Treasury ManagementUncategorized

Preparing to Plow Through The Next Recession

By December 12, 2019December 23rd, 2019No Comments

How one company survived the Great Recession, and advice on how to prepare for the next downturn.

With an economic slowdown looming—even if no one knows exactly when it will occur or how severe it will be—companies must prepare for the worst. It doesn’t get much worse than the slump Caterpillar Inc. experienced in 2009, when sales and revenue plummeted. But the company remained profitable and maintained its dividend. How did Caterpillar achieve its remarkable performance?

Recession planning was the focus of a recent NeuGroup meeting, where Ed Scott, senior executive advisor at NeuGroup and retired treasurer at Caterpillar, discussed the global company’s recovery methodology. He also noted some questions for treasury executives to ponder before the storm hits:

  • What approach is your company taking to prepare for a possible recession?
  • What are your company’s critical success factors that must be protected?
  • What levers/workstreams are necessary to protect those factors?
  • What is treasury’s role in the company in planning for and fighting a recession?

During the Great Recession, Caterpillar’s sales fell 37% and its profit dropped to $895 million from $3.6 billion. The company took a $3.4 billion charge to equity, and debt as a percentage of debt and equity soared to 59.7%, well above the company’s preferred maximum of 45%.

Caterpillar’s single-A rating, necessary to fund its captive finance company, was in jeopardy. So the company pursued the MAST methodology, which Mr. Scott said can be applied to virtually any significant project or initiative:

  • Meaning. Why take action? For Caterpillar, it was to remain profitable, avoid cutting its dividend, and protect its rating.
  • Action. Establish workstreams, which in Caterpillar’s case numbered 10 and included reducing inventory, closely monitoring the financial health of critical dealers and suppliers, aggressively pursuing collections and increasing liquidity as needed. Mr. Scott noted that each workstream had a designated owner.
  • Structure. The cadence to make sure the plan is carried. Caterpillar’s CFO, treasurer and controller met every Friday at 6:30 a.m. with all the workstream leaders to review and document progress over the last week and discuss the week ahead. “Why so early? Because nobody has a meeting at that time, so everybody had to show up,” Mr. Scott said.
  • Truth. Metrics for each workstream were key to tracking progress and eventual success. “It’s very important to define the critical success factors and the metrics to achieve that,” Mr. Scott said. 

In terms of preparing for a recession, Mr. Scott said, analyzing how much sales will likely drop, or trough planning, is key, and pressure testing is also important. “Think about what the company could do if it had a 20% or 30% drop in sales,” he said.

Jacob Bromsey

Author Jacob Bromsey

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