Facilitatinging efficiency within the Cash Conversion Cycle that delivers Working Capital Optimisation

John Mardle

CashPerform Ltd

Suite 44 Wrest ParkSilsoe, Beds, MK45 4HS, UK

Tel: +44 (0) 1525 864940

Email:johnmardle@cashperform.com

www.cashperform.com

Management Accounting Update

Our tool-box

Working Capital Optimisation

Business Process Management

Activity Based Management

Value Based Management

Performance Measurement

Change Management

About us

Why is Working Capital so important TODAY?

• Banks, investors , shareholders expect all types of debt to be serviced

• That cash is available to develop the business

• It satisfies the concept of ‘Going Concern’- Audit Practices Board Guidelines

Credit agencies have been found ‘wanting’ so the old methods of evaluating businesses need overhauling

New stress testing scenarios re FSA and IIF

Working capital models of businesses

Contract

Tender/ price list

Project Management & Scheduling

Design

Purchasing & subcontracting

Inventory, spare parts

Services carried out

Acceptance

Invoicing

Order

SERVICE

BUSINESS

Contract

Tender

Project Management & Scheduling Engineering

Purchasing & subcontracting

Assembly

Goods in transit

Civil works, erection &

sub contracting

Invoicing

PROJECT

BUSINESS

Delivery

Commissioning Pre-Acceptance

CertificateFinal Acceptance Certificate

A services business is generally more complex than a manufacturing company.

Contract

Tender/ price list

Material

Purchasing & subcontracting

Finished goods

Delivery

Invoicing

Order

MANUFACTURING

BUSINESS

Manufacturing

A project type business is even more complex.

Table of Cash Conversion Activities

TCP4 SID T C P

Description Account Timing Communication Process Description

Term Days via Balance Sheet Acronym

S Supply Chain DPO Trade Creditors P2P Purchase to Payment

I Inventory Chain DIO Stock/work in Progress I2C Inventory to Cash

D Demand Chain DSO Trade Debtors O2C Order to Cash

R Reverse Supply Chain Nil Net Zero Net by offsetting Dr/Cr R2C Reverse to Cash-Nil

Cash Conversion Cycle Positive WC cashflow CCC Healthy?

What’s wrong with CCC?

CCC – the challenges

• The target is to shorten CCC if its positive• Service Industries are normally negative-

Amazon• CCC varies between company, country and

industry sector – different T’s and C’s• Timing complications• Seasonality

• Reporting requirements

Different types of activities

Example:•Improvement in customer retention•Revenue generation enhanced

Examples:•Collection of cash from customers

•Sales team input on T&Cs

Core5%

Support55%

Noise35%

Discretionary

5%

Examples:•Audit of debtor accounts•Statements on systems

Examples:•Redo Invoices•Raise Credit Notes•Chase up calls from Head Office•Manual search of arithmetical errors

NOISE DRIVERSUncollectable Cash• Account Errors• Work Not Completed• Invoice errors• Notes on files not sufficiently accurate• Communication with debtor is inconsistent• Terms and Conditions not fully understood

NOISE DRIVERS Accuracy of Ledgers in Ageing debts• System ages incorrectly• Invoices cut off misaligned with month end accounts• Invoices not sent out timely• Training of people required• Communication lines need to be enhanced

More examples of noise drivers

Capacity, capability, maturity

• Capacity-does the company ,the function, the person have the time

• Capability- has training occurred, handover sufficient?

• Maturity-right MINDSET?

Fresh Thinking

• Are suppliers a liability?– When they have invested in you!

• Is stock/WIP an asset?– When it can degrade , become obsolete or

with WIP not be invoiced-expenses

• Are debtors an asset?– Debt is good but bad debt is bad

• Diversionary costs of collection• Only winners are lawyers and accountants!

Optimising Cash Flow

We believe the first step in developing an effective, working capital strategy is to optimise cash flow as the two go hand-in-hand.

However there are major barriers to effective cash forecasting. –First, cash forecasting involves input from many different individuals, causing the models to become unmanageable.

–Second, basic spread sheets are not a strong tool for monitoring data input and subsequent amendments to that data.

– Being able to access timely and accurate information is essential to effective forecasting.

Managing Credit

Managing credit efficiently is a cornerstone of your company's working capital strategy.

Balance sheet analysis will be a key component in a bank's evaluation of the sustainability of your business.

Operating cash has to sit somewhere and your deposits are highly valued by banks right now.

If you need to borrow capital, you should explore with your lender how your deposits factor into the negotiation.

For companies with excellent credit, deposits could tip the scale in your favour for obtaining capital.

Understand that your money market deposits may be the key to the operating capital that you need.

FCM and RRR and CSR

• Full Cost Model– Reflects real net margins

• Risk Review Report– Reflects risks of doing business

• Corporate Social responsibility

Country/Company/Community impact?

CapCut Cash in & Cash out cycles

Payment to Purchase Order

Payment of Suppliers Invoices

Any Queries from suppliers resolved Purchase

Invoices Approved

All goods/services receipted and quality

Originating Orders

Selecting and contracting with supplier

Procurement planning

• Full Cost model approved

Cash Received to Customer Enquiry

Bank clearance of money received

Cash Received applied to invoice correctly

Progress cash collections/ Disputed?

Sales Invoice raised per terms of order

Service/products/milestones met

Order Received and accepted

Bid/No Bid quoted and Risk Review?

Enquiry received and credit risk assessed?

Feedback from Sales/ Marketing and CRM?

Full Cost Model /RRR completed

BANK

ACCOUNTS

CASH IN

CASH OUT

Cash is a net consequence of how payments and receivables are managed in a number of complex processes throughout the business

Analyse process steps

Contract

Tender

Project Management & Scheduling Engineering

Purchasing & subcontracting

Assembly

Goods in transit

Civil works, erection & sub contracting

Invoicing

Working Capital Model of the business

Delivery

Commissioning Pre-Acceptance CertificateFinal

Acceptance Certificate

Contract

As is…

Contract

Tender

PM&S

Eng

P&SC

Assy

GIT

CW-E&SC

Inv

Del

C-PAC

FAC

Con

trac

t

Te

nder

PM

&S

Eng

P&

SC

Ass

y

GIT

CW

-E&

SC

Inv

Del

C-P

AC

FA

C

H = High impact

M = Medium

L= Low

HMH

L

H

H

H

H

M

M

M

M

Root Cause Matrix

Analyse process steps in reverse sequence of the working capital model and complete the matrix of upstream stages that cause problems further downstream.

In this example problems at the ‘Contract’ stage have been found to have a high impact on later stages..

Check list

2. …..

3. …..

4. …..

5. …..

Investigation to uncover root causes.

10 Common Working Capital Change Mistakes

1. WCO programmes must extend beyond the finance function and engage the company’s entire managerial team. Do not think that all working capital management problems can be addressed by treasury alone.

2. Do not artificially adjust working capital levels through delaying payments to suppliers or indiscriminately stepping up collection activities in order to boost quarter- or year-end performance metrics. In business, as in physics, every action is met with an opposite reaction. Delaying payments to vendors may reduce working capital over the short term, but that improvement is likely to disappear over time as vendors adjust their pricing accordingly.

3. Incentivise people to achieve their WCO targets by compensating staff accordingly, particularly at managerial level.

Common Working Capital Change Mistakes contd

4. Make a consistent effort to optimise working capital. It may be tempting to take the focus away from working capital when the company is growing as there may be less immediate need for it. Equally, in times of crisis, attention can be diverted elsewhere. Ignoring working capital during a downturn could significantly inhibit a company’s ability to grow and meet demand once business rebounds.

5. Ensure all hopes are not pinned on ERP implementation. Although ERP systems can provide significant benefits in the working capital arena, in the near-term they can cause deterioration in working capital performance as key managers and employees are distracted from their daily routines and forced to fine-tune the new ERP system.

6. Connect suppliers and customers across the enterprise to achieve maximum benefits.

Common Working Capital Change Mistakes contd

7. Negotiate before it is too late. Use the company’s leverage as a prompt-paying customer to help your bargaining position for better discounts or extended payment terms. This could not only provide cost benefits but also retain the goodwill of your suppliers.

8. Do not allow debt to become overdue before identifying and resolving disputes. Contact customers before payments are due to resolve any potential disputes and for delinquent payments, assign collection responsibilities to individuals and escalate the responsibility to more senior employees as invoices become further overdue.

Common Working Capital Change Mistakes continued

9. Develop forecasting techniques that incorporate intelligence from all relevant business segments, including not just sales but manufacturing, distribution and marketing. Evidence from these forecasts will assist in the production of company financial statements to investors.

10. Look holistically at the supply chain. For example, there is a direct correlation between inventory management methods and the level of customer service that a company can provide. Do not allow one area to suffer as a result of focusing attention on another.

……. And possibly the 11th ‘mistake’ Poor or non existent reporting of Working Capital

In these cash challenged times reporting cannot be left to chance and some of the old ways may no longer be fit for purpose.

The WCO approach addresses reporting in a constructive, robust and rigorous manner by focusing on the real working capital drivers so that auditors, investors, the banking fraternity and indeed suppliers, customers and shareholders can all see that actions are being taken in a measured and informed manner that will support business confidence and lead to a wider economic recovery for all ‘stakeholders’.

Producing reports might seem trivial but when the stakes are as high as they are at the moment, perhaps the reports will be the most vital differentiator of who will survive in the longer term.

Reporting Measures of Working Capital

Needs to be regular and reliable.

It is not just wading through a sea of ‘historic’ statistics like DSO, DPO and DIO.

Reports often fail to consider their type of audience, are rarely succinct in their delivery of the detail or used as an inappropriate medium.

In these cash challenged times reporting cannot be left to chance and some of the old ways may no longer be fit for purpose.

An example of reporting

Ultra Electronics Holdings plc Post balance sheet events On 5 February 2010 the Group renewed its £120m banking facility which is provided by a small syndicate led by the Royal Bank of Scotland. This renewed facility provides revolving credit over a three and a half year period and is denominated in Sterling, Australian dollars, Canadian dollars, Euros or US dollars and is used for balance sheet and operational needs. The facility is provided in equal proportions by the Royal Bank of Scotland, Bank of America, Barclays, Lloyds TSB and Santander. This facility is in addition to the Groups existing £80m Revolving Credit Facility and a £10m overdraft facility for funding short-term working capital requirements. The cash impact of working capital movements was an overall inflow of £11.9m (2008: £4.7m); a small outflow in receivables was more than offset by increased payables due primarily to advanced payments from customers. There was no increase in inventories during the year despite the increase in size of the underlying business. Receivables rose by just £2.5m as a result of debtor days improving from 46 days to 43 days. However, the major contributor to the working capital inflow was the increase in the value of payments in advance from customers on long-term contracts which was £37.4m (2008: £33.6m). The banking facilities are used to fund acquisitions and for other balance sheet and operational needs, including funding day-to-day working capital requirements.

Recent Quotes

From highly respected CEOs of Fortune 500 Companies have included:

“Cash flow is like the blood flow in our bodies. Interruption or restriction will cause a perfectly healthy body to rapidly deteriorate.”

“Cash is God not King.”

In both cases these CEOs were speaking after spending millions in correcting working capital issues and having to spend almost two years ‘communicating’ how they were retrieving their cash flow situation as investors and stakeholders had lost so much confidence in the management team.

CashPeform LtdSuite 44, Wrest Park

Silsoe, Beds, MK45 4HSTel : +44 (0) 1525 864940

www.cashperform.com

johnmardle@ cashperform.com

Thank you for listening- Any Questions?