working capital unharness your cash flow southern ... · working capital management focuses on...

Michael Diekmann Director, Bank of America Merrill Lynch October 10, 2014

Working Capital

Unharness your Cash Flow

Southern California AFP Luncheon

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Understanding Working Capital

Working Capital...

= Current Assets – Current Liabilities

How much cash is tied up in the operation of an organization. Best-in-class organizations are working to optimize their working capital…

which translates to

efficiently and effectively managing payables and receivables

Optimize working capital by…

OPTIMIZING PAYABLES

▪ Optimizing days payable outstanding (DPO)

▪ Lowered borrowing costs

▪ Reduced transaction and FX risk

▪ Streamlined processing

OPTIMIZING RECEIVABLES

▪ Optimizing days sales outstanding (DSO)

▪ Lowered financing costs

▪ Reduced transaction and FX risk

▪ Streamlined processing

BETTER MANAGING LIQUIDITY

▪ Enhanced cash flow management

▪ Optimizing visibility and control

▪ Minimized idle cash balances

▪ Reduced operating risk

A holistic view of working capital management

CASH (Liquidity)

PROCUREMENT Accounts Payables

(Expense) into Cash Outflow

INVENTORY Resources into Finished Goods

SALES Accounts Receivable

(Revenue) into Cash Inflow

Days Payable Outstanding “DPO”

Cash-to-Cash Cycle “Cash Conversion Cycle”

Operating Cycle

Days Inventory Outstanding “DIO”

Days Sales Outstanding “DSO”

Working Capital Cycle Cash Conversion Cycle

CCC = Inventory days (DIO) + Receivables (DSO) – Payables (DPO)

The period of time in which a company is able to convert its Resources into cash; or how quickly you convert sales into cash

Note: www.qfinance.com; Inventory conversion period: inventory / CGS x 365; Receivables conversion period: receivables / sales x 365; Payables conversion period: accounts payable / CGS x 365

Economists quote the CCC metric as: “one of the most accurate metrics for the real financial health of a company”

The Cash Conversion Cycle (CCC)

http://www.qfinance.com/

Working Capital Trends

-49%

Best in class companies have 49% less money tied up in inventories.

+1.7T

The increase in cash on hand in 2012.

-14 Days DSO

Best in class companies collect from clients 2 weeks faster.

+10 Days DPO

Best in class companies pay suppliers 10 days slower.

Source: 2012 CFO/REL Working Capital Scorecard

Working Capital Management

Working Capital

Management

DSO

DPO

Inventory

Cash Management

Control

Visibility

Forecasts

Financial Processes

A/R

A/P

Reconciliation

Liquidity

Financial Risk Management

Interest Rate Counterparty

Sovereign/ Country

Systems & Processes

ERP

TMS

T&E

Working Capital Metrics

Cost of Capital

FX

Market

SOX

Payroll

Legal & Tax

Rationalize/ Standardize/

Automate

Pooling/ Netting

Investing

Repatriation

Access to Capital

Leasing

Capital Markets

Lines of Credit

Supply Chain

Financing

Trade Solutions

Purchasing

The many facets of working capital

Financial Processes

Treasury

Billing

Accounts Receivable

Collections

Accounts Payable

General Ledger

Reconciliation

Payroll

Purchasing


Liquidity

Investing

ZBA Structures

Pooling/Netting

Repatriation of cash

Access to Capital

Lines of Credit

Capital Markets

Leasing

Supply Chain Financing

Trade Solutions


Financial Risk Management

Counterparty Risk

Interest Rate Risk

Sovereign/Country Risk

Market Risk

FX Risk

Compliance Risk

Reputation Risk

"When written in Chinese, the word crisis is composed of two characters. One represents danger and the other represents opportunity." - John F. Kennedy


Systems and Processes

ERP

TMS or Cash Setting Method

Online Bank Tools

T&E

Purchasing

Billing

Other

Rationalize, Standardize and Automate

To get the most out of these tools it is important to rationalize your systems and processes. Standardize your systems and processes and automate as much as possible.


Cash Management

Control

- You cannot manage what you do not own.

Visibility

- You cannot manage what you cannot see.

Forecasting

- An accurate cash forecast is essential

Access to systems and information

Open and honest communication

The past is not always indicative of the future.

“Only when the tide goes out do you discover who’s been swimming naked.” - Warren Buffett

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Understanding Working Capital Working Capital Management focuses on CASH!

OPTIMIZING CASH

MAXIMIZING CASH

VISIBILITY/ACCESS TO CASH

PROTECTING CASH

ensuring your cash is deployed efficiently by lean and automated processes

maximizing cash flow by improving DSO and DPO to grow operating cash flow

gaining visibility and access to cash through optimal liquidity structure and forecasting

preserving cash by investing wisely and by mitigating the risk of fraud and errors

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STANDARDIZATION

CENTRALIZATION

AUTOMATION

ELECTRONIFICATION

Working Capital Trends

• Process Efficiencies = Cost Savings •Better Data Management, Reporting, Decisioning

Remove manual steps, focus on technology enablement, ERP, TWS

• Fewer Errors, Tighter Controls • Prevent Risk of Fraud

Remove paper-based transmissions, focus on host-to-host EDI

One Policy, Process and Technology across all groups and subs

Payroll, Accounts Payables, Accounts Receivable, Acquisitions

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Procure-to-Pay Cycle

Sourcing • Develop a sourcing strategy • Negotiate payments types and term

Master Vendor Data • Payment methods (ACH, Card, Check, Wire) • Vendor review; single electronic payment file for all legal entities

Purchase Order & Receipt • Requisition entered and routed electronically for approval • Purchase Order created and delivered electronically to vendors

Invoice Processing • Automated invoices; terms verified against what is in Vendor Master, more favorable terms put in Vendor Master • Measure, monitor and reward taking full advantage of early pay discounts to improve DPO and cash flow

Payment • Eliminate or reduce paper-based transmissions • Single file submission for all payment types • Outsource check printing to reduce costs and protect against fraud

Reconciliation • Straight Through Processing - file-based transmissions, auto-reconcile payments, manage only the exceptions • Capture bank data for improved cash forecasting

Customer Service • Real time access to internal systems & vendor portal • Workflow capabilities to route and resolve requests and problems

Customer Service Reconcilement

Payment Execution

Invoice Processing

PO & Receipt

Vendor Master Data

Sourcing

Payables

Optimizing accounts payable

71% Of all invoices received in accounts payable departments today are via paper.

Source: Ardent Partners “The State of the AP Market: Not Broken, Needs Fixing” June 2012

12-36% The risk free return (APR) associated with taking early pay discounts.

73% Companies who have a strategy for converting paper-based transactions for payments to electronic. Source: Treasury & Risk “2012 Going Green Survey” 2012

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Order-to-Cash Cycle

Customer Service

Reconciliation Reporting

Cash Application

Collections Past Due

Invoice Creation

Order Management

Customer Master File

Customer Master File • Centralized customer master that feeds order management with hierarchy set-up facilitate global exposure reporting • Customer master stores credit limit, standard payment terms and payment method

Order Management • Purchase Orders received electronically from customers, integrated into ERP system • Orders are auto-released provided exposure is below credit limit and within terms

Invoice Creation • Automate the creation of an invoice sent electronically upon shipment of goods (decrease paper invoicing) • If customer cannot receive file-based transmission, have ERP system send invoice automatically via email or fax • Standard payment terms printed on invoice from Customer Master system with standard invoicing being electronic

Cash Applications • Straight through processing based on electronic invoicing, collecting , application and reconciliation • Customer-specific cash application rules housed within ERP system • Minimize and rationalize bank accounts, consolidate accounts with fewer banks to reduce costs and assist visibility

Collections Past Due • Centralized Collections group, measure, monitor and reward collection to terms with periodic audit • Check & ACH collections flowing to Lockbox/bank with data capture to facilitate straight through processing

Reconciliation/Reporting • Automate daily reconciliation ; straight through processing and manage exceptions only • Write off analysis to determine if there are any customer or process trends that need to be addressed • Capture bank data for improved cash forecasting

Customer Service • Real time access to internal systems • Workflow capabilities to route and resolve requests and problems

Receivables

Optimizing Receivables

43% Of businesses have customers 90 days or more past due. Source: FundingGates 2013

+10X Companies who accept card payments have a 10X shorter order to cash cycle than payment by ACH, Wire or Check. Source: MasterCard & Kaiser Associates-Commercial Card Acceptance Cost Benefit, November 2012

56.8% Companies who have a strategy for converting paper-based transactions for receipts to electronic.

Source: Treasury & Risk “2012 Going Green Survey” 2012

Working Capital…. working for you Cash Flow and Cost of Capital Impact

Estimated Savings and Cash Flow Improvements in the Cash Conversion Cycle

• Company with $200MM in annual revenue

($ in 000's)

CURRENT 1 Day 3 Days 6 Days

Annual Sales $200,000 $200,000 $200,000 $200,000

COGS $175,000 $175,000 $175,000 $175,000

Weighted Average Cost of Capital 9.5% 9.5% 9.5%

AR Days Reduced 1.0 3.0 6.0

AP Days Increased 1.0 3.0 6.0

Total Days Saved 2.0 6.0 12.0

AR Cash Flow Impact $548 $1,644 $3,288

AP Cash Flow Impact $479 $1,438 $2,877

Total Cash Flow Impact $1,027 $3,082 $6,164

AR Cost of Capital Savings $52 $156 $312

AP Cost of Capital Savings $46 $137 $273

Total Potential Savings $98 $293 $586

($ in 000's)


Annual Sales $500,000 $500,000 $500,000 $500,000

COGS $440,000 $440,000 $440,000 $440,000





AR Cash Flow Impact $1,370 $4,110 $8,219

AP Cash Flow Impact $1,205 $3,616 $7,233


AR Cost of Capital Savings $130 $390 $781

AP Cost of Capital Savings $115 $344 $687

Total Potential Savings $245 $734 $1,468



• Company with $500MM in annual revenue

($ in 000's)


Annual Sales $1,000,000 $1,000,000 $1,000,000 $1,000,000

COGS $875,000 $875,000 $875,000 $875,000





AR Cash Flow Impact $2,740 $8,219 $16,438

AP Cash Flow Impact $2,397 $7,192 $14,384


AR Cost of Capital Savings $260 $781 $1,562

AP Cost of Capital Savings $228 $683 $1,366

Total Potential Savings $488 $1,464 $2,928



• Company with $1B in annual revenue

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Working Capital Goals

▪ Operating Cash Flow

▪ Changes in Working Capital

▪ Cash Conversion Cycle

▪ DSO + DIO – DPO

▪ Prevent Fraud/Tighten Controls

▪ Margins

▪ Gross Margin

▪ EBITDA Margin

▪ Gain Market Share

• Incremental Cash Flow

• Cost Reduction

• Tighter Controls

• Fewer Errors

• Better Reporting

What Goals Does Your Firm Want to Achieve?

Best practices in working capital

Focus on long term solutions

Have clear goals and measure them

Centralize and Standardize Globally

Benchmark

Optimization is a journey, not a destination

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Taking the Steps to Success Establish an active working capital management approach

• Process improvement

• Reduced resource time

• Reduced cost

• Improved cash flow

• Improved DSO / DPO

• Profit center vs. cost center

• Internal education / awareness

• System capabilities

• Payment types

• A/P process & terms

• A/R process & terms

• Visibility

• Resource time

• Comprehensive payables

• Comprehensive receivables

• Supplier / Receivables financing alternatives

• Liquidity structures

• Reconciliation / cash application

• Advanced reporting & analytics

• Create awareness

• Identify key stakeholders

• Establish KPIs and accountability

• Implement comprehensive integrated solutions

Optimized Working Capital Management Approach

These steps are instrumental for driving rapid improvement and continued satisfaction

3. Identify Potential Solutions

4. Support Holistic

Approach 2. Understand

Your Challenges

1. Identify Your Objectives

Success

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QUESTIONS

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