Last year brought disruptions in almost every industry. We witnessed significant interruptions in order fulfillment and delivery systems, chaotic drops and soaring demand in certain categories, fresh liquidity for borrowers and cash crunches for others. And cash management underwent rapid change for those suddenly with too much or too little.

Short-Term Cash Management Led to Underutilized Cash

Manufacturers, retailers and distributors were already dealing with a host of distribution, inventory and labor related constraints. Then consumers radically changed their buying preferences in a matter of weeks. Many companies faced a combination of surpluses and shortages, and cash management was brought to the forefront. 

The winners (outside of the toilet paper anomalies) were companies that were able to quickly react and reposition their operations.

Those that survived market challenges had varying reactions to the new economy. Some:

• Quickly borrowed at low rates to build cash reserves,
• Expedited smaller capital improvements to capture demand spikes or
• Retreated to a cash preservation mode to ride out the shocks.

Across industries, many companies conservatively adjusted their capital investment strategies with as much as a 20-30% reduction in capital spending in 2020. Short-term planning led strategic discussions. 

For many companies, this resulted in cash sitting underutilized on the sidelines.

Overall lessons were learned, and new dynamics are beginning to settle. Now is the time for executive teams to focus on improving their data analytics, generating additional cash flow from new external resources and employing their excess cash in productive ways.

Hindsight Should Stay in 2020

Cash management in 2021 will need to be more than a static forecast of averages on historic and near-term sales and expenses expectations. Even the most robust of models will need to become more flexible to be able to pivot with market shocks.

Updated detailed cash flow forecasting should include scenarios with new external risk variables. The cash forecast needs to be more than just a tool to estimate debt needs/payments or a way to track variance to actuals for reporting.

Scenario planning, if not already incorporated into weekly cash forecasts and inventory demand plans, should be developed now as system shocks are likely not over.

A few expected changes could cause significant variances to the best of plans this year:

• Management teams need to be prepared for increases in borrowing costs.
• The next administration indicated increasing corporate tax rates should be expected.
• Supply pricing is likely to continue increasing, impacting margins.

And other supply chain challenges will continue into the new year:

• Competition for warehouse space will still exceed capacity, especially near transportation hubs.
• Transportation costs have skyrocketed, driven by a shortage of rail and truck as more vendors continue to increase their e-commerce presence.
• Port delays from a labor shortage are causing shortages, and increasing freight costs may continue.

Beyond accounting for increased sensitivity with expense variables, cash flow forecasts need to incorporate outputs of data analytics to inform decisions and planning. Knowing one’s expected cash position as well the level of cash need, or excess cash, is essential.

Want to know more? Learn what should be in your cash flow forecast:

Excess Cash Should Be Employed

Many companies recently raised funds, drew down on lines of credit, or borrowed from new federal loan programs to ride out the pandemic.

And now that 2020 has come to an end, vaccines are being introduced and companies see a light at the end of the tunnel, boards and executives need to consider how to best employ their cash reserves. 

Holding excess cash is not without risk. While the loans banks made recently via the PPP lending program were protected from defaults, cash borrowed by companies was not protected. The unlimited safeguards on cash on hand have not replicated those in place after the 2008 financial crisis.

Many companies recently borrowed in multiples of the new FDIC guarantee limits set at $250K. One strategy for protecting these borrowings is to simply allocate the cash across multiple financial institutions. While this is achievable, it is cumbersome from a reporting perspective and not lucrative.

Interest rates are generally expected to increase with inflation in 2021, albeit this is not guaranteed. Treasury rates went negative in 2020, as safe short-term investments were needed most for new borrowers or those with excess cash on hand. And they are only just above zero now. These shorter-term investment options appear less attractive presently, compared to some longer-term strategic uses of excess cash.

Accordingly, investment alternatives are again at the forefront of cash management discussions, given the abundance of unsecured or underutilized cash.

Strategic options for excess cash include:

• Debt repayment of borrowings at higher interest rates, noting any prepayment penalties
• Capital expenditure plans across technology and infrastructure can be executed or expedited
• Acquisitions and other partnerships
• Dividend payments to shareholders
• Share Repurchases, with an intent to increase corporate leverage

Underutilized cash is expensive from a lack-of-return perspective. Cash sitting only as a safety net hurts operating margins. Excess cash at higher interest rates begs to be repaid or restructured.

However, if your net borrowing costs are relatively inexpensive, consideration should be given to utilizing it to strategically propel the business forward.

Interested in learning more about optimizing cash flow?

Read our blog post: “Optimizing Cash Flow in Challenging Economic Times“

Alternatives When Cash Remains Tight

For those companies that are tight on cash or still need more cushion, options remain to generate cash in the near term. 

Additional government lending programs are still being considered, and borrowing rates at the present are still historically low for now. 

Near-term considerations should be given to securing the balance sheet. Fixed-rate debt at this point is preferred. Yet treasuries, even for a short period, would provide insurance against shocks.

Borrowing excess cash for certain strategic options to position your company for new growth is also an alternative. However, the current lower effective cost of capital should not necessarily be applied immediately to all long-term capital investment decisions.

Outside of debt plays, credit terms should be renegotiated where possible. This is especially relevant with vendors with which purchase levels are increasing significantly. However, in the current environment, one should expect limited results – unless your product is a 2020 success story.

You should work with your banking institution to perform a review of your cash holdings and discuss new product offerings that might prove beneficial to you and your supply chain vendors.

For instance, many larger banks offer supply chain finance programs that can accrete up to 2% of pre-negotiated discounts. These tend to be attractive to international vendors from an early-pay perspective. Commercial card agreements offer generous rebate structures in lieu of pre-negotiated discounts and terms.

Outside of these borrowing and financing alternatives, current assets and payables should be continuously monitored. While many sources of cash from receivable and payables reviews are limited or one-time, they are sources of cash nonetheless. 

Inventory and distribution reviews, especially in the new environment, are critical at this juncture for longer-term cash generation via expense reduction as well as margin and velocity improvement.

Prioritize Cash Management

Make time now to reassess your cash position, forecasting methodologies and tools, and investment processes. And given the chaos and time constraints many are facing right now, reaching out to external consultants for assistance is a worthwhile idea to consider. If you would like to learn more or explore how we can support your team, we invite you to contact us. You might also be interested in our downloadable resource below:

Gone are the days when Corporate Insurance renewals simply replicate the existing programs with all the same carriers and only minor increases in overall year-over-year pricing. While this has increasingly been the case for the last few years, the level of uncertainty and tightness across the insurance marketplace has continued to worsen during 2020 and portends a rough renewal climate for 2021. A typical three- to four-month renewal process may need to be extended if carriers are not renewing – at the right price or at all.

So let’s cover some best practices to remember when wading into renewals in the current climate.

Unprecedented Pricing Pressures Affecting Corporate Insurance Renewals

On the carrier side of the equation, they are facing monetary pressures as their pricing landscape has been complicated with reinsurance markets tightening up, an extremely low-interest environment limiting returns on carrier portfolios, natural catastrophes and other economic events such as the Federal Reserve signaling yield curve control measures.

Treasurers and internal risk managers have been facing a host of challenging market conditions this year as a result – including reduced capacity, higher collateral requirements, more restrictive terms, increased rates and historically high premiums.

Within the property market alone, the last twelve quarters have witnessed rate increases. And the year-over-year increases in premiums that had been around 5–10% have been in excess of 20% recently. This has forced some companies to purchase lower limits knowing that each layer will be incrementally more expensive.

Interested in treasury management? Learn more about benefits in our blog: “Treasury Management: The Best Defense is a Good Offense“

Set Expectations, Know the Goal

Challenging conditions will likely continue to acerbate pricing pressure this year. Hence, planning for your upcoming Corporate Insurance renewal process this year will require more from the leadership team to achieve relative gains.

The ultimate key to successful renewals will be year-over-year capital planning. This is where the risk team needs to lead resource coordination across the Company throughout the year. That said, current-year results are a critical component in renewals.

And while the team should continue working to respond quickly to the multitude of ongoing data and information requests from existing carriers, lender questions on coverage and other ad hoc requests, never forget that a successful renewal is the ultimate deliverable.

Be Prepared: Corporate Insurance Renewals in 2021 Are a New World

In years prior, brokers would often meet many carriers, existing and potential, at conventions over a short period of time. Some would do onsite visits prior to making decisions. These meetings are near impossible this year still. Therefore, locking in the existing carrier stack is more crucial than before. Time to pitch new carriers will take longer and may come at a higher cost.

Prompt preparation of operational and financial due diligence is critical in advance of the renewal process. In this competitive and costly insurance market, getting data to the carriers is especially time sensitive. If the stack is slow to fill or too expensive, new carriers will need to be added last minute.

Lastly, the Company should ideally have a detailed business continuity plan in place that is updated annually. Not all companies have had one previously though. If 2020 has taught risk managers one thing, it’s to have a plan in place for anything. Know that development of a detailed continuity plan will take a couple of months and may not yield current-year savings, but not having one in place could raise some carrier concerns about business stabilization and contingency planning capabilities.

Understand Your Data and How It’s Used

Brokers will coordinate the dissemination of information, but it is the Company that is responsible for producing the data timely. Work with your broker early to ensure that all data requests are understood prior to the Corporate Insurance renewals process starting so that delays are prevented.

A number of common insurance policies are relatively easy to prepare document requests for. Some of these data requests typically include historical loss or use data on policies such as Worker’s Compensation, Cargo, Cyber or Flood, while some policies require more detailed information requests such as Product Recall. And outside of specific policy documentation, a recent trend is for carriers to request engineering specifications, parcel maps confirmations, and other detailed information beyond what may normally be provided.

The Company will also be responsible for a detailed Statement of Values (SOV) that will be used for established the amount and pricing for Property and certain other policies. This statement compiles current balance sheet and income information that is summarized together as the Total Insured Value. Balance sheet information on all property is included, such as machinery and equipment inventory, and is combined with Income for the Total Insured Value (TIV).

While the income component on the SOV is fairly straightforward, current appraisal values may differ significantly from book values on some of the assets and should be reviewed in detail prior to finalizing the Statement of Values. By preparing draft due diligence early, the Company will have time to explain significant changes in values and, potentially, acquire current asset valuations if certain book values are questioned.

Moreover, the Company is responsible for the accuracy of the SOV. Once this analysis is submitted, it is more difficult to amend after distribution.

During the year, any policy may need to be repriced or replaced. Events happen over the course of the year such as acquisitions, new debt covenants, errors and other requirements that have downstream data distribution and pricing impacts. Managing ongoing data inputs and understanding significant changes in the underlying drivers to all policies outside of the renewal process will decrease the preparation time if a policy needs to be revised or replaced.

Risk Management Via Capital Expenditures

Developing a thorough assessment of facilities and processes as part of an ongoing strategic risk assessment and capital improvement process should be ingrained into the culture of the Company. The goal should be to always improve safety, reduce risk, limit potential losses and ultimately provide a current assessment of the Company’s risk profile to carriers.

If the Company has never had a comprehensive and independent risk assessment performed, one could be uniquely useful as a starting point. This can be done internally – but already having a sense for which projects need internal prioritization may obscure findings. Regardless of origin, the identification and prioritization of capital investment strategies, improvements and/or trainings will be the ultimate product.

For companies that are cash tight, actual investments will require more cost/benefit analyses. As some capital projects may have a ten-year return window or only theoretical risk reductions, immediate value can be achieved on the insurance side of the equation with potential premium or collateral reductions – or at least yield lower than expected rate increases this year.

As the re-insurance market also continues to tighten, more risk is placed back on insurers directly. Communication of detailed capital commitments during the renewal process may accrete additional positive results. Sharing risk assessments and plans builds trust. Working partnerships with carriers will benefit companies as options tighten. While pricing may be more inelastic – keeping the carrier stack in place year over year is a big win this year.

Read more about capital expenditure strategies in our recent post: “5 Easy Tips for Capital Investment Strategies During the COVID-19 Crisis“

Corporate Insurance Renewals: Coverage, Pricing and Financing

While each policy prices somewhat differently and various individual risks borne by each Company will yield different pricing, some things are universal. Data drives decisions, and bad data leads to bad decisions. This usually results in risk to the Company – either from paying too much for a policy or being underinsured.

And lack of sufficient coverage may cause downstream conflicts, such as those with certain debt agreements. Lenders need their investments to be properly covered and will actively review policies periodically.

Carrier pricing is directly correlated with the SOV, loss and other actuarial data. Knowing the range of rate increases that are possible in the upcoming Corporate Insurance renewals year combined with the total insured value and last year’s rate will yield an estimate of what the premium will be in the upcoming renewal for planning purposes prior to going to market. And in this upcoming year, that might be an unexpected hit.

That said, the Company may choose to insure less or more than the TIV based on various factors such as risk profile, dispersion of operating facilities, growth and cost vs. perceived value. It is ultimately the Company that chooses the amount of insured value to price based on its specific risk tolerance.

Depending on the carriers involved, paying for the premiums and collateral held by the insurers can be handled by various financial instruments. Outside of using cash on hand or using a credit facility, some carriers offer their own financing options with low- or no-interest options. Other policies can typically be financed through banks and what brokers bring to the table, if the rates are lower than those offered by the Company’s own credit facility.

Collateral requirements are typical with liability policies, such as workers compensation, general, auto and umbrella policies. As the collateral is structured effectively as a deposit, a letter of credit options is an ideal financial instrument for covering this potential liability.

And when all of this seems like it is very expensive and overwhelming, you may want to price shop next year. Always know what other brokers are doing for their clients and who is getting in with certain carriers. Keep an ear out for what is happening in the insurance market. It doesn’t mean you should switch; it just means more information is always better. Stay educated on changes in the insurance industry and your industry.

The more you can understand and improve your Company’s risk profile, the easier each successive renewal will be.

Learn More

8020 Consulting’s team of 120+ accounting and finance consultants is available to support your organization as needed. Our team has the expertise and depth to help you with corporate insurance, cash management and treasury, and financial planning & analysis. You can learn more about our services specifically tailored to this unique time of business: