AMA: Why should a company be concerned with
financial assets management?
Lee Epstein: The most important
reason is to keep the money. However, corporations are like people—no
two are identical. A company’s treasurer may be interested in increasing
their portfolio’s financial return within certain risk parameters.
Another company may be experiencing resource constraints and wants to
strategize how to achieve greater operating efficiencies within treasury.
Often CFOs and treasurers face “emergency” situations, with
unique, very specific issues that need to be addressed immediately.
AMA: Has this field changed in the recent past?
If so, How?
Epstein: As we headed into the recession and
earnings decreased, we found that more attention was being paid to financial
assets and their management. Also, companies are depending on these assets
to help them make their earnings estimates. There is a lot more focus
on P&L management than before.
AMA: What are some of the biggest challenges
treasurers face today?
Epstein: Education! First, you have to be able
to identify real risks and to distinguish them from non-risks. Too often,
treasurers think they are protecting their financial assets, while they
are actually inhibiting earnings without adding a measure of safety. Today,
there are many more choices available to a treasurer or CFO and sometimes
the variety seems daunting. There are some ways to increase earnings without
taking undo risk. But there are also strategies that could plunge a portfolio
into deep losses. Knowing which strategies are viable requires education.
AMA: What about opportunities? Which are the
greatest? Which are the most difficult?
Epstein: It depends on the goals and objectives
of the portfolio. But, in a general sense, increasing [quarterly] earnings
seems to be considered the greatest opportunity. Given that most professionals
believe that interest rates are going to rise sometime, preventing losses
is believed to be the most difficult.
AMA: What advice would you give to the newly
named treasurer of a medium-sized corporation with an investment portfolio?
Epstein: Don’t panic! Too often, I see
financial professionals doing nothing because they are afraid or unaware.
There is a fine line between being conservative and creating opportunity
cost. Part of the treasurer’s job is to make the assets under their
control as efficient as possible. If the treasurer were a factory manager,
manufacturing inefficiencies, such as those in many investment portfolios,
would not be tolerated.
Another major mistake treasurers are prone to is thinking
they know everything about investing their treasury cash because they
have been successful with their personal portfolio. They are two different
things.
I would advise treasurers to remain open to new strategies
and ideas. Some treasurers would opt to do nothing rather than make the
effort to educate themselves in this very arcane field of investment or
admit they may not know everything relating to investing working capital.
They’re really missing out.
AMA: How can a financial manager improve financial
assets performance?
Epstein: The first step is to determine how
much cash the company needs to fund shortfalls in revenues and invest
the balance more advantageously. He or she can research strategies to
determine their tolerances to risk. Not all risk is intolerable (e.g.,
an unrealized loss, booked to the balance sheet, rather than the P&L).
Depending on the strategy, substantial earnings may await. Then, research
execution—some due diligence into finding the appropriate party
to execute the strategy. Don’t simply choose some organization out-of-hand.
AMA: Can you give us some examples of innovative
treasury practices?
Epstein: Sometimes, it may be as simple as buying
on certain dates, such as tax day, when people are selling to pay taxes
and prices have dropped accordingly. Two other strategies are:
- Purchasing callable notes at higher yield(s) and taking the risk that
they may be retired early.
- Finding municipal notes issued in less populated states; because
their state’s citizens do not create as much demand, they sell
at lower prices (higher yield).
AMA: What criteria should a CFO use to
accurately measure the performance of his/her treasury department?
Epstein: In the past, this has been a real problem.
Indices don’t work to benchmark working capital portfolios. An index’s
value, by its very nature, considers that you will sell the portfolio.
But, as most working capital portfolios are invested to collect coupons
only, there are rarely sales. It’s called a buy-and-hold strategy.
So why measure on price, if price is not part of the strategy? The Association
of Financial Professionals has adopted a buy-and-hold benchmark. It is,
in my opinion, the best measurement tool for working capital financial
assets.
AMA: How have the recent changes in the economy
affected the assets management field?
Epstein: With so many companies experiencing
downsizing these days, we’ve seen increased interest in specific
areas: investment analysis and investment accounting services have attracted
many new clients who no longer have the resources to do the job in-house.
More treasurers and CFOs are seeking creative yet risk-appropriate ways
to improve the financial return on their investment portfolios and develop
other investment strategies that contribute to the P&L in general
(e.g., deferred compensation, reducing custodial fees).
AMA: What major changes do you expect to see
in your marketplace over the next few years?
The genie is out of the bottle. When an outside organization
can close investment books in twenty-four hours, balanced to the penny
and uploaded in the general ledger, this argues strongly against maintaining
the status quo in treasury.
Author Bio: Lee Epstein
is Chief Executive Officer of three financial companies, all of which
deal with an institutional clientele. For more than two decades he has
focused on helping public companies, municipalities, not-for-profit organizations,
etc. enhance their earnings. He was formerly the head of a Corporate Services
group for Lehman Brothers. Besides teaching for American Management Association,
Mr. Epstein lectures for the University of California Haas Business School
and NYU Stern's School of Business.
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