Working Capital Unharness your Cash Flow Southern California

Working Capital
Unharness your Cash Flow
Southern California AFP Luncheon
Michael Diekmann
Director, Bank of America Merrill Lynch
October 10, 2014
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…
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Optimizing days sales outstanding (DSO)
Lowered financing costs
Reduced transaction and FX risk
Streamlined processing
BETTER MANAGING LIQUIDITY
OPTIMIZING PAYABLES
OPTIMIZING RECEIVABLES
▪
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Optimizing days payable outstanding
(DPO)
Lowered borrowing costs
Reduced transaction and FX risk
Streamlined processing
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Enhanced cash flow management
Optimizing visibility and control
Minimized idle cash balances
Reduced operating risk
A holistic view of working capital management
The Cash Conversion Cycle (CCC)
Economists quote the CCC metric as: “one of the most accurate metrics for the real financial health of a company”
Operating Cycle
Working Capital Cycle
Cash Conversion Cycle
Cash-to-Cash Cycle
“Cash Conversion Cycle”
CASH
(Liquidity)
Days Payable Outstanding
Days Sales Outstanding
“DPO”
“DSO”
SALES
Accounts Receivable
(Revenue)
into Cash Inflow
PROCUREMENT
Accounts Payables
(Expense)
into Cash Outflow
INVENTORY
Resources into
Finished Goods
Days Inventory Outstanding
“DIO”
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
Working Capital Trends
-14 Days DSO
+10 Days DPO
Best in class companies collect
from clients 2 weeks faster.
Best in class companies pay
suppliers 10 days slower.
-49%
+1.7T
Best in class companies have 49%
less money tied up in inventories.
The increase in cash on hand
in 2012.
Source: 2012 CFO/REL Working Capital Scorecard
Working Capital Management
A/R
Supply
Chain
Financing
Lines of
Credit
Visibility
A/P
Control
Legal
& Tax
Forecasts
Leasing
Cash
Management
Financial
Processes
Access to
Capital
Trade
Solutions
DSO
Inventory
Reconciliation
Pooling/
Netting
Working
Capital
Management
Working
Capital
Metrics
DPO
Purchasing
Payroll
Capital
Markets
Investing
Liquidity
Repatriation
Cost of
Capital
Financial Risk
Management
Systems &
Processes
FX
Interest
Rate
Sovereign/
Country
Counterparty
SOX
Market
ERP
TMS
T&E
Rationalize/
Standardize/
Automate
The many facets of working capital
Financial Processes
 Treasury
 Billing
 Accounts Receivable
 Collections
 Accounts Payable
 General Ledger
 Reconciliation
 Payroll
 Purchasing
The many facets of working capital
Liquidity
 Investing
 ZBA Structures
 Pooling/Netting
 Repatriation of cash
Access to Capital
 Lines of Credit
 Capital Markets
 Leasing
 Supply Chain Financing
 Trade Solutions
The many facets of working capital
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
The many facets of working capital
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.
The many facets of working capital
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
Understanding Working Capital
Working Capital Management focuses on CASH!
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MAXIMIZING CASH
maximizing cash flow by improving DSO
and DPO to grow operating cash flow
OPTIMIZING CASH
ensuring your cash is deployed efficiently
by lean and automated processes
VISIBILITY/ACCESS TO CASH
gaining visibility and access to cash through
optimal liquidity structure and forecasting
PROTECTING CASH
preserving cash by investing wisely and by
mitigating the risk of fraud and errors
Working Capital Trends
CENTRALIZATION
STANDARDIZATION
AUTOMATION
ELECTRONIFICATION
• Fewer Errors, Tighter Controls
• Prevent Risk of Fraud
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One Policy, Process and Technology across all
groups and subs
Payroll, Accounts Payables, Accounts
Receivable, Acquisitions
Remove manual steps, focus on technology
enablement, ERP, TWS
Remove paper-based transmissions, focus on
host-to-host EDI
• Process Efficiencies = Cost Savings
• Better Data Management, Reporting, Decisioning
Procure-to-Pay Cycle
Payables
Sourcing
Vendor
Master Data
PO &
Receipt
Invoice
Processing
Payment
Execution
Reconcilement
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
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Customer
Service
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
Order-to-Cash Cycle
Receivables
Customer
Master File
Order
Management
Invoice
Creation
Cash
Application
Collections
Past Due
Reconciliation
Reporting
Customer
Service
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
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Optimizing Receivables
43%
Of businesses have customers 90 days or more past due.
Source: FundingGates 2013
56.8%
Companies who have a strategy for converting paper-based
transactions for receipts to electronic.
Source: Treasury & Risk “2012 Going Green Survey” 2012
+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
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
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
$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
Weighted Average Cost of Capital
Total Cash Flow Impact
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 $500MM in annual revenue
($ in 000's)
CURRENT
1 Day
3 Days
6 Days
Annual Sales
$500,000
$500,000
$500,000
$500,000
COGS
$440,000
$440,000
$440,000
$440,000
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
$1,370
$4,110
$8,219
AP Cash Flow Impact
$1,205
$3,616
$7,233
Total Cash Flow Impact
$2,575
$7,726
$15,452
AR Cost of Capital Savings
$130
$390
$781
AP Cost of Capital Savings
$115
$344
$687
Total Potential Savings
$245
$734
$1,468
Weighted Average Cost of Capital
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 $1B in annual revenue
($ in 000's)
CURRENT
1 Day
3 Days
6 Days
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$875,000
$875,000
$875,000
$875,000
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
$2,740
$8,219
$16,438
AP Cash Flow Impact
$2,397
$7,192
$14,384
Total Cash Flow Impact
$5,137
$15,411
$30,822
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
Annual Sales
COGS
Weighted Average Cost of Capital
Working Capital Goals
What Goals Does Your Firm Want to Achieve?
▪ 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
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• Incremental Cash Flow
• Cost Reduction
• Tighter Controls
• Fewer Errors
• Better Reporting
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
Taking the Steps to Success
Establish an active working capital management approach
Success
1. Identify Your
Objectives
• Process improvement
• Reduced resource
time
• Reduced cost
• Improved cash flow
• Improved DSO / DPO
• Profit center vs. cost
center
2. Understand
Your
Challenges
• Internal education /
awareness
• System capabilities
• Payment types
• A/P process & terms
• A/R process & terms
• Visibility
• Resource time
3. Identify
Potential
Solutions
• Comprehensive
payables
• Comprehensive
receivables
• Supplier / Receivables
financing alternatives
• Liquidity structures
• Reconciliation / cash
application
• Advanced reporting &
analytics
4. Support
Holistic
Approach
• 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
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