Cash is King

Fall 2009 S erv in g the C orporate Communit y

Regardless of industry sector, size or revenues, all organizations are being forced to navigate the current environment
in which traditional liquidity channels are no longer reliable, with debt markets stalled and equity markets down.
To address the issues of this recession, arguably one of the worst in decades, Alvarez & Marsal (A&M) has developed
the Cash is King multi-part series that explores the strategies and tactics of the resilient players in the marketplace.
In this issue, “Where to Find Cash”, we will be covering working capital as a source of cash flow, how it can
strengthen your balance sheet and supplement stressed revenue, and the actions you can take immediately to start
freeing up cash, now.

Issue One: Where to Find Cash

In A&M’s survey of over 2,100 publically traded The Results

companies with revenues exceeding $100 million1,
Alvarez & Marsal (A&M) discovered that although most In general, the survey found that companies fell into one
companies were seemingly healthy and could survive the of four categories:
effects of a passing dip in the market, up to 44 percent A. “Alphas” have positive cash flow and healthy reserves
did not have the resources to remain healthy through an
B. “Betas” have positive cash flow with a short-term deficit
extended period of a recession-like environment and if
credit markets were to remain tight. C. “Copers” have negative cash flow with healthy reserves
This issue of Cash Is King explores how an organization D. “Distressed” have negative cash flow and short-term
can evaluate their own balance sheet and revenue concerns, deficits
and then effectively implement methods to unlock much
needed cash by accessing your own reserves, without
raising significant cash by tapping unreliable resources.
Unlocking Value discloses ways to live within your means,
Ability to generate cash
be more efficient and emerge on an improved platform.
< 0 >0

About the Study Copers Alphas

Balance sheet strength

Based on 2009 fiscal second quarter results (publically • Negative cash • Positive cash
reported in SEC filings), A&M evaluated each company >0 flow flow
according to two metrics: • Healthy reserves • Healthy reserves

• Ability to generate cash (proxy for their “ability to cover

their costs”)
• Balance sheet strength (proxy for “ability to meet
commitments or obligations”) Distressed Betas
• Negative cash • Positive cash
As part of the study, A&M reapplied these metrics <0 flow flow
after three quarters of the recession, and then reviewed • Short-term deficit • Short-term deficit
how each company would fare if the difficult market
environment was prolonged.

1 These companies span 19 industry sectors and headquartered in the U.S.

Financial services companies were excluded due to variances in
measuring liquidity and financial performance.

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Cash is King

There were some surprising results in the midst of this
market turmoil:
• In total, there was over $1.3 trillion in short-term assets
and cash surplus to current obligations. This is reassuring
in that these “war chests” can be accessed easily to
manage difficult times and slow economic recoveries.
• Subsequently, those who are suffering from slowed
revenues can supplement their limited cash flow with
surplus cash capital from their balance sheet; this
method can allow companies to survive for an average
of five years at the current burn rate.
However, there were some alarming points to offset the
good news:
• After three quarters of recession-like markets, one
out of three companies would be unable to meet
current liabilities, and / or fail to have the cash to cover
such costs if they do not have rapid and cheap access to
external liquidity
• That is, 30 percent of the surveyed companies would fall
into Betas, Copers and Distressed categories
Furthermore, the economic environment is plagued with
uncertainty, with pundits communicating mixed messages
about the market’s near-term future. A likely forecast
predicts that margins will continue to fall, and if this is
indeed the case, many companies will find themselves
unable to recoup. An additional down quarter could be
severely detrimental to an already stressed company.
After modeling an additional 15 percent reduction in
gross margins (simulating a continued degradation due to
a slow recovery), we found that:
• Companies lost revenue (-19%) a lot faster than they
were able to control operating costs (-5%) leading to net
income and operating cash being slashed by 33 percent
• And during the same period working capital went up
close to 10%, reflecting the build-up in inventory and
customers slowing payments to preserve cash
Also, given the fragility of seemingly strong companies in
this unprecedented environment, we are left to wonder
who the next causality will be. If the marketplace does
not improve immediately, it is likely that the number of
industry groups entering troubled territory will increase
from two to seven. In other words, only 12 out of the 19
industry groups (down from 17 out of 19) we examined
would have a majority of Alpha companies, the healthiest
being:
• Food, Beverage and Tobacco (82%)
• Telecommunications (69%)
• Capital Goods (65%)
The hardest hit industries – where we saw the largest
reductions in proportion of healthy companies – were
dominated by consumer-driven demand:
• Food and Staples Retailing (-44%)
• Technology Hardware and Equipment (-41%)
• Retailing (-34%)
100 %
90 %

• One out of two companies would be troubled with not 80 %

enough cash left to cover their liabilities and / or not 70 %
generating any (up from one out of three)
60 %
• The life expectancy of those living off their assets would
be almost cut in half (i.e., two and half years) 50 %

• Companies relying on cash from operations to repair 40 %

their balance sheets could take twice as long to do so 30 % Distressed
20 % Copers
The Aftermath
10 % Betas
What happened during the last quarter of 2008 through 0% Alphas
the second of 2009? End of After Further
As expected all financial performance deteriorated, but Q2 ‘09 Stress
not uniformly. For some, the results were startling:

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Cash is King

Survey Says... What can be done?

As the results show, regardless of industry sector strength
and healthy balance sheets, a large drop in revenues and
gross margin will hit your cash flow – hard.
To mitigate this risk, A&M has been helping companies
turn to their most accessible source of cash – working
capital.
Most companies have between 15 and 20 percent of their
annual sales tied up in working capital, including on
average:
• 61 days of inventory
• 49 days of receivables
• 50 days of payables
This equates to an average 60 days of working capital.
50 days of payables
61 days of inventory
49 days of receivables
Acquired Pay
goods for Sell and
and start goods Get paid
deliver goods
production acquired
60 days of working capital
In our experience, most companies are able to reduce
their working capital by 20 to 30 percent within a year
with the right discipline and focus. This reduction
generates an immediate cash flow infusion. When we
applied this principle to the test population, the results
were encouraging:
• Companies surviving off their balance sheet extended
their lives by three to six months, and even years, past
the anticipated duration of the current recession
• More than 25 percent of companies with no cash
available were able to restore their balance sheets to
positive, healthy levels and achieve Alpha (or at least
Coper) status
• Some companies would generate upward to a billion
in cash flow; subsequently, the money saved on interest
payments alone equated to tens of millions annually.
The resulting balances from reducing working capital
often surpassed short- and long-term liabilities, and led
to incredibly robust balance sheets
A&M has developed a number of key actions steps
companies can take to help generate cash flow through
improved management of working capital. Below are some
key recommendations applicable to most companies.
Put the basics in place; get the business properly
instrumented, set the right working capital targets and
start tracking key drivers. Then link compensation to cash
received.
• Payables: Check the default terms in your system and
make sure it is at least 30 days
• Receivables: Leverage the pareto principle – 80 percent
of the cash will come from 20 percent of the accounts –
and get collection activity focused on receivables within
the largest accounts; also focus on those receivables
with the highest value, i.e., less than 90 days past due
• Inventory: Revisit safety stock calculations, and make
sure that you are only purchasing and building within
what demand patterns indicate; confirm
that new demand patterns have been reflected for
replenishment triggers
Get to the next level: The more complex the business,
the more working capital is required – look for ways to
simplify.
• Payables: Compile annual spend by category and then
by vendor to uncover opportunities to consolidate spend
into fewer suppliers; swap more volume for better pricing
and terms; renegotiate contracts; and do not become
over-dependent on only one or two suppliers
• Inventory: Rationalize SKU’s, evaluate historical usage /
demand and profitability, while eliminating slow
moving and obsolete items
• Receivables: Compile customer profitability, including
write-offs, deductions and other adjustments to get an
accurate picture; and address unprofitable customers
(new channels, new product mix, new contracts!)
Getting to best practice: Eliminate working capital.
• Payables: Leverage electronic payment and funds
transfer to eliminate mail float and automate cash
application; link terms to inventory levels; take early
payment discounts; expand P-Card program to cover
most of your spend

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 Cash is King

• Receivables: Provide customers with Electronic Bill
Presentment and Payment; automate or outsource
small volume collection; charge late payment fees,
accelerate disputes resolution
• Inventory: Maximize the use of vendor managed
inventory; optimize supply chain in partnership with
vendors / customers
Summary
Based on extensive research and analysis, A&M found that
many companies still remain relatively healthy after three
quarters of a recession. However, 30 percent have and will
enter troubled waters when their ability to raise cash is
stifled and they can no longer cover their short- and long-
term obligations.
Regardless of a company’s balance sheet and revenue
generating capabilities, most are able to unlock meaningful
value by reducing their working capital. Even those under
severe stress could, on average, extract $140 million in
cash flow and extend their lives by years, and in almost all
cases, long enough to weather a typical economic cycle.
Being able to access cash by looking internally is even
more meaningful given that the capital markets have
become wholly unreliable, and taking on further liabilities
is highly undesirable.
A&M has outlined specific actions a company can take
to tap into this dependable source of capital. However,
we would recommend that companies not wait until
they are in a crisis mode. Customers and vendors are less
likely to accommodate certain actions once the economic
stress becomes widely known. Increased cash flow is the
most reliable way for a company to create value – so take
advantage of the tools offered today, and start generating
cash flow now!

About Alvarez & Marsal

For more than 25 years, Alvarez & Marsal has set the standard for working with organizations to solve complex
problems, boost operating performance and maximize value for stakeholders. A leading independent global
professional services firm, A&M draws on its deep operational and turnaround heritage to help companies
across the industry spectrum improve operating and financial performance, and to navigate business, litigation
and tax matters with speed, responsiveness and unmatched quality. Whether serving as business advisers or in
interim management roles during periods of change or transition, A&M stands for leadership, problem-solving
and value creation. A&M clients range from multi-national to middle market companies around the world that
are both publicly-held and privately-owned. With a bias toward action, implementation and results, Alvarez &
Marsal professionals serve large and mid-cap private equity firms, company management and boards and other
© Copyright 2009 Alvarez & Marsal Holdings, LLC. All Rights Reserved.

stakeholders aiming to drive sustainable results up and down the balance sheet.
For more information, visit www.alvarezandmarsal.com

Disclaimer
This newsletter is not intended or written by Alvarez & Marsal Holdings, LLC to be
used, and cannot be used, by a client or any other person or entity. Readers should not
consider this document to be a recommendation to undertake any business action,
nor consider the information contained therein to be complete, and should thoroughly
evaluate their specific facts and circumstances and obtain the advice and assistance of
qualified advisers.

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