last year, when it sold off a major unit--Burton says that the key qualities of any executive or employee must be flexibility and the ability to multi-task. As treasurer at a middle market company, "you have to be that yourself, adaptable and flexible and able to juggle a number of different things at the same time," she explains, noting that while she tackled constructing the treasury in four months, she also had to handle everything from choosing the best bank for the company to use for payroll to meeting with rating agencies to explain the company's strategy.

Burton is an excellent example of a new breed of middle market executive, who comes with experience at bigger companies--in her case, Ohio Casualty Insurance Co.--and is far more aware of best practices and benchmarking. For her new treasury, Burton ended up putting together only a 4 1/2-person team that includes a real estate manager, a cash manager, a treasury analyst and a leasing analyst. She can rely on a few good managers because Relizon also uses a Selkirk treasury workstation. She says that although it's somewhat unusual for a company Relizon's size to have a workstation, it fits Relizon's management style: "We try to focus as a company on remaining lean in corporate functions but automating areas as much as we can."

Another task to which Burton attached high priority was building a short-term cash flow forecasting model, which as a division of a larger company Relizon hadn't needed before. Of course, changing economic conditions can always wreak havoc on a forecast's accuracy, and that's why treasury needs to keep in touch with other parts of the company to get advance intelligence on changes that could affect cash flows. Burton says.

All the hard work paid off for Burton, who at 39 is Relizon's CFO. She also retains the treasurer's position. As CFO, she has gotten to tackle new projects, including the refinancing of Relizon's bank debt in early 2004. "It was a very good time to go out to the marketplace," she says. "We were starting to see the momentum of the business improve and we had that story to tell. We were able to get some very good repricing." The new deal, which includes 75% of the original group along with new institutional investors, many of them funds, will save Relizon about $2.5 million in interest costs annually.

Burton says flexibility remains a key asset at the CFO level as well, where good management depends on a big picture based on detailed metrics. "You can't just be a numbers person and be a good CFO," Burton says.

The orthodoxy is that innovation starts with big treasuries that have big staffs and can save big bucks by outsourcing or automating a service. After that, the new product, service or technique gradually trickles down into the middle market.

But Corey Deible, de facto treasurer and cash manager of three sister construction firms in the Pittsburgh area with combined annual revenues of $347 million, is not a patient man. When he sees a product that he thinks will help his treasury operation, he is not waiting for the trickle down; he's signing up to get it.

At least that's how it was when PNC Corp. introduced its "cash pool allocator" service, and Deible was among the bank's first five customers. "The cash pool allocator was a real home run for us," says Deible, who handles treasury operations for three commonly owned S corporations--Trumbull Corp., P.J. Dick Inc. and Lindy Paving Inc. "It tells us exactly how much each company contributed to or borrowed from the master balance. That saves us a huge amount of time."

It also saved his operation a lot of money since the liquidity system he was forced to cope with before was, as he will readily tell you, clumsy at best. Until six months ago, the construction companies spread three general accounts, three weekly payroll accounts and one confidential compensation account among three banks, including PNC, so the banks could earn fees and Deible could keep his credit facilities. Before adopting PNC's cash allocator, this was the liquidity system: If one company was cash positive and another was cash negative, he would book an inter-company loan and wire funds from the flush account to the needy account. "In the morning, we would get a cash balance for each account. If there would be an overdraft, we'd wire money in from our line or from one of the other companies that had a surplus," he explains. It was manual. It was approximate. It incurred wire transfer fees. And it created daylight overdrafts with some regularity in some of the companies' accounts. PNC didn't complain about the intra-day shortfalls, but the other two banks did and applied penalty charges, forcing Trumbull to keep excess cash in its accounts to cover potential daylight overdrafts.

"We could sweep surplus balances into overnight investments that yielded about 1.25%, but we had to borrow from our line at prime, about 4.25%. We'd often have a few million kicking around in the accounts, at the same time we had to draw against our line. So we were losing about 3% net on the spread. Now we're able to borrow just what we need. The savings are huge--about $100,000 a year in interest," Deible estimates.

One irony: Deible doesn't even hold the title of treasurer at any of the companies. At Trumbull and Dick, he is assistant controller and at Lindy, he is the controller.

But that's how it is in the middle market. Finance executives have to be prepared to serve in many capacities. What Deible and several smart colleagues have discovered is that, when your resources are strapped, it doesn't hurt to have a little help from technology.

And vendors like PNC are actually often eager to work with companies the size of Deible's because their treasurers or finance executives don't have to share authority for operations. For this reason, as treasury consultant Susan Skerritt, a New York-based partner at Treasury Strategies Inc., notes, best-practice levels can be reached sooner in certain functions--working capital management being the most noteworthy--than at the treasuries of the nation's largest companies.

Skerritt points out that middle market companies are often favored beta testers because their limited staffs and fewer managers provide a more controlled environment. For example, one of the hottest current banking products is remote deposit--that is, depositing check images directly into a concentration account instead of taking paper versions to a local bank. And perhaps the very first companies to use this innovative service in test phases were from the middle market: St. Petersburg, Fla.-based brokerage firm Raymond James Financial tested a Citibank product and Clayton, Mo.-based real estate firm Kohner Properties Inc. was the guinea pig for a Bank of America remote capture product.

Deible's trio of companies may be unusual for the middle market, but they are hardly unique. For example, Blistex Inc., the Oak Brook, Ill., provider of over-the-counter pharmaceuticals, has teamed up with LaSalle Bank in Chicago to show that technological innovation can thrive in the middle market. Privately held Blistex, with annual revenues under $1 billion, has a three-bank credit syndicate that includes LaSalle. For treasury services, Blistex uses LaSalle, which Phillip Hoolehan, CFO and vice president of finance, calls "the most progressive of our banks in using technology."

For Blistex, that has meant, most conspicuously, turning over its A/R subledger to the bank and outsourcing cash application as an extension of its image-based lockbox service. Hoolehan credits that move with doing a lot to bring the firm's A/R from 60 to 90 days past due on average down to more than 90% current. Applying cash quicker doesn't cut that many days off DSO, of course, but outsourcing the cash app duties frees up Blistex's small finance staff to work more aggressively on credit and collections, he explains. "Cash application had been a big drain on our time," he notes.

Blistex also is an early adapter of electronic invoice presentment and payment (EIPP), having signed on with BillingZone LP. While customers aren't using EIPP en masse, a growing number of larger, more technologically sophisticated customers are getting their invoices this way and sometimes paying electronically, reports Hoolehan, who handles the strategic treasury duties himself. The company has also moved to more sophisticated, more automated financial reporting, using Cognos Finance software, he adds.

Or take the case of Hexcel Corp., based in Stamford, Conn. The $900 million manufacturer of composite carbon fiber structural material has moved from a spreadsheet treasury to an automated treasury in the past two years, says Michael MacIntyre, its treasurer. The breakthrough was ASP-hosted treasury software, which brought basic automation within reach of companies like Hexcel. The company signed up for Selkirk's Treasury Anywhere product 19 months ago and now is looking at Selkirk's new, robust Treasura, which is also Web-hosted.

As a result of the time saved by automating basic tasks like cash positioning and forecasting, Hexcel's three-person treasury turned its attention to risk management and has become a sophisticated user of derivatives like interest rate and foreign currency swaps and forwards, including cross-currency interest rate swaps, MacIntyre reports. With 45% of its sales outside the U.S. and 19 manufacturing plants around the world, Hexcel was able to get its hedging in place before the dollar's prolonged decline. "With so much of our assets and costs offshore, mostly in Europe, we're long the dollar and short local currencies, so the falling dollar would have been bad for us," MacIntyre says. "But our hedging protected our position considerably over the past two years."

Not every middle market company has reached these kinds of heights--for that matter many larger companies haven't either. But at those with a vision of automation like Blistex and Hexcel, one often finds not just one innovative product, but many. For instance, at Trumbull/Dick/Lindy, Deible has gone well beyond PNC's cash allocator, having an active, albeit plain vanilla, purchasing card program and PNC's image lockbox. With access to lockbox images, Trumbull knows the same day what checks have come in and can pay subcontractors sooner. Rather than scan in and index lockbox receipts on its own imaging system, Trumbull can simply download them from the bank right into its system, Deible explains. "The bank showed us how to do that so we wouldn't have to print out the images and then scan them again. We don't get any paper back from the lockbox now. Everything that used to be paper is now electronic." Can every large company say that?

If the key to being a great strategic treasurer at a midsize company is flexibility, then Frank Kimick, treasurer and vice president at fashion watchmaker Movado Group Inc., is a contortionist. As head of a four-person treasury for a company whose revenues have more than doubled in less than 10 years, to a projected $410 million in FY2005, Kimick says he ends up spending 60% of his time on finance matters that fall outside the realm of treasury. "If it's an M&A deal, I'm working on not only treasury competencies, but accounting, operational and finance [issues], doing things that in large corporate organizations other people would be doing, because they have more resources and more definition to their roles," he says.

None of that bothers Kimick, who likes the responsibility and independence he is given as senior jack-of-all-trades. Given Movado Group's global reach--it manufactures and assembles watches in Switzerland and the Far East and sells them worldwide, with major operations in North America, Europe, the Middle East and Asia--he faces the same treasury, tax and accounting complexities that Fortune 500 treasurers do, but with only an assistant treasurer, a cash manager and a treasury analyst to watch his back.

And Movado has kept Kimick running. In 2004, it acquired Swiss watchmaker Ebel from LVMH, a French luxury goods company, and struck a licensing deal with German apparel company Hugo Boss to manufacture and sell its branded watches worldwide.

While Movado had no stores of its own when Kimick joined in 1996, it now has 24 Movado boutiques and plans to open another three to five in its fiscal 2006, which will end Jan. 31, 2006. With each new store, treasury's cash management work grows, Kimick says. "We've probably doubled our retail business, and doubling that business means more volume, more transactions, more accounting, more people, more [human resources], more flow, more treasury supervision.... As volumes grow and transactions grow, the whole organization, your supply chain, your human capital--it all has to adapt to that," he says.

Much of treasury's work revolves around the risks involved in doing business in multiple currencies. While Movado has always done business overseas, in recent years it has been expanding globally. "With everything rolling up into the U.S., you have more FX risk, more noise," says Kimick. "The treasury department has been very focused on managing that risk and staying in compliance with [Financial Accounting Standard] 133 when we hedge." Movado's treasury uses FX programs that allow it to hedge up to two years' worth of FX risk, and it has an FXpress foreign exchange exposure management system to help it hedge, document its hedges and account for them. "That increased volume [and] more global reach of our business since I got here and the complexity of new accounting regulations have been a challenge, a challenge that ... I believe we managed successfully," Kimick says.

Kimick notes the pressure from banks for business and says that dealing with banks as a midsize company can be a challenge because the company only has a certain amount of business to divvy up among them. "They tend to try to ask about each other's business a lot," he says.

Earlier in his career, Kimick, 38, was treasurer for Sunshine Biscuits Inc., with revenues of about $800 million, and worked in the treasury consulting group of a midsize accounting firm. He's a firm believer in the benefits that treasury can provide. "Companies often put the treasurer on the left hand of the CFO, rather than the right hand," Kimick says. "At times people don't look at treasury as having a significant involvement in the business, but there's a ton of value it can generate."



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