Dive Brief:

• CFOs facing mounting wage pressures and rising wholesale prices can blunt the harm from high inflation by reviewing company assets and liabilities and unlocking cash, according to McKinsey.
• The CFO strategies for freeing up cash range from divesting underperforming assets and analyzing receivables and payables, to tightening up credit support and speeding returns from partnerships, McKinsey said in a report.
• Financial executives usually focus on an income statement to reduce debt-to-equity ratios, boost profitability and improve resilience, McKinsey said. “Few companies give much thought to the assets and liabilities on a balance sheet that can unlock lucrative opportunities.”

Dive Insight:

CFOs this year have had to quickly adapt their companies to the biggest spike in prices in 30 years.

The consumer price index last month rose at a 6.2% annual rate, according to the Labor Department. The Federal Reserve’s preferred measure of price gains — the core personal consumption expenditures price index — rose 3.6% in September.

The producer price index for final demand, a measure of what suppliers charge businesses, soared 8.6% in October from the prior year, according to the Labor Department. That was a record jump in a series of data first published in 2010.

“Helped wanted” signs go unanswered, prompting CFOs to raise wages. The quits rate, or the number of workers who left their jobs as a percent of total employment, increased 3% in September, the highest rate in data going back to 2000, the Labor Department said Friday. There were 1.4 job openings for every unemployed worker. 

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

CFOs can take some of the bite out of inflation, McKinsey said, by taking six steps to free up cash on their balance sheets:

1. Review receivables and payables

By finding process gaps in receivables and payables from the prior year, CFOs can shake loose cash for investment, debt reduction, dividends payments, and mergers and acquisitions, McKinsey said.

Slow invoicing, weak collections policies, early payments to vendors, inefficient payment processes and out-of-market terms can all slow the cash-conversion cycle and tie up cash, McKinsey said.

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

2. Sell or ‘reimagine’ underperforming assets

By identifying returns — or losses — from property, plants, equipment and other long-term assets, a CFO can single out low-performing assets for sale or repurposing.

"Those assets can then be sold or re-purposed, improving results by freeing up cash through the deployment of assets to higher-value activities and delaying planned capital expenditures," McKinsey said.

3. Recover ‘trapped’ cash

Cash may sit dormant among joint venture partners or foreign subsidiaries that lack an operationally or tax-efficient way to deploy it. Dividends from partnerships may arrive only after a lag. A thorough review of the balance sheet can identify partners with outstanding payments.

Also, by streamlining global cash management, a CFO can reduce the number of urgent cash transfers in a year, McKinsey said.

For example, a telecommunications company found that half of the cash on its balance sheet was inaccessible because of local account restrictions. The company freed up cash and reduced its dependence on external funding by updating its bank account structures and global cash management practices.

4. Pursue smart credit support

CFOs that use cash collateral, letters of credit and surety bonds as credit support for commercial or regulatory purposes may end up misallocating liquidity, McKinsey said.

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

For support still needed, a CFO should identify the most capital-efficient way to do so. At some companies, this may mean replacing cash collateral with a letter of credit, or a letter of credit with a surety bond that does not require further collateral, McKinsey said.       

5. Find alternatives for funding pensions

CFOs at companies with significant defined-benefit obligations can improve their outlook through one or a mix of several options: liability-driven investing, changing existing defined-benefit plans, freezing the plan and converting it to a defined-contribution plan, or adopting a cash-balance plan.

For example, a large U.S. retailer eliminated several billion dollars of pension liability for 30,000 employees by transferring the liability to an annuity provider. The retirees saw no reduction in benefits, and the retailer avoided volatility and future funding requirements.

6. Reduce long-term liabilities

A CFO that reduces environmental and other long-term liabilities can build a pool of cash for investment in high-performing business ventures to distribute to shareholders. The assumptions underlying some environmental compliance may no longer be valid, or compliance may be handled more efficiently.

For example, a U.S. power company found during a review that its balance sheet failed to account for completed reclamation and remediation. It worked with regulators to revise its environmental liabilities and reduce the needed credit support. 

“Companies that schedule robust, regular reviews of their balance sheets can increase working capital and convert underperforming assets and capital-consuming liabilities into accessible cash,” McKinsey said. “Together, these changes can finance M&A, research and development, and capital expenditures; strengthen resilience; and increase distributions to shareholders.”