Navigating the Changing Economic Landscape
On November 19, Chase Middle Market Banking hosted the
2014 Northeast CFO Conference to explore the key factors affecting
businesses in 2015.
rates, new regulations on lending and skyrocketing healthcare
As we move into 2015, CFOs need to be aware of a litany of
costs, excess capital is likely to be harder to obtain than it was
factors that could impact their businesses. But, according to
in 2014, which will require businesses to be even more strategic
Todd Maclin, Chairman of Chase Consumer and Commercial
with their planning and take a deeper look at their exposed
Banking, “The biggest challenge for the coming year is the
event you can’t plan for: ‘the black swan event,’ the unexpected.” weaknesses.
Doug Braunstein, Vice Chairman and former CFO of
As Maclin explained in his opening remarks at the conference,
JPMorgan Chase, hosted a panel discussion with industry“You need to be hyper-aware and plan ahead for the changes
leading executives on the ways mid-sized companies can
we all know are coming, so that you can overcome unforeseen
manage healthcare reform and the impact of rising costs on
changes and events.”
your bottom line. Braunstein spoke to the concerns of many
Healthcare costs, interest rates, volatility in international
CFOs, who worry that healthcare reform has the potential
economies, cybersecurity, ownership transition and changing
to be an incredible drain on employers in the coming years.
politics and regulations should all be top-of-mind as we go into
“Costs are rapidly increasing at a pace that outstrips inflation,
2015. While there is no shortage of outside factors that could
negatively impact your balance sheet in 2015, Chase Head
Economist Jim Glassman pointed out during the “Economic
Outlook” panel that “We’re in a time of unprecedented
transparency—from businesses, to banks, to the federal
government, transparency is at an all-time high.”
Smart companies will be using this increased visibility
to build a strategy that will guide them through the coming
changes and give them a cushion for the unexpected and for
Todd Maclin, Chairman of Chase Consumer
growth opportunities. However, with normalizing interest
and Commercial Banking
“The biggest challenge for the
coming year is the event you can’t
plan for: ‘the black swan event,’ the
unexpected.”
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and almost all the middle market companies we work with are
self-insured, meaning they pick up the bill,” he explained. “In
1970, 7 percent ($75 billion) of the U.S. GDP was healthcarerelated; today that number has increased to 18 percent ($3.1
trillion) and is expected to grow to 20 percent (5.2 trillion)
within 10 years.”
The top three ways the panelists suggested reducing costs
were high-deductible health plans (HDHPs), preventative
care and wellness-based incentives. According to panelist
Walter Hosp, CFO of AMC Health, “You need to begin shifting
responsibility to employees or risk not being able to provide
health insurance altogether.” But, as noted by Theresa Bresten,
Vice President and Treasurer of Finance at HP Hood, “Every
company will need a different coverage solution, based on
your employee-base. CFOs need to be actively engaged in
analyzing the unique attributes of their employees, like
demographics, the presence of unions and recurring chronic
diseases, to find the most cost-effective solution.”
The healthcare discussion highlighted a theme present in
every panel: A one-size-fits-all approach is no longer viable,
and CFOs must be more involved in their companies’ decisionmaking processes.
During a discussion on ownership-transition planning,
Managing Director and Head of Private Business Advisory
for J.P. Morgan’s Wealth Advisory Advice Lab, Steve Faulkner,
said, “Sometimes your job goes well beyond financials. One
day, you’re solving family problems between the owner’s heirs.
The next, you’re trying to reduce concentration risk and [you]
need to look at expanding internationally.”
A one-size-fits-all approach is no
longer viable, and CFOs must be
more involved in their companies’
decision-making processes.
Every panel discussion underscored that CFOs need
to be versatile and know how to play defense just as much
as offense. Whether that means locking in an interest rate,
refinancing to acquire a competitor, optimizing working
capital for supply chain investments, expanding globally
or investing in technology to protect against cybercrime—
minimizing risk is equally as important as maximizing
returns. While you can’t prepare for the unforeseen, you
can protect your company by identifying weak spots and
fortifying them before they become detrimental.
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Reducing the Cost of Healthcare in 2015
The complex regulatory requirements of the ACA and rising
healthcare costs require employers to look for new ways to
reduce overhead while maintaining employee coverage. In
this new era of healthcare, striking a balance between costs
to employers and employees is an even more important
consideration for business growth, financial gains and
employee retention.
Experts on the Healthcare Reform panel identified HDHPs
as a way to significantly reduce the effects of rising healthcare
costs on your bottom line.
HDHPs
With employers looking for new ways to handle rising
healthcare costs, High Deductible Health Plans (HDHPs) have
drastically increased in popularity in recent years. HDHPs
require employees to cover all healthcare costs up to the
deductible and are usually coupled with a health savings
account (HSA), a tax-preferred savings account employees can
use to pay medical expenses.
HDHPs financially incentivize employees to become more
responsible for their medical spending. Proponents of HDHPs
argue that if employees are able to see that an MRI can cost
anywhere from $150 to $2,500, they will become more selective
when seeking it out as a course of treatment, eliminating
wasteful or unnecessary spending and procedures. A RAND
study shows that people in health insurance plans with high
deductibles spent an average of 14 percent less than families
using health plans with lower deductibles.1
Implementing HDHPs helps to decrease annual premiums
and stay below the threshold for the ACA’s excise tax,
commonly referred to as the “Cadillac Tax.”
Source: “Healthcare Spending and Preventive Care in High-Deductible and
Consumer-Directed Health Plans.” RAND Corporation, 2011.
1
http://www.rand.org/pubs/external_publications/EP20110048.html
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THE AFFORDABLE CARE ACT’S
CADILLAC TAX
WHAT IS IT?
An excise tax imposed on high-end
premium h
ealth coverage plans.
WHEN?
The tax starts January 1, 2018.
HOW MUCH?
40% tax on employers.
FOR WHOM?
Individual plans totaling
$10,200 or more.
Family plans totaling
$27,500 or more.
Thresholds will change with inflation.
WHY?
Proponents of the tax argue that
benefit-rich p
lans encourage overuse
of care, which drives u
p overall costs.
Five Economic Trends to Watch in 2015
COMMERCIAL BANKING’S HEAD ECONOMIST, JIM GLASSMAN, REVEALS HIS TOP FIVE
ECONOMIC INSIGHTS FOR THE COMING YEAR.
The U.S. is now in its sixth year of recovery. We’ve powered
through one of the worst recessions in memory and fared
better than a number of other advanced economies. If these
five economic trends are any indication, the U.S. economy is
poised to shift into high gear in the coming year.
1
The 2015 U.S. economy will likely continue
to improve. Growth will likely quicken in the
coming year, and there’s substantial room for improvement
in the years ahead, a claim that’s backed by the actions of
the Federal Reserve. The Fed has ended its asset-purchasing
program and is now considering an end to its zero interest
rate policy. Additionally, real GDP is forecast to speed up by a
percentage point from this year’s forecast of 2.5 percent over
the four quarters of the year to about 3.5 percent in 2015.
2
Interest-rate levels will return to normal.
3
International recoveries remain on course.
The Fed may start to push its short-term interest
rate up toward a more normal 3 to 4 percent level sometime
between summer 2015 and summer 2016. U.S. bond yields will
go up if that happens, but the rise is expected to be orderly,
because forward rates already price in the Fed’s hike.
4
Employment will likely continue to expand,
though that may not be reflected in the
unemployment rate. Labor market trends remain positive,
but there are other factors to consider when surveying the true
state of employment in the U.S. As economic activity improves,
businesses will be able to extend work schedules, and those
working part-time involuntarily will be able to work longer
hours. In which case, businesses can meet new demand without
hiring more people.
5
Internet commerce has the potential to
transform the retail sector. For now, many Web-
only retail services (e.g. those offered by Amazon) are being
offered at subsidized prices. As Internet commerce business
matures—and businesses learn how to monetize such activity—
these subsidies may recede. Businesses may migrate to the more
efficient frontier of the Web, meaning that profits and aggregate
measures of economic activity can be expected to rise.
Although economies in Europe and Japan are
struggling a bit more than the U.S., they are likely to speed up
gradually as their central banks attempt to ease disinflation
pressures.
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WHAT’S BEHIND THE CHANGING INTEREST RATES AND CREDIT MARKETS ENVIRONMENT?
Speakers from the Credits Market Update and Simplifying Interest Rates and Foreign Exchange panels explain three factors
that could affect interest rates in the coming year.
1
The Federal Interest Rate Hike
The Fed recently ended its quantitative easing program (QE), a progressive asset-purchasing program that lowered
interest rates. The ending of QE, combined with on-target inflation levels and improving labor market conditions, have many
economists convinced that the Fed will hike the Federal Funds Rate in late 2015.
The higher the Federal Funds Rate, the more expensive it becomes to borrow money, across the board.
2
Basel III Regulation
Basel III is a set of international banking regulations that were developed to increase stability in the global financial
system. Under Basel III, banks are required to have significantly higher Tier I common equity, which increases the overall cost of
capital. Higher Basel III capital requirements phase in over time through 2019; however, most institutions are increasing capital
levels well ahead of the requirements.
Due to the higher cost of capital, Basel III will result in a higher cost of credit for most borrowers.
3
Highly Leveraged Transactions (HLTs)
In an effort to reduce risk in the banking system, U.S. banking regulators have introduced interagency guidance
pertaining to leveraged lending. Going forward banks are required to adopt heightened credit evaluation and underwriting
standards for HLTs, as well as more frequent and detailed monitoring and reporting of the HLT loans in their portfolio.
Increased focus on HLTs could result in longer execution timelines and higher cost for affected transactions.
Cybersecurity in the Digital Age
Greg Rattray, Chief information Security Officer for
JPMorgan Chase, explains how to protect your
company from phishing schemes.
It’s a typical day at the office: An employee receives a friendly
reminder email from a vendor he’s known for years about
an invoice coming due. The email is conversational, with the
vendor asking about the employee’s recent vacation, and then
reminding him that a late payment for the invoice could result
in a 20 percent surcharge, if not handled immediately. The
employee quickly gets the payment out to avoid late fees. In
his rush to get the payment out, however, the employee doesn’t
notice that the sender’s email address is off by one letter—and
by the time it is noticed, the money is long gone.
This isn’t just a story; it’s an example of a real phishing
scheme that cybercriminals have pulled on real businesses
across the globe. By using publicly available information on
social media, these criminals craft believable emails to trick
businesses into sending funds, convincing employees to act
quickly. Financial professionals are tasked with anticipating
6 Chase Middle Market Banking
possible fraud attempts like this, but doing so is becoming
more challenging, as the creative techniques that criminals use
are constantly evolving.
The 2014 AFP Payments Fraud and Control Survey shows
that the average loss by companies from one instance of
payments fraud was $23,100—making it imperative that you
put controls and processes in place to reduce the success of
these scams. You can protect your business from email phishing
schemes by ensuring that employees who handle payments:
• Validate new payment instructions that are received via
email—even if the email is internal.
• Pick up the phone, whenever possible, and speak directly
with the individual requesting a funds transfer.
• Contact the vendor or client directly to confirm any requests
for payment method changes, and validate that the changes
are legitimate before processing.
• Review all payments carefully before they are sent, and
ensure that all correspondence is validated and documented
in a unified way across your business.
A Short Guide to Effective Working
Capital Management
Working capital expert and Vice President of the
Client Solutions Specialist team for J.P. Morgan
Corporate Bank and Commercial Banking, Fabian
Khoshbakht, gives a simple five-step process to
help your business effectively and sustainably
manage working capital.
It’s vital that CFOs focus on working capital management in
2015. With interest rates expected to normalize in the near- to
mid-term, prices on loans will rise across the board, making
liquidity important to fund growth, increase revenue, decrease
costs, improve customer service and protect against the
unexpected.
STEP ONE:
ASSESS YOUR CURRENT POSITION
The first step in managing your company’s working capital is
to conduct a baseline assessment of the current status. Identify
patterns with incoming and outgoing assets and receivables,
and align them to levels of working capital. It will become
easy to identify trouble spots, like consistently late payers
or invoices that are sitting out 30, 60, even 90 days or more.
Continuous monitoring of baseline and changing metrics is key
to developing a sound working-capital management strategy.
STEP TWO:
ANALYZE YOUR PERFORMANCE
Raw-data collection is essential when planning your
management strategy. Once you identify what to benchmark,
set realistic targets over a fixed time period, and then measure
the results against the stated objective of your strategy.
Consider reviewing:
STEP THREE:
CREATE AN ACTION PLAN
If your strategy is tiered or designed to roll out in sections,
create an action plan (or plans). Each area of the company
should create practical, measurable action plans, complete with
accountability and target dates for results. This measurability is
essential to success.
STEP FOUR:
ROLL IT OUT
Any effective, strategic plan needs to be sanctioned and
spearheaded from the top. Now that the C-suite has a plan,
make sure you educate your employees from the top-down to
ensure best buy-in. Starting with senior managers, cascade the
information throughout the ranks, making sure that every team
and area leader has a full understanding of the scope and scale
of imminent operations.
In order to collect quick wins, aim for low-hanging fruit,
and demonstrate to your employees that effective workingcapital management is key to growth, even over the short term.
STEP FIVE:
CONTINUE TO IMPROVE
Make sure that your initiative is sustainable. Keeping things
simple is always important, and when undertaking a holistic
plan across numerous platforms, it’s even more so. There will
always be room for improvement, so continued analysis and
collaboration is integral to long-term success.
• Receivables performance
• Payables performance
• Current assets versus current liabilities
• Quarterly implications versus targets
• Discussion around potential actions to achieve these targets
WANT MORE?
Chase’s commitment to middle market companies goes beyond banking and finance. To help businesses
like yours, our dedicated experts compile timely industry insights in one place.
Get more Chase middle market insights at chase.com/executiveconnect
2014 Northeast CFO Conference 7
For more information, please contact your Middle Market Banking
representative or visit chase.com/executiveconnect
© 2014 JPMorgan Chase & Co. All rights reserved. Chase, J.P. Morgan and JPMorgan Chase are marketing names for certain businesses of JPMorgan Chase & Co. and
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