PwC Treasury Hot Topics Seminar Treasurer’s top 5 “must-haves” for optimising working capital...

Treasury Hot Topics SeminarTreasurer’s top 5 “must-haves” for optimising working capital

19 February 2009

All eyes on Treasury

…management of working capital is an area in

which many treasury departments can be more

active. Uncovering extra cash in this economy

is like finding gold…

PricewaterhouseCoopers

Agenda

Treasurer’s top 5 “must-haves” for optimising working capital

Audience perspectiveThe treasurer and working capital managementThe five Must-havesConclusionQ&A


Share your point of view

Question n°1

Do you have a formal policy on working capital?

1. Yes, we have a proper WCM policy2. Yes, as part of treasury policy3. Yes, as part of a credit policy4. Yes, as part of another policy5. No

Audience perspective

21%

21%

0%

21%

38%



Question n°2

By which frequency do you revise this policy?

1. More than once a year2. Yearly3. Every 2 – 3 years4. On an ad-hoc basis5. Never


6%

12%

6%

50%

25%



Question n°3a

To evaluate the working capital performance within your group, do you perform any benchmark exercise?

1. Yes

2. No


56%

44%



Question 3b

If yes, could you specify the benchmark exercise (Yes:1 - No:2)

A. Internal (intra-group benchmark)B. External (similar companies)C. Quantitative (KPI’s)D. Qualitative (processes)E. On a divisional basisF. On a geographical basis


44%

19%

69%

6%

50%

31%



Question n°4

Have Working Capital measures (such as DWC, DSO, DIO and DPO) been established as key corporate measures? If yes, please specify the reporting periodicity?

1. No

2. Yes, monthly

3. Yes, weekly

4. Yes, quarterly

5. Yes, yearly


17%

78%

0%

4%

0%



Question n°5

Have these measures (such as DWC, DSO, DIO and DPO) been established as specific targets?

1. Yes

2. No


79%

21%



Question n°6a

Does Group Treasury play a significant role in WCM

1. Yes2. No


70%

30%



Question n°6b

If YES, what is the role of Group Treasury (Yes:1 – No:2)

A. Pre-review of policies and proceduresB. Monitoring of key ratios and figuresC. Payment periods for inter-company salesD. Payment period for third party salesE. Sales channel financing solutions


43%79%29%36%36%



Question n°7

Did you have any working capital project ongoing last year?

1. Yes

2. No


68%

32%



Question n°8

What was the main focus of this WCM project?

1. Receivables

2. Payables

3. Inventory

4. Receivables, Payables

5. Receivables, Payables, Inventory

6. Receivables, Inventory

7. Payables, Inventory


26%

11%

0%

16%

37%

11%

0%



Question n°9

Who in your organisation was responsible for managing this working capital project and driving improvements?

1. Finance2. Treasury3. Sales4. Procurement5. Supply Chain / Operations6. Separate WCM project manager


53%

37%

0%

0%

5%

5%



Question n°10

Did the recent credit crunch have any impact on the way your group manages its working capital?

1. Yes 2. No


82%

18%



Thank you for your participation.

Let’s analyse your responses!



Agenda




Working Capital Management comprises three main elements

The treasurer and working capital management

Balance Sheet

€m

Fixed assets 1,355

Current assets

Stock

Debtors

Current liabilities

Creditors

___

Net current assets 537

Cash 263

Loans (2,314) ___

Reserves / net assets (194) ___

(raw materials, WIP and finished goods)

Stock

+

Debtors(money owed to us for our products)

-

Creditors(money we owe for our

purchases)

=Working capital

requirement

Other assets and liabilities

505

(283)

315

(35)

Customer discounts (47)

Days Sales Outstanding

Days Inventory Outstanding

Days Payables Outstanding


Potential to reduce working capital can be identified in three core processes

Order to Cash Cycle

Forecast to Fulfil Cycle

Purchase to Pay Cycle

CashCollection

BookAccount

Receivable

IssueInvoices

VerifyCredit-worthiness

ProcessOrders

PayInvoices

Process/book Invoices

AssessSupplier

Performance

OrderMaterials

Choose suppliers; negotiate contracts

Delivery and Customer

Service

Production Planning

InventoryManagement

SalesForecast

Product Development

• Sales/production planning• Delivery service level• Replenishment times• Warehousing concept

• Credit control• Terms of payment• Billing• Dunning process

• Terms of payment• Cash discounts• Procurement process• Payment process

Key drivers



Sales order/

Call-off

Billing

Master Data

Collections activity

Disputes

Sales processCash in

Procurements process

Master

Data

Purchaseorder

Invoice Approval

Stock

mgmt

Invoice Receipt

Scanning

Cash out

Treasury in The Financial Value Chain (FVC)

Classic Treasury



Agenda




1. Working Capital Policy

Objective• Formalise key policies regarding working capital• Framework for centralising all relevant procedures regarding key levers • Documented guideline of exception handling, eg. regarding payment terms

different from general terms and conditions

Outcome• Consideration of working capital from end-to-end perspective• Create transparency and consistency in approach• Use as tool to overcome cross-divisional boundaries

(Treasury/Sales/Procurement/Supply Chain)• Create sensibility for cash across group and create understanding of working

capital and its key drivers for non-finance staff

The 5 must-haves

Formalise and consolidate key levers of working capital



Typical topics • Group-wide definition of ratios and KPIs• Targets on appropriate level of working capital• Roles and responsibilities• Monitoring measures to ensure compliance• Links to credit policy, purchasing policy and T&C

WCM policy content

The 5 must-haves


1. Working Capital Policy Treasurer must-haves

Treasurer’s role:

• Initiate/improve the WCM policy based on your treasury policy experience

The 5 must-haves


2. Cash Flow Forecasting

Effective Cash

Forecasting

MethodologyConsensus on the

approach to forecasting

Information Availability

Attain access to required data, particularly at divisional level

CultureFoster an

environment stressing the importance of financial and cash flow management

Clear ObjectivesObjectives of the forecast are clear

SystemsRequired system infrastructure is

critical to success

Harmonized Forecasts

Ensure that other related forecasts

concur

Accurate Information

Ensure reported information is reliable

and accurate

TrainingProvide training and

communication around forecast objectives and

process

Critical Success Factors to Effective Forecasting

The 5 must-haves


2. Cash Flow Forecasting Treasurer = ideal person to assess best appropriate tool

Approaches that could be considered when addressing cash forecast systems requirements:

• Excel-based model• Consolidation tool• Current ERP environment (Oracle, SAP)• Treasury systems including cash forecast functionality and variance

analysis capabilities

Treasury System selection process very similar to CFF tool.

The 5 must-haves


2. Cash Flow Forecasting Best practices

• Measure forecasting accuracy• Use forecasts to identify areas for operational improvement• Keep forecasts simple• Centralize coordination of forecasts• Integrate forecasting system with its inputs and automate forecast

generation/ reporting• Consider historical cash inflows and outflows• Ensure Business Units frequently provide timely and accurate information

The 5 must-haves


2. Cash Flow Forecasting Treasurer must-haves

Treasurer’s role:

• Ensuring all sales & purchases are captured in cash flow forecasts

• Ensuring all billing adjustments, disputes and collection issues are reflected in cash flow forecasts

• Drive accuracy improvements of forecasts by analyse variances

• Independent reporting of working capital KPIs

The 5 must-haves


3. Working capital dashboard

Cash Flow Forecasting

Detail view of working capital levers, KPIs and ratios

Re-use data sources of cash flow forecast

Create visibility on key metrics

Working Capital policy

Working Capital dashboard

Closely monitor set progress on targets set within policy

Use definition of group-wide definitions

Objectives• Creating visibility on key metrics for working capital within reporting periods• Providing consistency in underlying calculation methods to ensure comparability• Understanding effect of working capital balance on treasury elements • Enabling the monitoring of key working capital levers

The 5 must-haves


Treasurer must have3. Working capital dashboard

Treasurer’s role:

• Define working capital metrics and KPIs used across the group

• Independent reporting of working capital KPIs• Drive accuracy improvements

The 5 must-haves


4. Supply Chain financing

• Market position determine outcome of payment terms negotiations

• One-sided opportunity calculation

Example: EADS

• 2000 tier 1 suppliers for Airbus alone in 2007• Consider impact of supplier bankruptcy on

supply chain

• Set-up of own team responsible for monitoring of financial health of suppliers

• Leverage own credit rating to secure financing for suppliers

Squeezing supplier terms has its limits

The 5 must-haves


Reversed factoring in general

Supplier

Bank Client

1. Delivery of the services/ goods

4. Longer term payment date

3. Immediately payment of invoice

Benefit: The client receives better paying terms compared to the terms the supplier would have been able to grant without reversed factoring.

Assignment acknowledgment

2. Assignment / factoring of invoices

4. Supply Chain financing

The 5 must-haves


Treasurer must-haves4. Supply Chain financing

Treasurer’s role:

• Provide input to procurement on possible financing options

• As the treasurer manages the bank relationship, he acts as a middle man between purchasing department and banks

The 5 must-haves


Early settlement discount and cost of capital

Price discount Number of days paid earlier

5 10 15 20 25 30 35 40 45 50

0.50% 36.50% 18.25% 12.17% 9.13% 7.30% 6.08% 5.21% 4.56% 4.06% 3.65%

0.75% 54.75% 27.38% 18.25% 13.69% 10.95% 9.13% 7.82% 6.84% 6.08% 5.48%

1.00% 73.00% 36.50% 24.33% 18.25% 14.60% 12.17% 10.43% 9.13% 8.11% 7.30%

1.25% 91.25% 45.63% 30.42% 22.81% 18.25% 15.21% 13.04% 11.41% 10.14% 9.13%

1.50% 109.50% 54.75% 36.50% 27.38% 21.90% 18.25% 15.64% 13.69% 12.17% 10.95%

1.75% 127.75% 63.88% 42.58% 31.94% 25.55% 21.29% 18.25% 15.97% 14.19% 12.78%

2.00% 146.00% 73.00% 48.67% 36.50% 29.20% 24.33% 20.86% 18.25% 16.22% 14.60%

2.25% 164.25% 82.13% 54.75% 41.06% 32.85% 27.38% 23.46% 20.53% 18.25% 16.43%

2.50% 182.50% 91.25% 60.83% 45.63% 36.50% 30.42% 26.07% 22.81% 20.28% 18.25%

2.75% 200.75% 100.38% 66.92% 50.19% 40.15% 33.46% 28.68% 25.09% 22.31% 20.08%

3.00% 219.00% 109.50% 73.00% 54.75% 43.80% 36.50% 31.29% 27.38% 24.33% 21.90%

3.25% 237.25% 118.63% 79.08% 59.31% 47.45% 39.54% 33.89% 29.66% 26.36% 23.73%

3.50% 255.50% 127.75% 85.17% 63.88% 51.10% 42.58% 36.50% 31.94% 28.39% 25.55%

The discount equivalent for a 2/10 Net 30 is 36.50%

5. Manage your payment terms

The 5 must-haves


Early Settlement Discount: Traditional process issues• Traditional discount terms of 2/10, Net 30 are rigid• Buyers often take discounts, even if they don’t pay within 10 day

window• It’s all or nothing: full discount on day 10, zero discount on day 11• 2% discount to accelerate payment by 20 days is expensive for

suppliers with good liquidity and access to cheaper sources of cash

Dynamic Discounting• Discount rates are proportional to days payments are accelerated• Predictable early electronic payment (direct debit) provided in

exchange for early payment discount• Depending on the provider, additional features include option for

supplier to request early payment with ‘dynamic discount’


The 5 must-haves

Early settlement discount vs Dynamic Discounting


Dynamic Discounting

Days to PaymentDays to Payment

DiscountDiscount

1010 2020 3030

2%2%

Early Settlement Discount

Early Settlement Discount


Dynamic DiscountDynamic Discount

Normal invoice payment cycleNormal invoice payment cycle

The 5 must-haves


Treasurer must-haves5. Manage your payment terms

Treasurer’s role:

• Know your WACC to make trade-off• Key role in establishing baseline calculation for

Sales and Purchasing and communicate• Update regularly• Payment terms always come at a price• Consider impact of payment methods

The 5 must-haves


The treasurer can play a key role in managing working capital


2. CFF 5. Supply chain financing

3. WC Dashboard

4. PT management

The 5 must-haves


Agenda


Audience perspectiveThe treasurer and working capital managementThe five Must-havesConclusionsQ&A


Treasury is always impacted by poor WCM.Why not take increased control of the FVC?

Increased involvement and/ or visibility of the FVC will give the treasurer advanced warning and increased control in his role as a provider of Working Capital

Increased control will allow the treasurer to help reduce the over all Working Capital Requirement

Building a business case for WCM

Business case as an accelerator for change?

Thank you!

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Martin Bö[email protected] +32 2 710 7527Mobile +32 493 24 04 00Fax +32 710 72 24

Didier [email protected] +32 2 710 9634Mobile +32 475 91 06 78Fax +32 710 7224

PwC Treasury Hot Topics Seminar Treasurer’s top 5 “must-haves” for optimising working capital...

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Transcript of PwC Treasury Hot Topics Seminar Treasurer’s top 5 “must-haves” for optimising working capital...