What's on today's treasurers' minds? in the uncertain global economy, treasurers are faced with a slew of internal and external financial, risk and technological challenges. (Treasury).

The treasurer of a 3,700-store U.S.-based retail chain is the steward of $2 billion in cash that was raised in the past two years through financing transactions and asset sales to mitigate the risks of paying bills and paying off debt. The treasurer of a global software company is managing $400 million in cash, distributed around the world, that is not necessarily "liquid cash," available for use within the U.S.

Ask a treasurer if he or she could be called "Chief Liquidity Officer" (CLO), and they'll probably agree. The CLO moniker fits, since regardless of industry or geography, today's treasurers main concerns focus on liquidity: how much cash or equivalents they have, where it is, its availability, how much of it is flowing--both in and out--and the degree of risk associated wth it.

The adage that "cash is king" is an understatement in the world of treasury, where even having cash has its challenges. And, along with global financial uncertainties, considerable changes impacting the treasury function are presenting new challenges for all treasurers, both the "haves" and the "have-nots." Financial Executive spoke with treasurers from the two industries described above to tap into their thinking on the current environment's impact on their role.

Treasurer of Autodesk Inc.

"We are a cash-rich company," says Jan P. Berger, treasurer of Autodesk Inc., whose main assets are its people and its software. "In the past, we have enjoyed a fairly decent return from interest income. In the current environment, our yields are down, and so the expectations that we had two or three years ago with regard to interest rates contributing to the bottom line have shrunk." It's a challenge, he says, "to try to eke out extra return while maintaining credit quality of investments." Also, as the company has grown internationally, managing that growth and getting return and yield on its cash balances have also changed.

Autodesk develops and markets design and drafting software and multimedia tools, primarily for the business and professional environment. The company operates with a small staff that controls the "lion's share" of activities, including its centralized treasury function, from its San Rafael, Calif. headquarters. While it sells in Japanese yen, Australian dollars, Canadian dollars and European euros, hub locations in Singapore, Switzerland and Montreal are structured as U.S.-dollar functional from an accounting standpoint. Berger explains that by holding the excess cash in U.S. dollars, "we're not subject to foreign exchange re-measurement every accounting period," and that allows the firm more flexibility for its investment choices. While some local generally accepted accounting principles (GAAP) reporting requirements relate mainly to taxes, the company's books are consolidated in U.S. dollars.

Berger works with one principal international bank with the geographic reach and global infrastructure that fits his requirements. "We leverage our banking structure and technology," he says, adding that "using its services and branches wherever we can around the world enhances our relationship and affords us the control to move money from one central location."

However, a recently changed legal structure is creating new challenges for the company's geographic "pockets of cash," says Berger. The strengthened euro and weakened U.S. dollar has been "somewhat" beneficial: "We sell in euros and yen, exchange those receipts into U.S. dollars, [so] we're getting more dollars." On the other hand, he says, "We do have hedge programs in those currencies, so those hedge programs, to a certain extent, limit our upside potential." He says his view of foreign exchange hedge programs is to minimize the big losses and the very large swings. "You're essentially buying insurance," he says, and need to stick to the course of a disciplined program that has a consistent approach. "If you try to time the market, you get into trouble."

The structure has other restrictions. For one, the excess cash outside the U.S. can't always be invested. "We're somewhat limited in what we can invest in, so our yield may not be what we'd like," says Berger. Yet, he says the structure helps avoid a lot of issues. For instance, it eases the difficulty of being geographically spread out. And, with one bank controlling the receipts and receivables, "all the customer payments come into banks that we control centrally. Then we feed each of the subsidiaries monthly operating expenses, so we are controlling the outflow as well."

Having created U.S. dollar-functional entities overseas lowers the foreign exchange exposure, he explains. "We do have balance sheet and cash flow foreign exchange exposures, which we hedge. We hedge cash flow exposures over 90-day periods in euros, yen and pound sterling. The challenge there is forecasting the business over 90 days, but that's a challenge for everyone in business, especially in these times when the economy is soft and sales become difficult. It's tough to predict. To mitigate that, we don't hedge 100 percent of our exposure."

Also, Berger says for the last two years, Autodesk has been in a share-repurchase program, using U.S. dollars. "We've acquired five or six companies in the past few years, which have also been out of the U.S. stash. To the extent that we consume our domestic liquidity, we're always careful to monitor and understand where the liquidities could be in any quarter. And, our company has not suffered the severe revenue reductions that a lot of our brothers and sisters in the technology industry have experienced," he explains.

Given the uncertain climate, what is Berger doing differently? "We're looking harder at the choice of investments that are available around the world to try to earn more yield." On the foreign exchange side, he concedes there's not much to do differently, "We keep a disciplined foreign exchange program, whether the dollar is weakening or strengthening."

Berger says that for the treasury function, the Internet is a great benefit. It "has enabled groups like ours to not expand, but rather to maintain staff levels." He's just wrapping up an implementation of a treasury workstation, which is enhancing his ability to view, locate, manage and forecast cash balances around the world. "It's enabling us to see where there are areas of idle cash; we're minimizing those and getting them invested in interest-bearing activities quicker than we had before." Also, Berger says he's made his first foreign exchange transaction via the Web; having previously used a provider to do the trading, he's now moving to integrate this function into the treasury workstation. "Foreign exchange trading on the Web has huge advantages: It sets up an auction-like setting, which significantly reduces the spread, and thereby, the cost.

"We leverage the Web wherever we can," says Berger, working with finance partners in the organization around the world, sending data back and forth between the company and the principal bank.

Operational risk in his industry is very low, says Berger. "As a software company, our asset is our people and our actual property--our code." He explains that CD production is subcontracted among several contractors around the world, so, should there be an operations facility down in, say, Freemont, Calif., the disks can be produced at another location. From the financial perspective, the largest risk he says is probably foreign ex-change, and, as noted earlier, Autodesk has hedge programs to mitigate that.

Another concern is corporate insurance, where the market has gone "topsy-turvy," Berger says. "We were in a multi-year soft period, where terms and conditions were lax, pricing was easy and availability was there. It's been a very difficult market for all corporate treasurers and risk managers," he laments. Things have been particularly steep in the tech sector and other areas that have been hit with shareholder litigation suits, leading to large director and officer liability insurance issues. "It's made these products extremely costly." He says with premiums doubling--and more--with less coverage and higher deductibles. "People have had to rethink how they're going to pay for insurance, or how they're going to retain risk from that standpoint."

Treasurer of J.C. Penney Co.

"We are in a turnaround, so liquidity is probably one of the things that I've spent the most time on in the past year and a half," says Michael P. Dastugue, vice president and treasurer of $32 billion retailer J.C. Penney Co. "Our investment strategy is to make sure that we remain in high-quality, shorter-duration investments so that we have plenty of flexibility. You can't have too much flexibility these days, especially in this economy" he adds.

In September of 2000, retail veteran Allen Questrom was brought in as chairman and CEO to revive J.C. Penney's department store, catalog and (wholly-owned subsidiary) Eckerd Drug Store businesses. Each business is undergoing signigicant changes, and the turnaround is estimated to take four to five years. To provide the appropriate financial flexibility over this timeframe, the company sold its direct marketing business and executed a number of financing transactions, including a $650 million debt offering, a $230 million debt exchange and a new three-year $1.5 billion bank line of credit.

From its Dallas headquarters, the treasurers' group is a centralized operation comprised of four groups: banking, financing, insurance risk management and benefit plans investment, all of which fall under Dastugue's management, and control the catalog, 1,100 U.S. J.C. Penney stores and 2,600 Eckerd stores. Also under its control are 53 Penney stores in Brazil and 6 in Mexico. Combining the relationships with key banks and using the software platform of its lead bank, J.P. Morgan Chase & Co., four associates manage the treasury operations for the nearly 4,000 retail locations and catalog.

Each day, Dastugue sees the department store and catalog cash flows--both the receipts and the disbursements. "We forecast every day; so, we know whether we're up or down. We have a long history with funds flow; we've been doing this on a daily basis at Penney for 10 years and since we acquired Eckerd (in 1996)."

The environment has certainly changed, Dastugue opines, particularly relating to bank consolidations. And, as every treasurer knows, consolidation impacts the amount of available credit. (If you had a $50 million line of credit with two separate banks, a merger of the two doesn't mean you'll now have $100 million.) "With the new institution, you hopefully get your same $50 million -- maybe $75 million, if you had a really good relationship," he says.

So, while it's different dealing with the larger institutions, Dastugue believes those can develop into more meaningful relationships. "We just renewed our line of credit -- we now have 19 banks; five or 10 years ago, we would have had 30 banks." He says more meaningful relationships have benefits. "When we need something, it's easier for the bank to justify certain services -- and we try to work it to our advantage." Dastugue says that his CEO Questrom and Executive Vice President and CFO Robert Cavanaugh make a point to personally meet with the chairmen of some of the largest banks when in New York, where the banks are based, since "the chairmen and CEOs of the banks, too, understand the importance of the relationships -- it's a partnership."

Another concern for Penney's treasurer is the equity markets' decline and its impact on pension funds. Dastugue says Penney has had a very efficient plan for about 36 years -- for which it's only had to put in about 10 percent of the funds, and the capital markets did the rest of the work. Now, he says, "With the decline in the last two to three years, we are looking at funding strategies going forward. We still have a plan with more assets than liabilities, but long-term, we want to make sure it is well funded."

Insurance risk is another key area for a retail firm such as Penney. The insurance market has turned from soft to hard, both before, and certainly after, 9/11. Dastugue says his firm has always maintained a highly protective risk (HPR), meaning that its facilities are designed and structured for optimal safety levels, and it's had only minimal issues or losses. In fact, following last year's earthquake in the Northwest U.S., he says, "Our stores survived minimal damage since we've always made sure the designs could stand a certain level of earthquake. Not all retailers do that."

Technology Is a Priority

Dastugue says, "We leverage technology wherever possible." One way is to eliminate checks in the mail. Currently, 90 percent of the dollars paid to J.C. Penney suppliers, and 75 percent going to Eckerd suppliers, are sent via EDI-EFT payment. "It's clearly in the company's interest to try to make everything electronic -- from a labor perspective as well," he says.

While sold on technology generally, he's not yet sold on treasury workstations. "We've looked at treasury workstations, and have yet to find one that could be fully integrated with our systems," he says. "It's not something we've closed the book on, but we have to prove that it makes more sense than some of the internally-developed software tools that we have."

Dastague was asked about three types of risk management: currency, operational and financial. He says that while Penney sources about 99 percent of the purchases for its private brands from overseas, it's done in dollars, resulting in little or no currency risk, and operational risk falls on the company's Executive Committee. The biggest financial risk, Dastugue says, would be "if we didn't have enough money to pay our bills or pay off debt maturities. The way we dealt with that is the financing transactions and asset sale to raise the $2 billion in cash."

A step taken a few years ago to greatly reduce financial risk was outsourcing its credit card operation to GE Capital Corp. "If you have a J.C. Penney credit card, you are getting financing from GE Capital," says Dastugue. In essence, he says, "We took something that was historically a marketing cost, and by outsourcing it, have turned the cost into a profit; every dollar that gets charged on a the credit card creates a small profit for the company. But even better -- from a cash-flow risk perspective - when something is charged on the credit card, Penney gets paid the next day from GE Capital. So, from a cash management perspective, we are in a much better situation," he says.

RELATED ARTICLE: Jan Berger's top issues:

* corporate insurance

* issues related to the new legislation and expensing stock options

* liquidity--not for him right now, but for other treasurers, especially in his industry

* FASB/SEC issues related to expectations in terms of reporting

Michael Dastugue's top issues:

* ensuring the company's financial flexibility over the next 4-5 years

* managing the bank consolidation arena

* the insurance markets

What Treasurers Are Keying On

* monitoring pension fund realities

Treasury Strategies (www.TreasuryStrategies.com) conducted a Global Treasury Management Survey in March 2002 as part of its ongoing assessment of the treasury management function and evolving treasury best practices. The companies surveyed were primarily large (the vast majority ranged between $1 billion to over $25 billion in revenues), multinational (on average 30 percent of their revenues were from outside the US) and in non-financial industries.

Among the findings, five points stood out:

Technology Usage Is Expected to Grow Markedly

Presently, more than half of the respondents do not utilize a treasury management automation system. With tight headcounts and a spotlight on control processes, treasurers are recognizing the benefits that can be achieved from effective treasury technology. Almost one-third plan to implement some form of treasury software over the next year.

Cash Forecasting a Top Focus

In the current business and financial climate, accurate cash flow forecasting has become a fundamental requirement. Two out of three treasury departments have ongoing projects to optimize cash flow forecasting.

Risk Management a Key Issue

More than half of the treasury departments have projects oriented towards improving risk management. In the area of operational risk management many are addressing treasury disaster recovery and continuity planning. Regarding financial risk management, many are still working to address the impact of FAS133.

Outsourcing Is on the Radar

Increasingly, treasurers are considering outsourcing selected treasury functions in efforts to free scarce headcount for strategic issues. A number of companies have outsourced their European treasury functions and are now looking for similar benefits in the U.S.

Globalization Affecting Treasury

Treasurers are reviewing and harmonizing their global treasury structures policies and processes. The focus is on Europe and Asia, where many companies have significant business operations but often use relatively decentralized structures for cash and liquidity management.

FEI's Treasurers' Teleconferences

FEI's Committee on Corporate Finance (CCF) is currently hosting a series of teleconferences aimed at the corporate finance community. The "Final Wednesday" series -- so named because the teleconferences are scheduled on the final Wednesday of each month -- began in September with a primer on managing rating agencies and investor relations. The October teleconference began a three-part series on treasury management in Asia. Below is a description of upcoming teleconferences:

Nov. 27. 2002: Treasury Management in Asia - Part 2: Tax Efficient Asian Cash and Treasury Management

Jan. 29, 2003: Treasury Management in Asia - Part 3: Treasury Management in China

Feb. 26, 2003: Hedging in the FAS 133 World (with guest speaker Ira Kawaller, Kawaller & Associates)

Additional topics scheduled for later in 2003 include:

* Credit and Bank Relationship Management

* Safeguarding Corporate Liquidity

To register or get more details on the scheduled programs, go to FEI's teleconference Web page: http://www.fei.org/tc, or contact Mark Prysock, FEI's Director of Tax Policy, at [e-mail] or 202.626.7804.