Financial Controllers’ Club - Deloitte · •Established in May 1997 as the Financial Controllers’ Club, and renamed Deloitte Finance Club in 2013 •Provides an annual programme

©2015 Deloitte LLP. All rights reserved.

Deloitte Finance Club

The community for Financial Controllers and senior financial executives

Wednesday, 18th November 2015



A few facts

• Established in May 1997 as the Financial Controllers’ Club, and renamed

Deloitte Finance Club in 2013

• Provides an annual programme of technical updates and hot topic briefings

• Connects our members to relevant experts as well as over 2,200 members

across the country

Deloitte Finance Club – Tax update and The lost opportunity of unproductive cash (18 Nov 2015)2



Upcoming programme

• Holiday finance checklist 2015

Wednesday, 9 December 2015 – 8:30am-10:30am (arrivals from 8am)


http://www2.deloitte.com/uk/en/pages/forms/event/deloitte-finance-club-holiday-finance-checklist-9dec.html



Agenda

• Tax update Bill Dodwell

• The cash paradox Sriram Prakash

• Working capital and cash flow management Alberto Baldan

• Deloitte Moneyback Charlotte Desourdy


mailto:[email protected]






Tax update

Bill Dodwell

©2015 Deloitte LLP. All rights reserved.Deloitte Finance Club – Tax update and The lost opportunity of unproductive cash (18 Nov 2015)

Breaking the news

6


The BEPS group

Sixty-two countries have collaborated on BEPSAlbania, Argentina, Australia, Austria, Azerbaijan, Bangladesh, Belgium, Brazil,

Canada, Chile, Colombia, Costa Rica, People’s Republic of China, Croatia, Czech

Republic, Denmark, Estonia, Finland, France, Georgia, Germany, Greece,

Hungary, Iceland, India, Indonesia, Ireland, Israel, Italy, Jamaica, Japan, Kenya,

Korea, Latvia, Lithuania, Luxembourg, Malaysia, Mexico, Morocco, Netherlands,

New Zealand, Nigeria, Norway, Peru, Philippines, Poland, Portugal, Russian

Federation, Saudi Arabia, Senegal, Singapore, Slovak Republic, Slovenia, South

Africa, Spain, Sweden, Switzerland, Tunisia, Turkey, United Kingdom, United

States and Vietnam.

Regional organisations

ATAF, CREDAF, CIAT

IMF, World Bank, UN


©2015 Deloitte LLP. All rights reserved.Deloitte Finance Club – Tax update and The lost opportunity of unproductive cash (18 Nov 2015)8

Impact of BEPS

“Although measuring the scale of BEPS proves

challenging… and the serious data limitations…

The findings… highlight the magnitude… with

global corporate income tax (CIT) revenue losses

estimated between 4% and 10% of global CIT

revenues, ie USD 100 to 240 billion annually”


How will BEPS Actions be taken forward?

Three levels

Minimum standard

Interest restrictions

Hybrid mismatches

Transfer pricing documentation

Best practice

CFC rules

Disclosure rulesRecommendations

Country by country reportingDispute resolution

VAT on business to customers digital services

Multilateral instrument

Permanent establishment Transfer pricing

Treaty abuseHarmful tax practices


Translating BEPS into law


National law

Interest restrictions

Hybrid mismatches

CbyC reporting

Disclosure rules

CFC rules

Transfer Pricing

guidelines

Practice

Treaty interpretation

Domestic law

Multilateral convention

Treaty abuse

Permanent est.

Dispute resolution

3 types of implementation


The main actions


Permanent establishment definition

Taxable presence – or notArea Definition

Dependent

agent

‘habitually plays the principal role leading to the

conclusion of contracts that are routinely concluded

without material modification by the enterprise’ of

contracts, that are:

(i) in the name of the enterprise; or

(ii) transfer of, or the granting of the right to use, property;

or

(iii) the provision of services of the enterprise

Independent

agent

• Not ‘independent’ where agent acts exclusively or almost

exclusively for group companies

• At least 10% of agency sales are to unrelated parties


Permanent establishment definition

Taxable presence – or notArea Definition

Specific activity

exemptions

• All exemptions for specific activities qualified by

‘preparatory or auxiliary’

• Option to retain specific activity exemptions if ‘anti-

fragmentation’ rule is included

Fragmentation of

activities (‘anti-

fragmentation’

rule)

Specific activity exemptions do not apply, where

a) local permanent establishment; or

b) the overall activity resulting from the combination of the local

activities (including local companies) is not preparatory or

auxiliary

provided the business activities constitute complementary

functions which form part of a cohesive business operation

Splitting-up of

construction

contracts

Include principal purposes test or to add connected

activities (exceeding 30 days) carried on by group companies

to the period for 12 month rule


Transfer Pricing

Risk and recharacterisationAreas Comments

Delineation • Delineation of the actual transaction

• Conduct trumps contractual arrangements

Control over risk • Capability (competence) and functional performance

(decision-making)

• Management of risk may be outsourced

Financial capacity

to bear risk

• Ranks equally with control

• Access to funding

Non recognition

(recharacterisation)

• Recognise actual transaction where commercial

rationality and assessment of the perspectives of

options realistically available


Countering harmful tax practices more effectively

Countering harmful tax practices

Intellectual

property regimes

• Substantial activity requirement

• Minimum standard – ‘nexus approach’

• Substance predicated on a link between intellectual

property income and qualifying R&D spend

• By 30 June 2016

• new regimes including the nexus approach and

existing regimes closed to new entrants

• By 30 June 2021

• no more tax benefits under non-nexus regimes

Other preferential

regimes

• Application of substantial activity requirement to

headquarters regimes, distribution service centre regimes,

financing or leasing regimes, fund management regimes,

banking and insurance regimes, shipping regimes and

holding company regimes


Countering harmful tax practices more effectively

Countering harmful tax practices

Framework

for

compulsory

spontaneous

exchange of

rulings

between

governments

• Rulings relating to preferential regimes, unilateral advanced

pricing agreements, cross border for downward adjustment of

tax profits, permanent establishment, related party conduit

rulings and a catch-all category

• Applies to information on rulings

- issued on or after 1 Jan 2010 that were still in force at

1 Jan 2014 – exchanged by end of 2016

- issued on or after 1 April 2016 – exchanged as quickly as

possible

• EU Directive on mandatory automatic exchange of cross-

border corporate tax rulings

- Expected in national law by 1 Jan 2017

- Exchange information on valid rulings from 2012-2017 and

rulings after 1 Jan 2014 that are now invalid

- Small and medium-sized entities – exchange applies on

rulings obtained after 1 April 2016

16


Prevent treaty abuse

• Countries have flexibility to agree their approach (e.g. to reflect constitutional

restrictions, EU law etc.)

• Options put forward:

• Other optional targeted rules


No limitation of

benefit (‘LOB’)

Simplified LOB can

be used

Detailed robust LOB

required

Option 1 Option 2 Option 3

Principal purposes test (‘PPT’) only

PPT plus LOBLOB plus anti-

conduit rule


Interest deductions

‘Best practice’ recommendations (not ‘minimum standard’) include:


Interest deductions for each entity

General /

primary rule

Fixed ratio rule

• By reference to tax-based EBITDA and net interest

• Countries to set own ratio within 10-30%

• Factors to determine benchmark

Secondary rule Group ratio rule (optional)

• 10% uplift

• Loss-makers?

Exclusions • De minimis threshold

• Privately owned public-benefit assets

Other features • Optional carry forward of disallowed interest / unused

capacity

• Transitional provisions and grandfathering

Targeted rules To support general rule/ address specific risks


Transfer pricing documentation

Three-tiered global standard for transfer pricing documentation

Country-by-

country

reporting

Global allocation of a group’s income and taxes paid together

with indicators of the location of economic activity

• From 1 January 2016

• Consolidated revenue of more than €750m/£586m/$840m

Information includes:

• Tax jurisdiction

• Revenues (related party and third party)

• Profit before tax

• Tax paid (on cash basis)

• Income tax accrued – current year

• Stated capital

• Accumulated earnings

• Number of employees

• Tangible assets

• Description of business activity

19


Timetable

Countries sign Multilateral Convention

Review of country-by-

country reporting

20168 Oct2015

Nov2015

21-22Sept2015 2017 2020

Updated OECD

Transfer Pricing

guidelines

Committee on Fiscal

Affairs approves Actions

G20 Finance Ministers

G20 Leaders

Release of updated

OECD model treaty

Countries implement

agreed actions –2016- 18?

CbyC Treaty


Questions


The cash paradox

How record cash reserves are influencing corporate behaviour

Sriram Prakash


The Cash ParadoxReleased at Davos and featured on the front page of the Financial Times,

and many other business media

Deloitte research on corporate cash piles has received

extensive coverage in the global media including the Financial

Times, where it featured on the front page and six subsequent

articles.

In Davos, where it was released, it triggered a debate on the

role of the corporate sector in economic recovery and

subsequently we were invited to present at a FTSE100 CEO

roundtable chaired by George Osborne.

The research was also cited in global media outlets in the UK,

US, Germany, Korea, Brazil, Japan, Australia etc.


The changing corporate sector landscape The shift in leverage from corporate and financial sector to the

governments, which eventually led the corporate sector to emerge far

stronger, is one of the defining consequences of the financial crisis

15.1% 13.2%

61.1%

93.0%

18.214.3

0

10

20

30

40

50

60

70

80

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2008 2013

Ba

nks le

ve

rag

e (

No. o

f tim

es)

Corp

ora

te a

nd

go

ve

rnm

en

t le

ve

rag

e (

%)

Leverage of corporates, banks and sovereigns

Corporate leverage Government leverage Bank leverage

Corporate leverage = Net debt as a % of total assets for all non-financial companies in the S&P Global 1200 Index based out of United States, United Kingdom,

Sweden, Spain, Netherlands, Italy, Ireland, Greece, Germany, France and Finland

Government leverage = Public debt as a % of GDP for United States, United Kingdom, Sweden, Spain, Netherlands, Italy, Ireland, Hungary, Greece, Germany,

France, Finland

Bank leverage = Total assets to equity of 41 banks which are part of S&P Global 1200 Index based out of United States, United Kingdom, Sweden, Spain, Italy,

Ireland, Greece, Germany and France


Cash reservesGlobally the 1000 largest companies have built up $3.56 trillion in cash

reserves, US corporate sector accounts for nearly half of those reservesGlobal cash holdings by geography (2014)

200

400

600

800

1000

1200

1400

1600

1800

2008 2009 2010 2011 2012 2013 2014

$ b

illi

on

US

Europe

Asia

Change in cash reserves France Germany Hong Kong Japan South Korea Switzerland UK US

Change in cash (2008-14) 29% 21% 122% 46% 300% 24% 106% 101%

Change in cash CAGR (2008-14) 4% 3% 14% 6% 26% 4% 13% 12%

United States45%

Japan14%

France7%

United Kingdom

6%

Germany5%

South Korea3%

Hong Kong3%

Switzerland2%

Others15%

Global cash

holding (2014)

$3.56 trillion


Cash reservesThe TMT sector has amassed $1.1 trillion in cash reserves, growing by

130%, it has overtaken Manufacturing as the industry with most reserves

Consumer Business

15%

E&R15%

LSHC11%

Manufacturing28%

Real Estate0%

TMT31%

Global cash

holding (2014)

$3.56 trillion

200

300

400

500

600

700

800

900

1000

1100

1200

2008 2009 2010 2011 2012 2013 2014

$ b

illi

on

Consumer Business E&R LSHC Manufacturing TMT

Change in cash reservesConsumer

BusinessE&R LSHC Manufacturing Real Estate TMT

Change in cash (2008-14) 57% 60% 65% 57% 11% 130%

Change in cash CAGR (2008-14) 8% 8% 9% 8% 2% 15%

Global cash holdings by geography (2014)


The Cash ParadoxJust a third of global companies hold 80% of the cash reserves, and these

‘large cash holding’ companies nearly doubled their reserves in the five

years following the financial crisis

In total there are 960 non-financial companies in S&P Global 1200. Of these 274 companies are large cash holding companies and 686 companies are small cash holding companies.

Large cash holding companies are the ones who have more than $3 billion cash reserves in the year 2014. Small cash holding companies are the ones which have less than $3 billion

cash reserves in the year 2014.

Cash reserves include cash and cash equivalents & short term investments

1.221.35 1.34

1.47 1.49 1.53

1.912.13

2.312.53

2.80 2.860.34

0.42 0.430.46 0.53 0.50

0.63

0.68

0.71

0.74

0.77 0.70

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Cash

re

se

rve

s (

US

$ t

rilli

on

)

Small cash holding companies (71% of S&P Global 1200 non-financial companies)

Large cash holding companies (29% of S&P Global 1200 non-financial companies)


US corporate overseas cash reservesUS companies dominate global cash holdings, with a significant proportion

of the reserves being held overseas, making the prospect of M&A

particularly attractive

$690 billion51% of total US corporates

cash reserves (2014)

$368bn (53%) overseas cash held by the below 10

companies

Cash parked overseas (2014)

15.1

19.5

22.1

25.7

26.1

35.2

38.7

47.4

61.1

77.1

HP

Coca cola

Apple

Amgen

Pfizer

Oracle

Google

Cisco

GE

Microsoft

United States67%

Other MENA8%

Asia Pacific ex. Japan

7%

Other6%

Canada & Unspecified Americas

5%

Western Europe

4%

Latin America2%

Japan1%

S&P 500 revenue by region (2014)

$2.1 trillionprofit accumulated by

US multinational companies

outside the U.S. (+8% since 2013)*

US corporates overseas profits (2014)

*Overseas profits includes the 346 S&P 500 companies

(excluding REITs and companies domiciled outside the U.S.)


0 200 400 600 800 1000 1200

0% 20% 40% 60% 80% 100%

Large cash holding companies Small cash holding companies

Capex of S&P Global 1200 non-financial companies

Capex as % of cash from operations Capex as % of cash from operations

Capex US$bn Capex US$bn020040060080010001200

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

0%20%40%60%80%100%


How companies spend their cash – CapexSmall cash holding companies are allocating more cash from operations

towards Capex


Capex as a proportion of D&AHowever small cash holding companies are spending proportionally more

on “growth related capex”, as compared to “maintenance capex”

50%

60%

70%

80%

90%

100%

110%

120%

130%

140%

150%

160%

170%

180%

190%

200%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014


Average for large cash

holding companies – 128%

Average for small cash

holding companies – 152%

CAPEX as a proportion of Depreciation and Amortisation


M&A markets have made a strong comebackWe are projecting 2015 year to end with $3.9 trillion in announced deals;

likely to be the best year for M&A since 2007

Global M&A values and volumes 2001-2015 LTM

92%86% 85%

80%

79%73%

76%

85%

87%79% 77% 75% 73%

73% 74%

8%

14%15%

20%

21%

27%

24%

15%

13%

21% 23% 25%27%

27%

26%

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

0

500

1000

1500

2000

2500

3000

3500

4000

4500

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 (Q1-Q3)2015

Deal volu

me

Dis

clo

sed d

eal valu

e (

$ b

illio

n)

Global deal value and volumes

Strategic disclosed deal value (LHS) PE disclosed deal value (LHS) Strategic deal volume (RHS) PE deal volume (RHS)

RecoveryPre downturn Lehman insolvency and

immediate aftermath

Q3 2015 LTM

deal volumes

2015 full year projection

based on LTM calculation


0 100 200 300 400

0% 50% 100% 150% 200% 250% 300%


Cash M&A spend of S&P Global 1200 non-financial companies

Cash M&A spend as % of cash reserves Cash M&A spend as % of cash reserves

Cash spend on M&A US$bn Cash spend on M&A US$bn0100200300400

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

0%50%100%150%200%250%300%


How companies spend cash – M&AThe small cash holding companies are spending significantly more of their

cash reserves on M&A, compared to their large cash holding counterparts


Credit conditionsDeloitte CFO survey shows credit conditions remain favorable


1,637 1,681 1,688

1,889

2,214

2,552 2,5672,635

2,878

3,189

3,352

3,456

21%

25% 26%

24%

24%

20%

25%

26%

25%

23%

23%

20%

10%

15%

20%

25%

30%

0

500

1000

1500

2000

2500

3000

3500

4000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Cash r

eserv

es a

s %

of

tota

l debt

$ b

illio

n

Small Companies - Total Debt Cash reserves as % of total debt

3,105

3,319 3,244

3,693

4,2894,455

4,927

4,702

4,927

5,192

5,419 5,477

39% 4

1% 41%

40%

35%

34%

39%

45%

47%

49%

52% 52%

30%

35%

40%

45%

50%

55%

0

1,000

2,000

3,000

4,000

5,000

6,000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Cash r

eserv

es a

s %

of

tota

l debt

$ b

illio

n

Large Companies - Total Debt Cash reserves as % of total debt


Trends in Corporate Debt Both sets of companies raised from the capital markets, however the ‘small

cash holding’ companies increased their debt by 35%, compared to 23%

by the ‘large cash holding’ companies


Total Debt vs. Cash Reserves as % of total debt


Divergence in revenue performanceThe impact of the contrasting attitudes towards cash accumulation and

spending is clear when we saw ‘small cash holding’ companies grow their

revenues at a faster face than their ‘large cash holding’ counterparts

0

100

200

300

400

500

600

700

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Reb

as

ed

to

10

0


Revenue performance for large vs. small cash holding companies in S&P 1200


Divergence in share price performance More striking is the divergence in relative share price, shares of ‘small

cash holding’ companies grew by 728% compared to 365% for the ‘large

cash holding’ companies, the results even starker since the financial crisis

0

100

200

300

400

500

600

700

800

900

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Reb

as

ed

to

10

0

Small cash holding companies Large cash holding companies

Share price performance of large vs. small cash holding companies in S&P 1200


Wake up call Even as S&P share price index touched new highs, year-on-year revenue

growth has fallen since 2011, going forward we expect investors to put the

spotlight firmly back on growth & companies will start feeling the pressure

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

0

200

400

600

800

1000

1200

1400

1600

1800

2000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

S&

P G

lobal 1200 n

on

-fin

ancia

l com

panie

s r

evenue

gro

wth

S&

P G

lobal 1200 I

ndex

S&P Global 1200 Index and revenue growth

S&P Global 1200 Index Revenue growth (Non-financial companies)

S&P 1200 index vs. Revenue growth of constituents


Spotlight on CEOsBoards have started to realign themselves and they are recruiting a new

breed of CEOs who are willing to pursue growth with a vigour

Analysis of FTSE 100 CEOs


Working capital and cash flow management

The lost opportunity of unproductive cash?

Alberto Baldan



Objectives of this session

• Framing the context – quick update on working capital trend in UK PLCs

• How organisation can develop and implement working capital improvement

programmes – hints, tips and common pitfalls



Framing the contextCFO priorities and risks would suggest working capital performance should

be at the top of their action list

0%

10%

20%

30%

40%

50%

2014 Q1 2014 Q2 2014 Q3 2015 Q1 2015 Q2 2015 Q3

To what extent is increasing CF a strong priority over the next 12 months?

0%

10%

20%

30%

40%

50%

2014 Q1 2014 Q2 2014 Q3 2015 Q1 2015 Q2 2015 Q3

New products/new markets expansion

40%

42%

44%

46%

48%

50%

2014 Q2 2014 Q3 2014 Q4 2015 Q1 2015 Q2 2015 Q3

Fear of increase in interest rate

Working capital typically moves up management’s agenda following a cash trigger such as

requiring an investment to fund growth or bridging temporary downturns in business

performance. Deloitte CFO survey highlighted the following top priorities/risk.

Top priorities

Top risk


Framing the context How have CFO priorities and risks been reflected in working capital

performance?

• Performance metrics extract (from Deloitte study) including listed entities with revenue

>£50m suggested that DWC in the UK have progressively deteriorated in the past 6 years

• Top performers have slipped back slightly, inverting the trend of improved YoY performance

• Across the board DPO, DSO and DIO have worsened, surprising especially given

commodity price trend that might hide a much gloomier picture


Working capital is marginally deteriorating across all components inverting the trend of the

last few years


Framing the contextPicture by industry segments is a lot more nuanced, with DSO overall

deteriorating more than other components and DPO relatively more stable

Improvement

Deterioration


Framing the contextA number of studies suggested that relatively cheaper debt finance may

have shifted focus off working capital

• Most organisations seem to have clear focus on working capital but inevitably earnings

(especially for listed entities) come first

• Reporting and performance metrics used in Executive dashboards are generally earnings

focused and fairly limited when it comes to WC that is analysed via DSO, DPO, DIO at

aggregated level

• Accumulated cash seems at higher level than before but to an extent likely to be driven by

cheap (and available) debt finance that is probably causing some complacency/reduced

effort on working capital given the overall picture on performance

• Other elements like governance structure, performance managements and communication

(tone at the top) play a very important role


What are the key drivers behind these trends?


Working capital and cash flow managementWorking capital programmes are a multidimensional exercise that need to

be addressed considering the overall business imperatives

• Tone at the Top is key not just to take the programme off the ground but to

ensure improvements are sustainable rather than a one off exercise

• Businesses must take a comprehensive view of working capital

management, managing the entire portfolio of receivables, payables, inventory is

often a balancing act and entails trade offs (e.g. cash vs margin) that need to be

addressed without losing sight of the overall picture and business imperatives.

‒ How much cash do we need?

‒ What is our baseline

‒ Can we recover price cuts later?

‒ Not all levers are created equal. Often impact on margin is typically less when

compressing payables rather versus extending receivables


What are the key ingredients for a successful working capital programme?


Working capital and cash flow managementFinance may drive the programme but the organisation as a whole needs

to embrace the challenge and support the changes

• Numbers please – some companies use rule of thumbs or sub-optimal metrics

to drive decisions. In almost all cases, transactional analysis has revealed a

different (or more nuanced) story.

• Not just a business strategy issue but an operational exercise – working capital

reduction cannot be driven only by Finance: Procurement, Supply Chain and

Customer Service teams need to an integral part of the programme. They should

became aware that working capital is “our cash”.


Price

Quote

Contract

Signed

Order

Placed

Order Fulfilled /

Built

Order

Shipped

Order

Billed

Payment

Received

£ Inflow

£ Outflow

Fund

Committed

Supplier

Sourced &

Selected

PO/Order

Placed

Order

Received

Payment

Disbursed

Supply Chain

Procurement

FinanceSales

Cash Operating Cycle


Working capital and cash flow managementComplexity and approach may vary depending on nature of the business

and industry

Manufacturing-basedService-based

Many vendors

& customers

Few vendors

& customers

Capital Intensity

Vo

lum

e o

f ve

nd

ors

& c

us

tom

ers

Companies may fall into more than one archetype across their business and most companies will

play the role of working capital collaborator in at least part of their business

Working capital framework

Working Capital

Manager

Companies that produce physical

goods; maintaining relatively few

vendors and customers

Working Capital

Minimalist

Service-based organizations that

maintain relatively few suppliers and

serve a small number of customers

Working Capital

Collaborator

Service-based companies that

maintain a vast network of customers

and suppliers, but have little

inventory

Working Capital

Exploiter

Products-oriented companies that

require emphasis on all major WC

components for operational efficiency

and competitive advantage

WC approach centers around the

proactive management of AR & AP

Comprehensive approach combining

precise forecasting, proactive WC

management & broad coordination

Often characterized by a targeted,

situation-based approach, supported by

basic underlying WC processes

Leverage relationships w/ customers and

suppliers to minimize inventory & optimize

AR/AP

Nature of the business

Healthcare

Media

Telecom

Banking &

Securities

Government

Insurance

Agriculture

Homebuilding

Real Estate

Automotive

Retail

Technology

Primary

industries

Primary

industries


Working capital and cash flow managementCombining performance and process assessments enables potential

improvements and initiatives required to be identified

Pe

rfo

rman

ce a

sse

ssm

ent

Pro

ce

ss a

sse

ssm

ent

Cro

ss-f

un

ctio

na

l wo

rkin

g c

ap

ita

l

pro

ce

ss w

ork

sh

op

s

Mo

nth

ly m

an

ag

em

en

t re

po

rt /

tra

nsa

ctio

na

l d

ata

pe

rfo

rma

nce

ga

p

an

d tre

nd

an

aly

se

s

Review of management reports and/or transactional data::

• Customer payment performance vs. payment terms

• Supplier payment performance vs. payment terms

• Customer and supplier leverage assessment cf. terms in place

Self assessment of existing processes that drive AR and AP

against Deloitte leading practice framework by cross-functional

teams covering:

• Order to cash (Accounts Receivable)

• Purchase to pay (Accounts Payable)

• Cash mind set enablers (People, Organisation, KPIs)

What constrains working

capital?

What drives working capital

performance?

What opportunity is there for

improvement?

What can be done to realise

the opportunity?

Performance improvement initiative

options

Combining performance and process assessments

• Identify underlying drivers

• Highlight areas for potential improvement

• Identify performance improvement initiative options

• Categorise options based on benefit scale, delivery risk and

timescale

• Facilitate Management to select appropriate options


Case studyThe need to continually invest coupled with margin erosion led this

business to reappraise their sources of funds• Working capital was identified as a low cost source of funds

• Releasing cash from working capital had proven difficult in the past due to multiple

businesses, geographies and autonomous local management teams

• Production efficiency had always been a priority and had contributed to high levels

of finished goods stock

Accounts receivable• Reactive cash collection processes

• Unofficial extended credit "grace period“ driven by delays in expediting payments

• Multiple payment terms with no standard credit policy

• Informal dispute resolution with high levels of unresolved and aged disputes

Accounts payable• Lack of official payment policy with invoices paid based on supplier terms

• Early payments with invoices paid weekly in advance

• Payment clock based on supplier invoice date

• Low level of priority assigned to payment terms when negotiating with suppliers

Inventory• Experience and intuition based demand forecasting

• Lack of tracking of forecast accuracy and bias

• Product family based stock management with standard parameters applied to SKUs

• Underdeveloped approach to postponement in production planning

Cash flow forecasting• Lack of clearly defined responsibility for cash flow forecast inputs

• No tracking of forecast accuracy

• Absence of processes to identify cash management opportunities


(43) (39) (52) (35) (35) (47) (42) (40) (35) (53) (39) (40) (38)

68 72 72 75 93 88 8359 62

84 99 97 86

131 133 145114

142 140 142141 135

143140 150 155

156 165166

154

201 181 183161 162

175200 207 203

(100)

(50)

-

50

100

150

200

250

300

Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08

DPO based on sales DSO based on sales DIO based on sales NWC Days based on sales

-

5

10

15

20

25

30

35

40

45

Jun-

07

Jul-07 Aug-

07

Sep-

07

Oct-

07

Nov-

07

Dec-

07

Jan-

08

Feb-

08

Mar-

08

Apr-

08

May-

08

Jun-

08

Va

lue

, €

Millio

ns

-

50

100

150

200

250

Days

NWC Net Sales NWC Days based on sales

47%

44%

8% 1%

Pharmacies Wholesalers Public Various

15%

69%

13%

3%

Pharmacies Wholesalers Public Various


Working capital and cash flow managementAnalysing customer payment performance at a transactional level enables

payment drivers to be identified and actions to be devised to adjust

customer behaviour Entire Population - as at Mar - 2011

3,400401 393

6,003

16,796

28,451

15,873

25,367

50,529

34,480

24,238

14,532

11,2328,907

25,522

855 528 512 2,093

6,065

8,042 6,997

12,612

27,549

19,831

11,766

6,071

4,169 3,189

9,623

0

5,000

10,000

15,000

20,000

25,000

30,000

0

10,000

20,000

30,000

40,000

50,000

60,000

< -55 -55 to -45 -45 to -35 -35 to -25 -25 to -15 -15 to -5 -5 to 0 On time 5 to 15 15 to 25 25 to 35 35 to 45 45 to 55 55 to 65 >= 65 #£k

Transaction Value (£k) # of Transactions

Late payerEarly payer On time payment

Early payments

• Early payments can be caused by

administrative inefficiency on the part of

the customer’s unclear payment terms

or due to a customer’s payment run

profile (leading to an individual customer

making some payments early and some

late)

Marginally late payments

• These are usually caused by the

timing and structure of the

customer’s payment run or by a

customer pushing the terms to

gain extra credit – this is

especially true of end of month

terms

Late payments

• These may be caused by a combination of :

– straightforward payment disputes

– customers systematically pushing credit

terms

– customers facing temporary liquidity issues.

– customers with inefficient administrative

systems/processes

Extremely late payments

• These are usually a result of:

– major disputes requiring intervention

– unsurfaced disputes which are

allowed to roll

– customers facing major liquidity issues

and who should be regarded as a

credit risk


Working capital and cash flow managementSegmenting customers based on payment delay, revenue and margin

enabled specific actions to be taken to address specific customer

performance issues

-90.0

-70.0

-50.0

-30.0

-10.0

10.0

1 10 100 1,000

Per

form

ance

Gap

(D

ays)

Sales $k

Customer Payment Performance and Margin Segmentation

Margin - Upper Quartile Margin - 2nd Quartile Margin - 3rd Quartile Margin - Lower Quartile

Minor Good

Minor Bad

Minor Very

Bad

Major Good

Major Bad

Major Very

Bad



Working capital value drivers

Working capital improvement drivers

Forecast to Fulfill

Supply chain flexibility

Supply planning

Sales & operation planning

Inventory management

Demand planning

Purchase to Pay

Purchase processing and execution

Purchase price negotiation strategy

Payment processing and execution

Vendor relationship management

Payment term setting and management

Order to Cash

Selling price setting

Payment term setting and management

Collections processing and execution

Invoice processing and execution

Overdue and bad debt management

Trade credit (risk) management



Accounts receivable value drivers and levers

Accounts

receivable

Actual payment behaviour

Agreed payment termsNegotiation results

Geographies Competitive advantage towards other suppliers

Relative size

Switching costs

Customer credit quality

Geographies

Choice of target markets

Billing efficiency

Credit risk policy

Customer service quality

Cash collection effectiveness …

Order-to-Cash execution

Overdue management

Payment term alignment Align used payment terms, customer master payment terms and contracted payment terms

Deep dives (qualitative analysis of Order-to-Cash process)

Payment agreements

Segment customers and harmonize contracted payment terms

Evaluate negotiation payment terms against the cost of EBIT

Collection (payment method) and dispute management

Reduce overdue

Accounts

receivable


Working capital and cash flow managementAssessing the maturity of processes that drive accounts receivable

enabled performance improvement areas to be identified and prioritised

Credit risk

AssessmentKey area

Contract

set up

Contract

fulfilment

Billing

Cash

collection

Dispute

management

• Inefficient process to gather supporting documentation for credit insurance

claims

• Inconsistent payment clock definition (invoice date, invoice receipt, month end)

Key performance drivers

Lacking Leading

• Lack of visibility of customer contracts for account managers and finance teams

• Absence of trade off modelling to position payment terms against revenue and

margin

• Lengthy customer processes for signing off purchase orders

• Risk of purchase orders being unapproved after work has been completed

• Lack of cross checking between contract requirements and billing schedules

• Absence of procedures to ensure compliance with all contractual billing

requirements

• Proactive and prioritised collection activity impaired by incidence of disputes

• Absence of cash related targets for key drivers of performance

• Lack of understanding by sales of cash collection processes

• Lack of dispute resolution timescales and supporting escalation procedures

• Lack of clarity around specific responsibility for dispute resolution

• Poor appreciation of importance of prompt dispute resolution

Current TargetKey:Priority: High Medium Low


Working capital and cash flow managementAssessing the maturity of processes that drive accounts receivable

enabled performance improvement areas to be identified and prioritised

Po

ten

tial A

R i

mp

act

(£) Hig

h

S 7.5. Dispute Reason Codes 1.1. Credit Policy Document

1.3. Credit Limit Review

1.5. Stop Policy

2.1. Standard Contract Templates

3.1. Order Acknowledgement

3.2. Delivery Acknowledgement

4.3. Pricing Discrepancies

6.3. Proactive Telephone Activity

7.3. Dispute Resolution Timescale

7.4. Dispute Resolution Responsibility

M 7.6. Root Cause Eradication

8.1. Transactional Payment Performance

8.3. Dispute Management Metrics

4.1. Pricing Methodology

6.1. Customer Visits

6.2. Customer Segmentation

6.6. Backlog Eradication Plan

7.1. Dispute Surfacing

7.2. Dispute Logging

8.2. Days Sales Outstanding

8.6. Customer Value Based KPIs

L 2.6. Contract Performance Assessment

5.1. Preferred Vendor Status

Me

diu

m

S 2.5. Statement Design

M 5.2. POD Scanning

8.4. KPI Dashboard

1.2. Credit Limit Review

3.3. Delivery Discrepancy Notification

4.4. Price Lists and Bar Codes

5.4. Invoice Automation

6.5. Cross-functional Account Team

5.5. Returns

L 4.3. Systems Support 1.4. Credit Risk Exposure

2.4. Invoice Design

Low

S

M 5.3. Carrier Scanning

8.5. Incentives

L 6.4. Direct Debit

Timescale

L (Long)

M(Medium)

S (Short)

High Medium Low

Implementation challenge


Working capital and cash flow managementThere is a third important element that need to be addressed:

the Cultural aspect (including governance and change management

approach) will play a much wider role than most organisations expect

Cash competence

Ch

an

ge

ap

pe

tite

Will

ing

Re

lucta

nt

Re

sis

tant

Unconsciously

competent

Consciously

competent

Unconsciously

incompetent

Consciously

incompetent

1

1

1

1

12 2

2

23

2

3

33

444

1

Specialists

3

Credit controller

Inventory controller

2

Influencers

4

Sales executive

Materials buyer

1

2


Working capital and cash flow managementMoving towards unconscious cash competence required a practical blend

of measurement and cultural / behavioural change customised to

organisational culture

Practical information

(knowledge)Skills Commitment Behavioural change

Basicknowledge

Management & governance

• Apply structured KPIs to

practical individual goal

setting

• Make people accountable in

applying new standards

• Change mindset, create

culture which prevents ‘old

ways of thinking”

Procedures, roles &

responsibilities

• Understanding of

procedures, roles and

responsibilities at individual

level.

• Individual awareness of

consequences of different

actions

Basic knowledge

• Understanding of leading

practices, tools, techniques

and skills

• Cash based induction module

for all new starters

• Continuous refresher training

Work instructions

• Insight in new elements of

processes, goals, alignment

of departmental targets,

responsibilities between

departments / customers and

suppliers.

• Cross functional operational

and financial teams.

Learning is embedded in different layers

Learning requirementsSustaining the change requires different educational aspects covered in the capability transfer


Working capital and cash flow management23% sustainable working capital improvement delivered in 12 months

• Ownership and capability vested in local management teams to drive sustainability

• Working capital metrics dashboard to measure and monitor performance

• Working capital training and development courses

• Induction programme enhanced to include working capital leading practices

Accounts receivable

• Improved major account payment performance via proactive cash collection

• Increased visibility of payment performance and priorities from customer segmentation

• Improved dispute resolution efficiency from structured dispute management processes

• Accelerated resolution of high value disputes via fast track dispute process

Accounts payable

• Increased payment terms by installing official supplier payment policy

• Efficient implementation of payment policy by segmented supplier communications

• Improved efficiency by revising supplier payment processes to eliminate early payments

• Increased payment period by standardising and applying payment clock timing

Inventory

• Increased demand forecasting accuracy through SKU level management

• Improved alignment of SKU level stock parameters with customer service policy

• Enhanced management of inventory via SKU rationalisation

• Increased finished goods rotation from application of effective postponement strategy

Cash flow forecasting

• Clear roles and responsibilities for providing cash flow forecast inputs

• Monthly visibility of forecast accuracy and bias

• Increased visibility of cash management opportunities


€ 20

€ 43

€ 11

€ 73

€ 87

€ 41

€ 93

€ 130

€ 52

0

5

10

15

20

25

Receivables Inventory

Payables Net Working Capital

0

5

10

15

20

25



Business Unit #3Business Unit #2

0

5

10

15

20

25



Business Unit #1

Work

ing C

apital

(as %

of

sale

s)

Work

ing C

apital

(€m

illion)

173

702

1,328

7,852

6,519

4,489

1,160

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

A B C D E F G

3rd

Pa

rty

Re

ce

iva

ble

s m

inu

s P

ay

ab

les

(€

k)

11%

48%

18%

2%

1%

2%

1%

3%

3%

10%

1%

Mistakes in customers data Duplicate order Product mistake

Product not received Units not received Product missing or lost

Product broken or deteriorated Goods refused Re-labelling mistake

Compensation claim Product received but not invoiced Product received but not ordered

Need for having a new invoice raised Others



In summary

• Align your strategic objectives to your cash and working capital needs and

address working capital overall, understanding end to end processes and working

capital baseline

• Address it overall but analyse at granular level, via transactional analysis,

breaking down each working capital item into component parts

• Segmentation is key to understand the real underlying performance and key

drivers for improvements

• Make it an organisation-wide challenge, not a finance problem

• Compliance with your own policies – for many organisations would already

represent a good step forward

• Change management, culture and governance – will be the key to move from

one off to sustainable improvements

• Prioritise – not all improvement opportunities are the same



Questions


Self-service spend recovery

Moneyback

Charlotte Desourdy


£15k recovery 4

Why?

Studies have proven that typically between 0.1% and 0.5% of all invoices paid in

the UK are duplicates, meaning an organisation which is making £50 million in

annual invoice payments is likely to be paying out £50,000 or more in duplicate

payments per year.



Why?


©2015 Deloitte LLP. All rights reserved.64

Why should I care?

£40k£250k

How do I get started?

www.apmoneyback.com

Deloitte Finance Club – Tax update and The lost opportunity of unproductive cash (18 Nov 2015)

http://www.apmoneyback.com/



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Contacts and resourcesContacts

• James Bates +44 20 7303 0094 [email protected]

• Bill Dodwell +44 20 7007 0848 [email protected]

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• Charlotte Desourdy +44 113 292 1893 [email protected]

Resources

• Deloitte Finance Club home page: www.deloitte.co.uk/financeclub

• UK Accounting Plus (formerly IAS Plus): www.ukaccountingplus.co.uk

• Deloitte Monday Briefing: www.deloitte.co.uk/mondaybriefing

• The Global Cash Paradox: http://dupress.com/articles/excess-cash-growth-

strategies/

• Deloitte Moneyback: https://www.apmoneyback.com/







http://www.deloitte.co.uk/financeclub

http://www.ukaccountingplus.co.uk/

http://www.deloitte.co.uk/mondaybriefing

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https://www.apmoneyback.com/



Recent seminars• How technology is disrupting the Finance Function – 14 October 2015

• Economic update and Football Finance – 16 September 2015

• Summer finance checklist 2015 – 14 May 2015

• Business Partnering: better decision-making through Finance insight –

29 April 2015

• The rise of omnichannel: what it means for Finance – 25 March 2015

• Holiday finance checklist 2014 – 10 December 2014

• All change! Key trends and developments in the UK insurance market –

19 November 2014

• Managing pensions risks and costs and a Tax update – 22 October 2014

• Football Finance and Fraud: an inevitable cost of doing business? –

1 October 2014


http://www.deloitte.co.uk/email/DFC-FinanceTech.pdf

http://www.deloitte.co.uk/email/DFC-EconFF.pdf

http://www.deloitte.co.uk/email/DFC-SummerFC15.pdf

http://www.deloitte.co.uk/email/DFC-BusinessPartnering.pdf

http://www.deloitte.co.uk/email/DFC-Retail.pdf

http://www.deloitte.co.uk/email/DFC-HolidayFC14.pdf

http://www.deloitte.co.uk/email/DFC-Insurance.pdf

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http://www.deloitte.co.uk/email/DFC-Football-Finance-Fraud.pdf


©2015 Deloitte LLP.

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which is a legally separate and independent entity. Please see www.deloitte.co.uk/about for a detailed description of the legal structure of DTTL and its member firms.

Deloitte LLP is the United Kingdom member firm of DTTL.

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Documents

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