From the February 2009 issue of Treasury & Risk magazine

For Your Information

After months of deteriorating sales, Richmond, Va.-based Circuit City Stores Inc. pulled the plug on its 567 outlets in January as it failed to find a buyer or secure adequate working capital. A few days earlier, the 104-year-old regional department store chain Gottschalks Inc. filed for bankruptcy protection as it sought a buyer or additional capital. Other blow-ups could follow, analysts say, as retail sales remain soft and credit remains tight. Meanwhile, more businesses--even those in far healthier sectors--are bracing for possible cash flow shortages, recent surveys show. Nearly 80% of U.S. companies say economic turmoil has hurt business with 67% citing tightening cash flow as a top concern, according to the Credit Research Foundation, which represents financial and working capital executives of manufacturing and banking companies.

This finding is backed up by a KPMG LLP poll showing that slightly more than 80% of the 550 U.S. and European senior financial executives surveyed cited working capital management as their highest, or high, priority. That's not surprising considering two-thirds reported flat or deteriorating capital, compared with three years ago and only 37% of those respondents had a working capital improvement program in place during the past five years. Of those who lacked a program, 70% predicted working capital will stay the same or decrease. "There is no doubt that companies have heightened cash management concerns today as compared to just a few months ago," says Brad Hillier, a managing director in KPMG's advisory services practice.

Contributing to these problems are unreliable cash flow forecasting systems, says KPMG. Only 14% of the financial executives surveyed by the consulting company reported achieving accurate projections in the past 12 months--even though almost all (95%) said they have forecasting mechanisms in place.

Inadequate forecasting systems, among other factors, contributed to collections problems, a major strain on working capital, analysts say. Indeed, slightly more than 65% of Credit Research respondents cited accounts receivables difficulties as a major strain on working capital. "Working capital is the biggest concern across the board," says Rob Sherman, president of outsourcer Vengroff Williams and Associates, who cites customer worries about dispute resolution, order management and collections as reasons customers seek outside help.


Pension Losses Hit Profits

U.S. employers will have to contribute $108 billion to defined benefit plans this year, but that's $16 billion less than they would have before last year's legislation that provided some relief.

That legislation, however, didn't go nearly far enough, argue business groups and consultants. Many are pressing Congress to provide more support in the economic stimulus package now under consideration.

"We urge lawmakers to pass additional temporary relief as companies transition to new, more restrictive fund requirements while battling declining pension asset values and a weakened economy," says Alan Glickstein, a senior retirement consultant at Watson Wyatt.

These recommendations come as another consulting firm, Mercer, reports that 2008 year-end funded status for Standard & Poor's 1500 companies dropped to 75% from 104% a year earlier, and this dramatic fall will cut into earnings as corporations make up the difference.

"This will reduce balance sheet strength, which leads to consequences for several areas of the business, including capital expenditure decisions, loan covenants and credit rating decisions," says Adrian Hartshorn, a member of Mercer's Financial Strategy Group.


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