CONFERENCE SUMMARY

WORKING CAPITAL MANAGEMENT:

LESSONS FROM THE LEADERS

■ A Summary of Presentations at CFO Magazine’s Annual Working Capital Conference ■

©2001 CFO Publishing. All Rights Reserved—6/01 1

 ■ Table of Contents

A Word from the Conference Chairperson …………………………………………………… 4

Introduction: Superior Working Capital

Management is Always Crucial ………………………………………………………………… 5

Spotlight on Top Performers …………………………………………………………………… 5

Meeting the Performance Standard

Stephen Payne, REL Americas Consultancy Group Limited ……………………………….. 5

Case Study: The Dow Chemical Company

Geoffery Merszei, The Dow Chemical Company ……………………………………………... 7

Case Study: PepsiCo

Stephen Bowater, PepsiCo ……………………………………………………………………… 9

Case Study: Newport News Shipbuilding, Inc.

Rick Wyatt, Newport News Shipbuilding …….……………………………………………….. 10

Final Note ...………………………………………………………………………………………. 11

Sponsor Workshops ………………………………………………………………………….….. 12

©2001 CFO Publishing. All Rights Reserved—6/01 2

"Working Capital Management: Lessons From Leaders" was prepared in conjunction with the 2nd Annual
Working Capital Management one-day symposium, which was held on February 21, 2001 in New York
City. Working Capital Management is one of the premier educational and networking events for senior
financial executives hosted by CFO magazine’s Executive Programs division.

The next Working Capital Management series will take place in February 2002.

For information about CFO Executive Programs, please visit our web site
www.cfoconferences.com

To learn about the capabilities of CFO Research Services or CFO Executive Programs, please contact
Mary Driscoll, President, CFO Enterprises at marydriscoll@cfo.com

CFO Enterprises is the executive education unit of CFO Publishing Corporation.

CFO, 253 Summer Street, Boston, MA 02210, Tel: 617-345-9700, Ext. 249

COPYRIGHT
© 2001 CFO Publishing Corporation, which is solely responsible for the contents of this report. All rights
reserved. No part of this report may be reproduced or stored in a retrieval system or transmitted in any form
or by any means without written permission.

©2001 CFO Publishing. All Rights Reserved—6/01 3

A WORD FROM THE CONFERENCE CHAIRPERSON…

On behalf of CFO Publishing Corporation and the editors of CFO magazine, I would like to extend my
thanks and appreciation to all who participated in this conference. Judging from the feedback we have
received from the 100+ senior finance executives in attendance, this forum did succeed in meeting its core
objective and that was to provide an environment in which practical insights and sophisticated dialog could
be shared among the executives facing unprecedented management challenges.

Do let me know if you have any further comments. And do let me know if you would like to be considered
as a panelist or speaker on future conferences from CFO.

Go to www.cfoconferences.com to see what is coming up next.

Sincerely,

Mary Driscoll
President and Editorial Director
CFO Enterprises
www.marydriscoll@cfo.com

©2001 CFO Publishing. All Rights Reserved—6/01 4

■ Introduction: Superior Working Capital Management is Always Crucial
As levers of financial management go, none bears more weight than working capital. The viability of
every business activity rests on daily changes in receivables, inventory, and payables. It’s the lifeblood of
the business, and every manager’s primary task is to keep it moving and put shareholder capital to work
efficiently and effectively.

The faster a business expands, the more cash it will need for working capital and investment. Good
management of working capital will generate cash, help to improve profits, solidify relationships with
suppliers and customers, and reduce risks. When it comes to managing working capital, time is money.
If you can get money to move faster—speed the cash conversion cycle—by, say, reducing the amount of
money tied up in inventory or accounts receivable, the liquidity of the business increases and incremental
cash flow can be generated. Likewise, the business may be able to reduce its debt and interest expenses.
If you can negotiate improved terms with suppliers, e.g., obtain longer terms, you can leverage financial
resources in new ways. Money trapped in working capital is money not being used to grow.

■ Spotlight on Top Performers

In response to readers’ intense interest, CFO magazine launched New Rules in Working Capital
Management, a highly successful series of seminars. These seminars, held over the past two years, have
focused on how the top performers in the magazine’s annual Working Capital Performance study earned
their high marks. In addition, attention was focused on practical ideas for improving performance across
a number of key metrics such as inventory turnover and the all-important days sales outstanding (DSO).

Working Capital 2001 followed this path with focused case studies to examine new strategies for
improving corporate liquidity, investment optimization, and the flow of financial information across the
value chain. Corporate presentations were made by Geoffery Merszei, Vice President and Treasurer of
The Dow Chemical Company; Rick Wyatt, Treasurer of Newport News Shipbuilding; and Stephen
Bowater, Director of International Treasury at PepsiCo. Additional presentations were made by William
Otten, Senior Vice President, Interlink Capital; Richard Jaycobs, CEO of OnExchange.com; and Richard
Jacobs, Vice President, REL Americas Consultancy Group (REL).

■ Meeting the Performance Standard

Stephen Payne, President of REL, served as the co-chair at the conference held in New York City in
February 2001. REL has been CFO magazine’s research partner, helping to gather and analyze the core
data that feed the annual rankings of working capital leaders. He summarized the challenge facing senior
finance executives this way:

ü Manage accounts payable to match receivables

ü Leverage suppliers’ and customers’ operations to improve your cash management
ü Tie compensation to working capital improvement
ü Look for alternative financing to get receivables off the books
ü Develop a culture that strives for continuous improvement

Over the last five years, among the top 1,000 companies in the annual survey, working capital has
improved by 6.3 days. “That sounds impressive,” Payne said, “but is it enough?” The survey measures
cash conversion efficiency (CCE), which is cash flow from operations as a percentage of sales, and days of
working capital (DWC), which is accounts receivable plus inventory minus accounts payable as a
percentage of daily sales. See Figure 1 on next page.

©2001 CFO Publishing. All Rights Reserved—6/01 5

The core data, which come from publicly available sources, are not as sophisticated as the companies’
internal data, but it allows CFO/REL to use the same calculation for all surveyed companies. The survey
covers 33 industries, which vary considerably in their demand for working capital as well as in their cash
conversion efficiency. For example, aerospace companies have among the highest demand for working
capital, while food and drug companies have among the lowest. Cash conversion efficiency tends to be
higher with high-margin companies (like petroleum) and service companies.

As Payne explained, the highest-ranking companies in the survey share several characteristics. “Many of
them manage their accounts payable to match their accounts receivable. Successful organizations, also,
constantly strive to leverage the level of operating costs and working capital. Many of them also leverage
what he called “the extended enterprise,” not only their internal operations, processes, policies, and
execution, but “those of their suppliers, customers, and even their customers’ customers.” Another
characteristic, which Payne said was controversial, is tying compensation to working capital improvement
programs. And finally, many of the top companies use alternative financing, such as factoring.

Payne discussed the drivers of superior working capital performance, pointing to several companies
surveyed. First off, he cited Vestar Resources Inc., which sported more than $1.1 billion in sales in 1999.
This cost-conscious company, in spite of volatile performance over a recent two-year period, generated a
CCE that was relatively high. Dell Computer, a world leader in supply chain management, centralized A/P
to gain efficiencies. Burlington Northern Santa Fe, with over $9 billion in sales, was also mentioned as an
interesting case. It involved the merger of the two companies. The merger had produced an adverse effect
on CCE until the businesses were integrated. But in the aftermath, particularly in 1999, cash became a
major focus; and the company has been pushing ever since to reduce the time to issue a bill, using its
marketing and sales forces to resolve customer disputes and factoring its receivables. Overall, “cash really
became the primary focus,” said Payne.

©2001 CFO Publishing. All Rights Reserved—6/01 6

Casey’s General Stores, the grocery concern with over $25 billion in sales, was another case cited by
Payne. The company manages its own distribution center rather than using wholesalers, and it receives
cash through the register before it has to pay its suppliers, giving it negative working capital. Casey’s also
always takes prompt payment discounts. Working capital is important, Payne said, because it is a
performance barometer for the business. Figure 2 illustrates what the survey’s key metrics reveal about
underlying business behavior. Payne concluded by saying that lack of predictable, positive cash flow was
the factor behind many dot.com failures. “Analysts look at cash flow because it’s hard to manipulate.”

■ Case Study: The Dow Chemical Company

Dow is a $30 billion company, manufacturing in 35 countries. About 60% of its business is outside the
United States. The company has a central, highly coordinated group of financial professionals who share
the objective of minimizing financial expenses on an after-tax basis. This team includes not only the
corporate finance people but also business finance directors, senior financial people who act as key
consultants to the business.

Geoffery Merszei explained that “at Dow Chemical, treasury is a global and proactive financial function
that supports the financial objectives of the company by maintaining the company’s financial flexibility to
meet overall business objectives and by having access to the world capital markets. In addition to being
geographically focused, the treasury function is also process driven.” Dow’s treasury function follows these
operating principles:

ü Functional excellence
ü Proactive management and controlled risk taking
ü Flexible, decentralized organization designed to identify and capitalize on opportunities
ü Continued evaluation and use of innovative financial technology
ü Global processes to ensure consistent standards

©2001 CFO Publishing. All Rights Reserved—6/01 7

Merszei pointed to the circumspect mission of Dow’s Customer Financial Services (CFS) function, a part
of the treasury group: “We will optimize credit risk versus business reward in providing customer financial
services, integrated with global business strategies and financial objectives. Responsibilities are as follows:

ü Evaluate /analyze risk versus reward to support businesses

ü Set and enforce payment terms, including cash discounts
ü Set and enforce customers’ and country credit limits
ü Revoke credit limits and hold shipments, when political, economic and financial
conditions are adverse or when the credit risk is not acceptable
ü Design, implement and enforce company internal control procedures regarding accounts
receivable management
ü Oversee the money collection process
ü Provide on time and accurate management performance reporting on a global basis
ü Provide financial services and consulting to customers (Dow Credit Corporation)

Credit, and everything that relates to accounts receivable, is the responsibility of treasury, but the sales
department and the customer service centers around the world “do the dialing,” said Merszei. Tools
include: interest charging; consignment control; exposure simulation; credit cards; and bad debt reserve
determination. Merszei’s central point, however, was the importance of working in tandem with the
business units to achieve their buy-in. Treasury officials are risk managers, not collectors, he said, and only
get involved when a red flag comes up. The company has triggers for holding up on a shipment, and
whenever that happens, both a customer service representative and the account officer for that business is
automatically notified. Reporting is key, he noted, and the model has to be flexible.

The underlying database and related applications are a key to Dow’s working capital management
capabilities. Dow uses SAP R2. And even though it has over 250 legal entities, Merszei can now access the
exposure of any customer anywhere in the world. The shared data network, the SDN, and the Dow credit
matrix are proprietary systems developed by Dow using SAP R2. Data accuracy is vital, Merszei stressed.
“If you tell commercial people that customer X, Y or Z didn’t pay, and then it turns out that in fact they did,
you lose a lot of credibility,” he explained. Dow undertook a major effort to ensure data accuracy in the
course of a two-year systems implementation cycle.

Bad debt reserve determination, which lets the company set a reserve for customers, is one proactive tool
used at Dow. The reserve is applied against the earnings of the units, which can only book their earnings
once collections have been completed. The result: business units are highly conscious of the impact of
selling to a customer with an uneven credit history.

The system is capable of producing reports with information arrayed in terms of specific customer, legal
entity, business, and geography. One important report involves paying habits, and it includes not just a
customer’s current payment status, but its entire payment history. Another is the collection effectiveness
index, or CEI, which provides the same information on a portfolio basis. A third is the customer collection
report. Salespeople have access to all the data that goes into those reports, as well as to the reports
themselves.

The results of this concentrated effort to manage working capital, said Merszei, can been seen in how Dow
compares quite favorably to industry peers across a range of key performance indicators. For example,
Dow has experienced a significant reduction in global DSO over the past four years. Two key factors have
made this possible, he concluded: (1) the business and finance teams share a deep sense of strategic goals
and (2) the Customer Financial Services team is empowered to carry out its mission.

©2001 CFO Publishing. All Rights Reserved—6/01 8

■ Case Study: PepsiCo
Stephen Bowater pointed to three activities that reflect the philosophy of working capital management at
PepsiCo:

ü Motivating line management with salary incentives for improving cash flow
ü Listening to customers about what the company does that makes prompt payment difficult
ü Squeezing more value out of fewer bank relationships with a sharper focus

Pepsi has different business models across its structure, oftentimes impacting the same customers, and that
poses a challenge. Frito-lay is a direct store-delivery and largely cash business. The company’s Pepsi-Cola
customers are a small number of large bottlers. And its Tropicana unit uses a warehouse distribution
system.

The company’s noticeable cash-management improvement was driven by the CFO, who introduced a new
mantra: eps is nice, but cash is king. The improvement stemmed from three main factors. The first, and
most important, was to wrap the goals of improving cash flow and working capital into the company’s
bonus and long-term incentive program. Motivated line management that sees their year-end paycheck
affected by what they are able to do in this area gives “the biggest bang for the buck.” The effort drove the
dramatic improvement in the Frito-Lay division, which saw significant progress in its cash conversion
cycle over the past four years. See Figure 3.

©2001 CFO Publishing. All Rights Reserved—6/01 9

The second initiative involved developing a common language that was used within the organization to talk
about, communicate, and set targets for working capital. Pepsi’s main metrics are:

ü The cash conversion cycle (CCC = DSO + DII – DPO)

ü Working capital (cash = A/R + Inventory – A/P), which picks up how much idle cash is
lurking within its business
ü Operating free cash flow (NOPAT + DA + ∆WC – CAPEX), which picks up additional
changes and improvements in working capital
ü Return on invested capital (adjusted NOPAT/NAB)

The third effort sought to form a three-person swat team that does nothing else but consult with managers
on cash and working capital management. This is not an internal audit: the reviews are for the sole benefit
of the managers being reviewed; nobody has to explain them to their boss. The team also identifies best
practices and shares them internally.

Pepsi deployed a variety of techniques to wring out its improvements. Management works closely with the
sales organization to improve collection processes, meeting with top customers and asking “What are we
doing that’s making it hard for you to pay us?” On the accounts receivable side, the company made a lot of
changes, such as converting customers from credit to COD if they did not consistently meet the company’s
terms. As for payables management, Pepsi began to periodically check its A/P master files for uneconomic
vendor terms. The company reduced its bank relationships to minimize handling costs and cash float.
Tapping the potential of automation, Pepsi sought to eliminate manual interfaces and processes whenever
possible.

Pulling it all together, Bowater used an example from the Frito-Lay NA division to illustrate how a simple
misalignment between a company’s practices and its customers practices can impact DSP performance.
The problem was this: credit terms specified payment due 30 days from delivery date. But the company did
not bill the customer until 15 days after the product hit the store. And customers were paying 30 days from
the statement date. Compounding matters, if delays resulted from changes in delivery scheduling, a
payment cycle could get as high as 48 days. The company accommodated its customers by switching to a
monthly billing cycle, and at the same time asked its customers to pay their bills 15 days from the statement
date.

■ Case Study: Newport News Shipbuilding

Rick Wyatt explained the special working capital management challenges he has faced:

ü Lumpy cash flow on big projects that demand special efforts to turn receivables into cash
ü The need to be able to forecast cash flow precisely
ü The need to develop a cash team to search for new ways to squeeze cash out of operations
ü The need to create a level of transparency that would give banks and creditors confidence
in the company’s strategy

Newport News Shipbuilding is the largest shipyard in the country and one of the largest in the world, with
about 17,000 employees. The company, with a year-end 2000 market cap of about $1.7 billion, was spun
off from Tenneco in 1996. Its contract backlog is about $7 billion The company is located at a single
facility, which improves communication and helps working capital management. Its revenues are
predictable, coming primarily from long-term government contracts, extending out to 2009. So, its
working capital challenges are squeezing cash out of the business and smoothing it out.

The spin-off presented challenges: the company had to pay Tenneco a huge dividend, creating an inflexible
balance sheet, and the company made an unsuccessful move into commercial shipbuilding which drained
working capital.

©2001 CFO Publishing. All Rights Reserved—6/01 10

The company’s first move was to increase its ability to forecast the liquidity position and identify cash
drivers. The company started by developing a system for matching its real cash–i.e., cash inflows and
outflows–with the cash balances indicated on its balance sheet. Now, it is focusing on the line items that
produce cash performance in a forecast model that it runs daily. The company has a 60-to-90 outlook
prepared each day, with real-time estimates of operating and free cash flow. An annual operating plan and
five-year forecasts are also prepared. The company focuses intensely on free cash flow, which was a major
concern for Wall Street in analyzing defense and aerospace companies. The chairman, CEO, COO, CFO,
and controller now receive weekly reports on the cash flow position.

One of Newport’s challenges is what Wyatt called “lumpy” cash flow; which results, for example, from the
fact that billings tend to be heavily driven by contract cost and progress. One of Wyatt’s key points was
“take control of the items you can influence.” To that end, the treasury department has focused on liquid
accounts that it can manage–specifically, on turning accounts receivable into cash as fast as possible. To
enable that process, the company includes in its contracts language that forces a customer to turn over
invoices in a certain amount of time–in some cases as quickly as seven days. Also, it is working on billing
customers for materials as soon as they are received. A current project is timing accounts payable around
billing cycles.

A key to the company’s performance is a cash team that focuses on squeezing cash out of the business. The
team looks not just at cash opportunities, but also cash risk. The central point is to establish communication
with the functional areas that drive cash flow.

As the effort unfolded, it became clear that technology challenges had to be overcome. Historically, each
department had developed its own programming capability, and those programs did not communicate with
each other easily. Another issue at the time: questions around Y2K. The cheapest and best solution, the
company decided, was to replace everything, leasing software, contracting out its maintenance, and
adjusting operations to fit the software, rather than the other way around. And the company was able to
finance the project off balance sheet, which was important, since Newport was heavily leveraged. That
financing solution allowed the company to match the cost of the systems with the benefits it expected to
achieve.

Wyatt noted that bank and credit relationships were critically important. Newport treats all its lessors with
care, making everything transparent to them. “There are so many things that are counter-intuitive in the
defense industry,” Wyatt said. “It’s been important to make sure that we articulate [nuances] to the lessors
so they can get comfortable and understand our strategy.” Again, we see the value of having a tight grip on
cash flow drivers and a sound technique for communicating the impacts.

■ Final Note
CFO magazine’s Executive Programs will host its 3rd annual working capital management conference
series in the first quarter of 2002 in New York City and Chicago. For further details, go to:
www.cfoconferences.com.

©2001 CFO Publishing. All Rights Reserved—6/01 11

■ Sponsor Workshops
CFO is grateful to the generous support provided by the two conference sponsors: Extensity Inc.,
(www.extensity.com) and LeaseForum, Inc. (www.leaseforum.com). Workshops presented by senior
executives of these two firms are summarized below.

■ Case Study: Cisco Systems’ Use of Employee-Centric Solutions to

Increase Productivity and Improve the Bottom Line
Workshop Presentation by Elizabeth Ireland, SVP of Marketing, Extensity, Inc.

“What we are challenged with is the productivity of the knowledge worker. The intellectual assets –
the “talent” of a company – will be more valuable than its tangible assets.”
-- Dr. Peter Drucker

Cisco Systems is a premier example of how to become a successful e-business, in the sense that the
company has utilized the Internet to streamline internal processes. This presentation describes how Cisco
has implemented Extensity’s applications to help increase employee productivity, cut costs, and improve
the bottom line.

■ ERM Background
Extensity provides employee relationship management (ERM) applications built to take advantage of
Internet technology to boost the efficiency of employees and companies. The Extensity Connect family of
ERM applications automates travel and expense reporting, project time capture, and procurement to drive
productivity, reduce costs, enhance control, and promote competitive advantage. Extensity has licensed
more than 700,000 seats worldwide to over 300 customers.

Since the days when e-mail, fax and voicemail were cutting-edge, technology has steadily improved
business efficiency. Departmental ERP and SFA systems have automated core business functions and
helped to streamline back-end data management. Corporate intranets have emerged, giving employees
access to a wealth of information and resources to help them do their jobs.

ERM represents the next wave of technology for improving efficiency. ERM applications harness the
Internet to streamline employee-centric tasks in ways that previously would have been impractical, if not
impossible, with mainframe or client/server technology. ERM applications automate the full employee
lifecycle including the tasks involved in acquiring, deploying, and retaining employees.

As seen at Cisco, the financial impact of automating these employee processes is compelling. A
per-employee increase in productivity results in lower workforce costs, better cash management, and
higher profitability per employee. If employees can be hired faster, developed more effectively and retained
longer, the company benefits from shorter time to market and increased productivity. Also, by giving
employees mobile solutions that let them perform tasks from anywhere using real-time information, these
applications result in streamlined execution and enhanced decision-making.

■ Cisco’s METRO Solution

Recognizing that travel and expense (T&E) is the second largest controllable expense for a company
(according to American Express Consulting’s 2000 Survey of Business Travel Management), Cisco set out
to automate its internal T&E processes. The result was Cisco’s first generation of T&E management
software. The goals for their system, internally branded as METRO, included more effective travel policy
enforcement, a better flow of T&E information between employees and managers, incremental cost savings
per expense report, and time savings in the expense reimbursement cycle.

©2001 CFO Publishing. All Rights Reserved—6/01 12

■ Next Generation Solution – METRO II
While Cisco’s METRO solution was the first step in automation of Travel & Expense Management, it did
not meet the needs of their rapidly growing international employee base. Cisco’s second phase METRO II
system is based on Extensity Expense Reports.

Selecting Extensity Expense Reports allowed Cisco to maintain some of the key processes their employees
had grown accustomed to; one of those being the automatic credit card feed. Every time an employee
charges a business expense with a corporate credit card (in Cisco’s case, American Express), that expense
can be automatically downloaded to the expense report. Every night, the system pulls all of Cisco’s
employee charges in from American Express. At any time, employees can log in to the system, review their
charges and build/submit their expense reports. While entering the data, the system will identify any policy
violations and allow users to correct or explain them. Required receipts are listed at the end so the user can
submit them as a separate, physical mailing.

When an employee submits an expense report, the system sends an e-mail notification to the manager
including the date, amount, policy violations, and URL for viewing detail. The manager has 48 hours to
DISAPPROVE the request. The manager can flag the report for auditing if a) it had policy violations, b) it
gets selected as part of a random auditing process, or c) the traveler is flagged as “always audit;” e.g. all
travel personnel or by manager request.

If the manager does not disapprove the expense report within 48 hours, it is automatically submitted to the
backend financial system for payment to vendor and employee with an automated EDI transfer. The
employee and the manager are notified of this transfer by email. The clearinghouse bank then performs
transfers to both American Express (on behalf of the employee), and to the employee’s payroll direct-
deposit bank account (unless a check is requested).

The data captured by the automated expense reporting process allows employees, managers, and auditing
staff to view the status of any report at anytime, as well as perform analysis on the expense patterns of
employees.

■ Cisco’s Strategic Decision: Buy Vs. Build

Cisco has a strategic direction to buy packaged software whenever possible, rather than building systems.
The decision to base METRO II on a commercial software application (Extensity Expense Reports) was
based on the following factors:

ü Reduced implementation time

ü Lower cost of ownership.
ü Ability to leverage the vendor’s core competencies
ü Opportunity to benefit from others’ implementations (in this case, Extensity’s customer base)

■ The Choice of Extensity

Cisco chose Extensity Expense Reports for its second phase METRO implementation for a variety of
reasons. First, Extensity’s architecture is 100% Internet-based, with features to support multi-tier scalability
and performance as well as a wide variety of client devices (PCs, PDAs; Web-enabled cell phones). In
addition, Extensity can be seamlessly integrated with backend financial systems, enabling a company to
leverage its existing ERP investment. Finally, Extensity offers capabilities for rapid deployment that speed
time to ROI and lowest total cost of ownership.

■ Cisco’s METRO: The Benefits

With more than 36,000 employees worldwide, Cisco processes 23,000 expense reports per month from its
US/Canada offices alone, and 13,000 expense report per month from its EMEA/Asia Pacific offices. With
METRO, the company has shaved its average reimbursement cycle to only five days.

©2001 CFO Publishing. All Rights Reserved—6/01 13

With METRO, Cisco estimates the processing cost per expense report to be $2.73. This is a marked
contrast to the industry average of $36.46, as estimated by American Express Consulting Services.

Probably the most valuable benefit, however, is in terms of productivity. Cisco estimates that a productivity
improvement of only 1% per employee adds $75 million to the bottom line every year in cost savings.

■ How Successful Companies Leverage and Manage Leasing

Workshop Presentation by Susan S. Franklin, President and CEO of LeaseForum, Inc.

Increasingly companies today are turning to leasing to solve more then just capital spending needs. Using a
strategic alternative form of finance, today’s finance executive is keeping debt in check and cash on hand
by implementing leasing programs for everything from desktop technology and corporate aircraft to their
corporate headquarters.

With stock prices depressed, many companies are fueling acquisitions by freeing cash tied up in
depreciating assets. Sale-leasebacks of equipment, real estate and even software are putting cash back in
the corporate treasury. Savvy executives with Alternative Minimum Tax (AMT) positions are passing
depreciation allowances to lessors to drive lease rates well below debt service payments. Others are
learning how to mitigate mid-quarter convention issues with tax leases. Regardless of industry, creative
executives are using leasing as a financial re-engineering tool to better manage financial ratios, increase
return on assets, maintain debt ratings and stabilize earnings.

To get this much out of leasing, companies are keenly aligning operating drivers with their corporate focus.
Those who have been most successful have centralized their leasing efforts, either physically or virtually,
developing a well-defined plan and a practical framework. With the corporate focus clearly articulated,
companies are attacking the opportunities leasing presents.

■ How can your company get there? First, define your primary
objectives.

ü Are you seeking to replenish cash or stream payments to manage cash flow?
ü Can the company’s AMT or NOL position be used to lower lease rates?
ü Do trends in financial ratios need addressing? and what is the impact to earnings or debt ratings if they
are not addressed?
ü Can you likely face a mid-quarter convention issue?
ü Are your DSO’s putting you in the lending business?

■ Next you need to evaluate which structures can get you there.

ü When are capital leases sufficient?

ü Which operating lease structure best supports a particular purpose?
ü Which structured options provide the greatest flexibility without trading on price or increasing risk?

■ Now it’s time to approach the market, but which funding sources
“best fit” for your needs?

ü If the equipment is specialized, who are the most qualified residual players?
ü Which sources can best utilize AMT or NOL positions to pass you the most aggressive rate?
ü Who has the most competitive source of funds?

©2001 CFO Publishing. All Rights Reserved—6/01 14

■ Finally, to ensure that the “benefits of leasing” are not eroded by
ineffective management, you need to ensure that adequate resources are
available.

ü Who will oversee the closing process?

ü Which management systems are in-place or available to manage the leasing lifecycle?
ü Where will lease contracts be maintained?

Companies deploy a significant number of assets domestically and internationally in plants, operating
facilities, and warehouses. This diverse asset population, essential to productivity, is costly to acquire and
maintain. With one-third of these assets financed through leasing, in addition to “where it is“ and “what it
is,” corporations need to track “how it is financed” and “what are the terms of that financing.” It is an
information intense process, and many companies struggle to effectively manage leases and assets using a
hodgepodge of spreadsheets locked up in desktops around the enterprise. To truly capitalize on leasing,
companies need to combine their strategic drivers with prudent underwriting and pro-active tracking
systems to capture the salient details of geographically dispersed assets from lease inception through
ultimate disposition.

Companies using leasing as a part of their financing strategy should manage leases aggressively like they
do other portfolios. As a lease portfolio grows, matures, and diversifies its complexity compounds, making
it increasingly more difficult to manage. The complexity of lease portfolio management is often
underestimated. Portfolios contain multiple lessors, contracts, lease structures, locations, equipment types,
and end-of-term of options. The portfolio undergoes constant change as new leases and equipment are
introduced, active leases expire or renew and the equipment is upgraded, purchased, returned, sold,
destroyed, or disposed.

It is ironic, but the benefits of leasing are often the reasons why lease management is difficult to achieve.
Unlike fixed assets, leased assets are not generally recorded or depreciated. Often a tool for operating
personnel to manage around budgetary constraints, leasing occurs in pockets throughout an organization.
Leasing activity and lease management is often decentralized making it difficult to control or measure.
With the lessor paying vendors directly, not even accounts payable records are generated. Finally, leases
are long-term commitments and personnel who put leases in-place may not be around when those leases
expire.

So even if your company sources competitive lease rates, failure to practice lifecycle management can
result in costs that significantly exceed those anticipated at lease inception. There can be logistical issues
tracking all the terms, payments and nuances of leases. Without effective management systems, it is easy
to miss critical deadlines forcing companies to pay significant penalties and, at times, leads them to give up
the right to exercise the economically prudent options they were so careful to structure at the onset of a
lease.

Good management systems and procedures help companies stay on top of their portfolio. During or at the
conclusion of a lease, or as assets are moved or taken out of service, corporations scramble to effect
options, return equipment in compliance with their lease agreements, or transport idle assets from the
production floor to warehouse facilities. The logistics of collecting, testing, packing, and shipping off-lease
and surplus equipment are time consuming and challenging. The cost of moving, storing and managing
idle assets is extremely high.

Companies are increasingly turning to web-based asset tracking tools to proactively manage leases and
assets. These tools help companies readily locate equipment and re-deploy it to increase asset life and
control acquisition costs. Staying on top of a portfolio is ninety-percent of the game. Once information is

©2001 CFO Publishing. All Rights Reserved—6/01 15

accessible and easy to maintain, companies can use the data to drive a wide variety of processes, including
redeployment strategies, property tax compliance, budget reconciliation, and inventory audits.

Presently, most companies are managing leasing activity using desktop database or spreadsheet packages,
paper files, or purchase order management systems. To improve lease and asset management practices,
companies must alleviate their reliance on multiple, non-compatible databases. Consolidating lease
information in a central repository reduces manual processes and paperwork, eliminates data errors and
redundancy, and makes employees more productive. Standardizing lease and asset descriptions result in
more useful and accurate reports. Access to real-time, critical information that can be shared across
functional groups accelerates the decision-making process and enhances the quality of decisions.

With the amount of operational equipment being leased today, a company’s productivity and profitability
are dependent on an ability to manage those leases. The emergence of Web-based solutions that enable
companies to centralize the sourcing and management of leases and assets is maximizing the performance
of this innovative financial tool.

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©2001 CFO Publishing. All Rights Reserved—6/01 16