Cash flow transformationImproving free cash flow starts with enabling a cash‑focused organization

2 | Cash flow transformation

A cash-focused organization can help enhance the outcomes of your business strategies“Cash is king”, as the saying goes.

Experience tells us that those companies that adopt strong cash flow disciplines have success in revenue growth, cost containment and capital efficiency, and ultimately the ability to achieve their mission.

Factors such as technology and operational processes impact the organization’s competitive agility. Just as important are the people, including their behaviours and norms that will impact the organization's cultural tone, and with it determine how successful it is in achieving its objectives.

Despite a heightened awareness of the importance of cash, many companies still fail to address the fundamental organizational obstacles that prevent cash flow optimization. At EY, we know that by aligning the culture of the organization to more of a cash focus, coupled with an effective approach to optimize the business cash drivers, significant improvements can be realized in both the short and long terms.

Business Strategies

Free Cash Flow

Mission

EBITDA Working Capital CAPEX

Your organization’s cash focus:• Increase free cash flow• Strengthen the balance sheet• Increase return on capital• Improve operational effectiveness• Increase shareholder value

Cash flow transformation | 3

Enabling a cash-focused organization

Moving to a more cash-focused organization is about shifting your people’s mindset so that individual, functional and collective actions align to optimize free cash flow.

A cash focus does not occur naturally for all organizations. An effective management system is necessary to balance competing priorities, reduce the disruptive nature of day-to-day business and propel the organization to achieve its full potential.

Our experience working with leading organizations has identified a number of common critical success factors that embody leadership, teamwork, flexibility and the application of a continuous focus in the pursuit of effective cash management.

Focus on fundamentals• Develop and communicate a compelling

story line for the importance of cash• Conduct granular analysis to understand

your performance baselines and define the opportunities and required actions

• Tackle organizational resistance head-on• Establish clear goals and operational metrics

to track progress• Align management incentives to goals• Apply consistent management attention

and commitment

Cash- focused

organization

Active C-suite

leadership

Prioritized value-driven initiatives

Organizational alignment

Cross- functional

coordination

Cash flow metrics

Continuous focus

Lead from the topMake it a clear priority for the

organization. The CEO, CFO and COO should all participate in communicating

the importance of free cash flow.

Make it a team effortAll functional areas (sales, procurement, finance, treasury, operations) influence cash performance. Priorities must be aligned to ensure the organizational result is maximized.

The race never stopsApply a continuous focus on cash

flow objectives, rather than just monthly or quarter-end periods.

Practices should be embedded in planning, forecasting and day-to-

day activities. Use digital solutions to embed the change.

Be proactive, not reactiveMeasure operational activities that

are the true drivers of cash flow performance to elevate visibility. Incorporate predictive analytics

to improve decisions and prevent risk. Enhance treasury support tools to increase cash visibility

and forecasting.

Act as onePeople, processes and systems must all be addressed for optimal results. Standard policies should be communicated and implemented. Consider the link between performance and remuneration.

Prioritize resourcesImprovement initiatives and capital deployment should be prioritized by

their impact on the business objectives. Competing priorities and trade‑offs should be regularly reviewed using

a portfolio-based approach.

4 | Cash flow transformation

Proactively analyze the drivers of cash

The race to become a world-class organization never ends. Companies need to adopt a continuous and relentless focus to address the business issues and challenges preventing them from achieving their cash flow targets.

Leading organizations apply a portfolio-based approach, gaining visibility to problems and how to address them, with the relevant cost-benefits, requirements and dependencies. Resources can then be more effectively allocated to those initiatives that both enhance cash flow and impact on the organization̓’s strategic imperatives.

It’̓s important for management to have the visibility and breadth of understanding of what needs to be addressed to make informed and unbiased decisions.

Examples of typical activities to focus on when seeking to improve drivers of free cash flow:

Align organizational focus to free cash flow drivers

Customer to cash Forecast to fulfill Procure to pay

Rapidly turn profitable sales into cash Enable a flexible and efficient value chain to meet internal and external customer expectations

Effectively reduce the economic cost of purchasing and deploy capital to directly impact strategy

• Measure and understand customer expectations and priorities

• Challenge pricing and discount structures to capture the full value of products and services

• Evaluate customer profitability and apply differential product or service strategies

• Identify and eliminate revenue leakages

• Prevent billing inaccuracies to reduce inquiries and disputes

• Enforce customer contractual agreements

• Effectively manage payment deductions and short payments

• Make use of technology and increase collaboration to more effectively manage uncertain demand

• Balance the competing objectives of cost-to-serve and inventory levels

• Apply differentiated inventory management strategies to customers and products

• Effectively manage the deployment and lifecycle of the product portfolio

• Reduce risk through effective monitoring

• Effectively partner with suppliers to achieve cost and service targets

• Develop sufficient insight of cost drivers to sustainably and continuously reduce costs to serve

• Challenge the ‘as-is’ procurement and sourcing strategies

• Directly align capital investment to core business strategies rather than traditional functional budgets

• Determine optimized payment terms for each supplier

• Eliminate non-compliance to procurement and payment policies

• Establish efficient payment systems that optimize timing and transaction costs

Cash flow transformation | 5

EY can help you accelerate your improvements

We bring deep experience, methodologies and tools and provide access to an extensive network of subject matter and industry professionals.

We can rapidly help you identify and accelerate value creation initiatives that will improve cash flow performance, and help establish a change framework to prevent organizational barriers from getting in the way.

Our support programs are scaleable and fully tailored to provide the complementary insights and resources necessary to your organization.

We support you through the entire improvement lifecycle from identification and design through to implementation and journey management:

1. Data-driven assessments to quickly benchmark performance and identify opportunities for action using an unbiased, precise fact base.

2. Design a detailed program, developing leading practice approaches to realize improvement opportunities alongside an effective governance framework.

3. Delivery support, providing knowledge and operational know-how to help effectively implement changes and mitigate risks.

We bring together the right people to work with you and align our objectives and interests with yours.

Identify and define opportunities

Change framework to enable a cash-focused culture

Design services, establish tracking and governance

Deliver, track and manage

Development of information-rich improvement opportunities

Prioritized and sequenced initiatives agreed to address business issues and realize benefits

Initiatives executed, benefits tracked and change monitored

1 2 3

• Benchmark financial and operational performance to recognized leading practices

• Perform data analytics and present visual performance insight

• Facilitate ideation workshop to create fact base for change

• Model potential improvements and business impact

• Develop targeted communication strategy

• Design change management plan

• Engage key business stakeholders to gain buy-in

• Develop solutions and prioritize for risks versus benefits

• Design and agree implementation plan

• Support rapid tactical opportunity implementation

• Develop process maps, revised policies and Standard Operating Procedures (SOP)

• Assist in governance and mediation of initiative owners

• Educate employees with required training and tools

• Support or manage overall plan

• Develop predictive analytics and dashboards linked to Enterprise Resource Planning systems (ERP)

• Confirm effectiveness and stabilization of re-engineered processes and systems

• Embed new benefits and targets into future roadmap for system, process, and people

• Commence the progress reporting and establish the stage gate review rhythm

• Develop innovation and ideation mechanisms for continuous improvement

6 | Cash flow transformation

We bring a value-centric approach with short-term payback and long-term effects

Making the necessary changes to enhance cash flow management can generate significant results. But the benefits go far beyond cash flow by providing financial flexibility, improving operational effectiveness, increasing customer service and reducing risk.

In the short term, tactical changes offer significant opportunities to address value leakage. This can be addressed through communication, policy adherence, system fixes and process enhancements. Cash realization in the first three to six months can provide funding for future initiatives.

Every organization must constantly challenge and optimize their business processes and structures to align with business objectives. This will improve efficiency, lower costs and address evolving customer needs.

Through outperformance, continuous improvement, aligned employees and delighted customers, organizations can start to see transformational cash flow performance.

By building momentum and enabling a cash-focused organization, the road to world class becomes ever easier.

More cash = More optionsOn average, our engagements generate an additional $25m-$35m (5-7%) in cash flow for every $500m of a company’s revenue

Typical outcomes from our projects:

• Increased free cash flow (equivalent to 5%-7% of company’s revenue)• Increased revenue (1%-5% leakage prevented/recovered)• Less cash tied up in net working capital (20%-25%)• Improved cash conversion: lower days sales outstanding (15%-20%), increased days payables

outstanding (20%-25%), increased inventory turns (15%-20%)• Optimized finished goods inventory holdings with increased service levels and lower obsolescence• Integrated and agile value chain from supplier to customer• Increased procurement and payment processing controls

Baseline

Short term Long term

Transformational shifts

Continuous optimization

Tactical changes

Cash flow transformation | 7

ConclusionWhether looking to fund growth, manage economic headwinds or increase shareholder returns, business strategies that are focused on maximizing free cash flow will be critical.

Indeed, shareholders and analysts alike have increasingly high expectations of cash flow performance. As a result, management teams have little room for error and must ensure the organization is focused on cash.

Top performers also prioritize addressing cultural barriers that can cause a drag on success. By leading from the top, management can create cross functional alignment and buy-in to enable a step change in performance.

While it’s often overlooked, releasing cash tied up in non-productive working capital can also provide an important cash injection, while also driving a significant impact to operational cash flow.

EY has a highly experienced, high-impact senior-level team with a proven track record of helping companies across all industries to achieve their cash flow goals. The payback for getting it right can be significant.

Consider what more you could achieve by enhancing your organization’s focus on cash.

EY | Assurance | Tax | Transactions | Advisory

About EYEY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.

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© 2016 Ernst & Young LLP. All Rights Reserved. A member firm of Ernst & Young Global Limited.

1823415 ED NoneThis publication contains information in summary form, current as of the date of publication, and is intended for general guidance only. It should not be regarded as comprehensive or a substitute for professional advice. Before taking any particular course of action, contact Ernst & Young or another professional advisor to discuss these matters in the context of your particular circumstances. We accept no responsibility for any loss or damage occasioned by your reliance on information contained in this publication.

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ContactFor a conversation about your cash flow and working capital strategy, please contact us:

Graeme Deans Partnergraeme.deans@ca.ey.com+1 416 943 2283

Tim MacDonald Partnertim.e.macdonald@ca.ey.com+1 416 943 2033

Chris Stepanuik Vice Presidentchris.stepanuik@ca.ey.com+1 604 648 3610

Simon Rockcliffe Senior Managersimon.rockcliffe@ca.ey.com+1 416 943 3958