Working Capital Efficiency Benchmarking - Amazon S3 · The measurement of working capital...
Transcript of Working Capital Efficiency Benchmarking - Amazon S3 · The measurement of working capital...
Contents
Introduction Pages 3-4
Section 1 - Accounts Receivable Pages 5-11
Section 2 - Accounts Payable Pages 12-19
Section 3 - Inventory / Working Capital Pages 20-23
Section 4 - Users of the SystemSection 4 - Users of the System Pages 24-31
Auditors
Due Diligence/M&A
Risk Finance
Business Management/KPI's
Contacts Page 32
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Introduction
The measurement of working capital efficiencies are covered in many industry white
papers and are most often the most single cause of bankruptcies.
Companies experiencing higher than normal growth can experience cash flow problems
if this critical resource (asset) is not managed properly. Benchmarking against
comparable industry standard/average is common practice.
Section 1 and 2 of this set of publications details benchmarking methods for Accounts
Receivable and Payable using weighted sales/purchase values, taking into account the
relevant payment terms, from the source of the transaction instead of the balance relevant payment terms, from the source of the transaction instead of the balance
sheet information.
Manipulation (intentional or unintentional) of ageing periods is completely eliminated
in this instance and provide an objective and true reflection of the performance of
these functions under Working Capital (Section 3).
Key Performance Indicators (KPI's) formulation and monitoring for each function are
addressed in Section 1,2 and 3.
These KPI's can be applied over groups of employees, divisions or groups.
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Measurement Benchmark
Data
Used
Working
Capital Optimum Benchmark Data UsedS
ectio
n
Days Sales
Outstanding
(DSO)
Industry
Average
Debtors
Ageing
Accounts
Receivable
Days Sales
Outstanding
Benchmark (DSOB)
Turnover incl
VAT/Sales Tax,
Weighted by
Payment Term and
Value 1
Days Payables
Outstanding Industry Creditors Accounts
Payable
Days Payables
Outstanding
Purchases incl
VAT/Sales Tax,
Weighted by
Payment Term and Outstanding
(DPO)
Industry
Average
Creditors
Ageing PayableOutstanding
Benchmark (DPOB)
Payment Term and
Value 2
Days Sales of
Inventory (DSI)
Industry
Average
Historical
Cost of
Good
Sold Inventory
Days Forecasted
Sales of Inventory
(DFSI)
Inventory days by
Forcast Cost of
Goods Sold 3
DSO + DSI - DPO =
CCC (days) CCC (Value) 3
DSOB + DFSI -DPOB =
CCCB (days) CCCB (Value) 3
CCC - CCCB $$$$$ 3
Cash Conversion Cycle (CCC)
Cash Conversion Cycle Benchmark (CCCB)
Value locked up in Working Capital Effeciencies
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Section 1 - Accounts Receivable
Analysis tools available to measure Accounts Receivable performance :
Measurement Standard Method Preferred Method
Debtors Days
Debtors Balance or Average Debtors /
Annual Sales X 365
Receivables Balance / Annualised Sales for
current and immediate past two month (ie
Sales 3 months X 12/3) X 365
Countback method :
Reducing Receivables balance starting from
current month X days in month. Calculate
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Days Sales Outstanding
(DSO)
Closing Debtors / Total Credit Sales X
Days in period
current month X days in month. Calculate
until AR balance is exhausted and add up
the different days
Benchmark
Best Possible Days Sales
Outstanding (BPDSO) Current Receivable / Total Credit Sales X Days in period
Average Days Deliquent
(ADD) DSO - BPDSO
Collection Effectiveness
Index (CEI)
(Opening Receivables + Credit Sales in Period - Ending Total Receivables) /
(Opening Receivables + Credit Sales in Period - Ending Current Receivables ) X 100
5
Days Sales Outstanding Benchmark (DSOB)
The DSOB is calculated using :
• Sales value by Payment Term.
• Period-to-date sales as determined by Payment Term on a weighted index
The benchmark is not influenced by :
Early Payments
Wrong allocation of payments
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Weighted Sales include all applicable sales within the Payment Term
Period.
i.e. Payment Term 90 days from Statement
All sales for the past 90 days plus the statement month (90+30)
From the DSOB calculation, the following benchmarks can be applied to evaluate
Accounts Receivable Efficiencies :
Delinquency Index % DSO/DSOB
Delinquency Improvement Index (DSO-DSOB)/DSO
6
Accounts Receivable Data Required
1. Turnover incl VAT Totals by Payment Term
(Standard report in most accounting packages)
2. Debtors Aged Totals (Standard report)
** Note that no confidential information i.e Client Names are required
If the information in Report 1 is not available, an alternative option is to use Excel
linking Debtors Ageing with Payment Terms (Master file) and sub-total by change
in Payment Term.
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in Payment Term.
A variance in both value of individual Payment Terms and Total Sales per Month
are used to illustrate the effect on DSOB more effectively.
In the sample only 7 months data were used but the number of historical periods
is unlimited. The more periods used, the better visual impacts of the graphs
shown later.
Current Debtors are based on the current month turnover to show the effect on
BPDSO if not properly aged.
7
The performance review clearly shows the performance of the Credit Control
function month by month, benchmarked against its internal Credit Policy.
Using an Industry Standard i.e. 60 days (30 days statement) as a general
benchmark against DSO would show a decline in the Credit Control function
where in fact the opposite is true comparing it to the DSOB.
DSOB calculated the fluctuations in sales volume and mix of payment terms on a
monthly basis.
Accounts Receivable Performance Review
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monthly basis.
Forecasting using the same method can be used to more accurately project Account
Receivables balance in each period and highlight potential cash flow problems due to
a change in sales mix (payment term customers).
10
Setting and Evaluating KPI's
From the same dataset, KPI's can be set for individual Credit Controllers, Credit
Managers, Divisions and Diverse Groups of Companies (various industries).
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** The Initial Benchmark is set at the start of the incentive program and should remain constant for a set period length (until next
review).
The participant's (i.e. credit controller) performance will be benchmarked monthly against his/her own credit portfolio.
If a monetary incentive is favoured, a suggested method used above calculates the Financial Return of the improved DSOB Index on
the cash flow benefit. If the Credit Book is below the Initial Benchmark, then no benefit will be payable to the participant.
Alternatively, the DSOB Benchmark can be used for annual performance reviews using an average Index over the year.
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Section 2 - Accounts Payable
Analysis tools available to measure Accounts Payable performance :
Measurement Standard Method Preferred Method
Creditors DaysCreditors Balance or Average Creditors /
Annual Purchases X 365
Payables Balance / Annualised
Purchases for current and immediate
past two month (ie Purchases 3 months
X 12/3) X 365
Days Payables
Countback method :
Reducing Payables balance starting from
current month X days in month.
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Days Payables
Outstanding (DPO)Closing Creditors / Total Credit Purchases
X Days in period
current month X days in month.
Calculate until AP balance is exhausted
and add up the different days
BenchmarkBest Possible Days
Payables Outstanding
(BPDPO) Current Payables / Total Credit Sales X Days in period
Average Days Deliquent
(ADD) DPO - BPDPO
** It must be noted that a very high ADD could result in loss of discounts or stop
supply from Suppliers.
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Days Payables Outstanding Benchmark (DPOB)
The DPOB is calculated using :
• Purchases value by Payment Term.
• Period-to-date purchases as determined by Payment Term on a weighted index.
The benchmark is not influenced by :
Early Payments
Wrong allocation of payments
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Wrong allocation of payments
Weighted Purchases include all applicable sales within the Payment Term
Period.
i.e. Payment Term 90 days from Statement
All purchases for the past 90 days plus the statement month (90+30)
From the DPOB calculation, the following benchmarks can be applied to evaluate
Accounts Payable Efficiencies :
Delinquency Index % DPO/DPOB
Delinquency Improvement Index (DPO-DPOB)/DPO
13
Many analysts use Cost of Sales instead of Purchases to calculate Days Payables
Outstanding. This calculation would not be a correct as there is no relationship between
Accounts Payable and Cost of Sales in a specific month.
Purchases effect the Inventory value and not the Cost of Sales value.
Purchases can be calculated in the following manner :
Purchases = Cost of Sales
– Opening Inventory
Purchases or Cost of Sales
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– Opening Inventory
+ Closing Inventory
If Accounts Payable transactions include non-stock items i.e Expenses, then the value of
these expenses should be included in the Purchases calculation.
All Purchases must include VAT as the Accounts Payable is inclusive of VAT.
The Purchases value is more complex to calculate compared to revenue because of the
different cost lines applicable. Alternative methods of obtaining the purchases values
are discussed in the next slide.
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Accounts Payable Data Required
1. Purchases incl VAT Totals by Payment Term
(Standard report in most accounting packages)
2. Creditors Aged Totals (Standard report)
** Note that no confidential information i.e Supplier Names are required
If the information in Report 1 is not available, an alternative option is to use Excel
linking Supplier Ageing with Payment Terms (Master file) and run a transaction
list from Accounts Payable and sub-total by change in Payment Term.
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list from Accounts Payable and sub-total by change in Payment Term.
A variance in both value of individual Payment Terms and Total Purchases per
Month are used to illustrate the effect on DPOB more effectively.
In the sample only 7 months data were used but the number of historical periods
is unlimited. The more periods used, the better visual impacts of the graphs
shown later.
Current Creditors are based on the current month turnover to show the effect on
BPDPO if not properly aged.
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Example of Input Format
Data Input Grey Area
Purchases incl VAT/Sales Tax Feb 2014 Mar 2014 Apr 2014 May 2014 Jun 2014 Jul 2014 Aug 2014
COD R 10 000 R 10 000 R 10 000 R 10 000 R 10 000 R 10 000 R 10 000
7 days Invoice
15 days Invoice
30 days Invoice R 100 000 R 100 000 R 30 000 R 120 000 R 500 000 R 150 000
45 days Invoice R 100 000 R 100 000 R 30 000 R 100 000 R 100 000 R 150 000
60 days Invoice R 100 000 R 100 000 R 30 000 R 100 000 R 100 000 R 150 000
75 days Invoice
90 days Invoice
30 days Statement R 100 000 R 200 000 R 200 000 R 100 000 R 150 000 R 100 000 R 150 000
60 days Statement R 100 000 R 200 000 R 200 000 R 200 000 R 150 000 R 15 000 R 100 000
90 days Statement
120 days Statement
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120 days Statement
150 days Statement
Total Purchases incl VAT/Sales Tax R 510 000 R 710 000 R 500 000 R 630 000 R 310 000 R 825 000 R 710 000
Total Credit Purchases incl VAT/Sales Tax R 500 000 R 700 000 R 490 000 R 620 000 R 300 000 R 815 000 R 700 000
Payables Age Analysis as at
Monthend
Feb 2014
Monthend
Mar 2014
Monthend
Apr 2014
Monthend
May 2014
Monthend
Jun 2014
Monthend
Jul 2014
Monthend
Aug 2014
1 to 30 days (Current) 500 000 700 000 490 000 620 000 300 000 815 000 700 000
31 to 60 days 0 500 000 700 000 490 000 620 000 300 000 815 000
61 to 90 days 0 0 200 000 280 000 196 000 248 000 120 000
91 to 120 days 0 0 0 100 000 140 000 98 000 124 000
121 to 150 days
151 to 180 days
180+ days
Total Payables Age Analysis R 500 000 R 1 200 000 R 1 390 000 R 1 490 000 R 1 256 000 R 1 461 000 R 1 759 000
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Accounts Payable Review (Model Output)
Accounts Payable Performance Measurement Feb 2014 Mar 2014 Apr 2014 May 2014 Jun 2014 Jul 2014 Aug 2014
Creditors Days - By Ageing Bucket 30.42 60.83 73.00 79.08 79.08 79.08 79.08
Creditors Days - Average Purchases Method (3 months) 30.00 60.00 74.02 74.09 80.17 75.79 87.22
Days Payables Outstanding (DPO) 28.00 59.00 72.20 77.83 81.57 78.30 86.40
Best Possible Days Payable Outstanding (BPDPO) 28.00 31.00 30.00 31.00 30.00 31.00 31.00
Delinquent Days Payables Outstanding (DDPO) 0.00 28.00 42.20 46.83 51.57 47.30 55.40
Days Payable Outstanding Benchmark (DPOB) 28.00 40.40 50.12 51.20 57.52 47.12 46.55
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Days Payable Outstanding Benchmark (DPOB) 28.00 40.40 50.12 51.20 57.52 47.12 46.55
Payables Effeciency Index (DPO/DPOB) 100.00% 146.05% 144.07% 152.02% 141.81% 166.17% 185.60%
Payables Effeciency Achievement (DPO to DPOB) 0.00% 31.53% 30.59% 34.22% 29.48% 39.82% 46.12%
Accounts Payables Performance Values
Total Creditors Book Value R 500 000 R 1 200 000 R 1 390 000 R 1 490 000 R 1 256 000 R 1 461 000 R 1 759 000
Payables Effeciency Achievement Value R 0 R 378 374 R 425 159 R 509 840 R 370 327 R 581 757 R 811 265
DPOB Value R 500 000 R 821 626 R 964 841 R 980 160 R 885 673 R 879 243 R 947 735
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The performance review show the performance of the Payables function month
by month, benchmarked against credit terms extended by Suppliers.
Care should be taken that the company is not marked as a delinquent customer
resulting in credit terms being reduced or withdrawn.
DPOB calculated the fluctuations in purchases volume and mix of credit terms on
a monthly basis.
Accounts Payable Performance Review
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Forecasting using the same method can be used to more accurately project Account
Payables balance in each period and highlight potential cash flow problems due to a
change in purchases mix (payment term customers).
18
Setting and Evaluating KPI's
From the same dataset, KPI's can be set for Creditors Administrators, Financial
Managers, Divisions and Diverse Groups of Companies (various industries).
KPI Formulation Feb 2014 Mar 2014 Apr 2014 May 2014 Jun 2014 Jul 2014 Aug 2014
Initial Minimum Benchmark Set % over DPOB ** 30.00% 30.00% 30.00% 30.00% 30.00% 30.00% 30.00%
Value in Creditors over Initial Minimum Benchmark
(Cashflow Saving) R 150 000 R 246 488 R 289 452 R 294 048 R 265 702 R 263 773 R 284 321
Cost of Capital (CoC) per Annum 10% 10% 10% 10% 10% 10% 10%
Monthly Financial Benefit of Initial Benchmark R 1 250 R 2 054 R 2 412 R 2 450 R 2 214 R 2 198 R 2 369
Current Optimum Benchmark -30.00% 1.53% 0.59% 4.22% -0.52% 9.82% 16.12%
Incentive Participation % 0.00% 1.53% 0.59% 4.22% 0.00% 9.82% 16.12%
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** The Initial Benchmark is set at the start of the incentive program and should remain constant for a set period length (until next
review).
If a monetary incentive is favoured, a suggested method used above calculates the Financial Benefit of the achieved DPOB Index.
If the Creditors Value is above the Initial Benchmark, then no benefit will be payable to the participant.
Alternatively, the DPOB Benchmark can be used for annual performance reviews using an average Index over the year.
Total Cashflow Benefiit in Period subject to incentive R 0 R 12 580 R 5 664 R 41 338 R 0 R 86 333 R 152 782
Monthly Financial Return based on CoC R 0 R 105 R 47 R 344 R 0 R 719 R 1 273
Benefit Split 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Company 80.00% 80.00% 80.00% 80.00% 80.00% 80.00% 80.00%
Employee/Manager etc 20.00% 20.00% 20.00% 20.00% 20.00% 20.00% 20.00%
Employee Incentive Value R 0 R 21 R 9 R 69 R 0 R 144 R 255
Company Benefit Value R 0 R 84 R 38 R 276 R 0 R 576 R 1 019
R 0 R 105 R 47 R 344 R 0 R 719 R 1 273
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Section 3 – Inventory
Analysis tool available to measure Inventory performance :
Inventory consist of :
Raw Materials
Work-in-Progress (WIP)
Measurement Standard Method Preferred Method
Days Sales in Inventory
(DSI) or Inventory Days
Inventory / Historical
Cost of Sales X 365
Inventory / Forecasted 3 month Annualised Cost of Sales
(ie CoS 3 months X 12/3) X 365
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Work-in-Progress (WIP)
Finished Goods
Benchmarking Inventory performance is difficult due to various influencing factors :
•Supplier Lead Times
•Manufacturing Time
•Product Sales Mix
•Out of Stock (Lost Sales)
Targets should be set by Management based on the forecasted Sales (CoS).
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Example of Input Format / Inventory Review (Model Output)
Data Input Grey Area Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14
Actual Cost of Sales R 650 000 R 950 000 R 1 550 000 R 1 350 000 R 1 350 000 R 1 350 000 R 1 350 000
Projected Cost of Sales (Forecasting)
Inventory
Raw Material R 162 500 R 162 500 R 237 500 R 387 500 R 337 500 R 337 500 R 337 500
Work-in-Progress R 97 500 R 97 500 R 142 500 R 232 500 R 202 500 R 202 500 R 202 500
Finished Goods R 650 000 R 650 000 R 950 000 R 1 550 000 R 1 350 000 R 1 350 000 R 1 350 000
Other
Total Inventory R 910 000 R 910 000 R 1 330 000 R 2 170 000 R 1 890 000 R 1 890 000 R 1 890 000
Inventory Performance Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14
Days Sales of Inventory (DSI) - Historical 3
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Days Sales of Inventory (DSI) - Historical 3
months Sales 42.00 34.13 37.58 51.85 40.47 42.93 42.93
Days Forecasted Sales of Inventory (DFSI)
- Next 3 months sales 21.75 19.48 30.21 49.29 42.93 42.93 42.47
Days Forecasted Sales of Inventory
Benchmark (DFSIB) 30.00 30.00 30.00 30.00 30.00 30.00 30.00
Inventory Efficiency Index (DFSI/DSIB) 72.48% 64.95% 100.71% 164.31% 143.11% 143.11% 141.56%
Inventory Efficiency Achievement (DFSI to
DSIB) -Below/Above 0.00% 53.97% 0.70% 39.14% 30.12% 30.12% 29.36%
Inventory Performance Values
Total Inventory Value R 910 000 R 910 000 R 1 330 000 R 2 170 000 R 1 890 000 R 1 890 000 R 1 890 000
Inventory Efficiency Achievement Value -R 345 435 -R 491 099 R 9 348 R 849 348 R 569 348 R 569 348 R 554 835
DFSIB Value R 1 255 435 R 1 401 099 R 1 320 652 R 1 320 652 R 1 320 652 R 1 320 652 R 1 335 165
21
Cash Conversion Cycle (CCC)
The Cash Conversion Cycle measures the amount of time it takes a company to convert a
resource into cash.
Using the Benchmarks for Accounts Receivable, Accounts Payable and Inventory, an
index can of the best possible CCC available based on credit terms extended to
Customers and by Suppliers.
From the output models in :
Section 1 (Accounts Receivable),
Section 2 (Accounts Payable) and
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Section 2 (Accounts Payable) and
Section 3 (Inventory)
it is possible to calculate the Cash Conversion Cycle and Benchmark the result against
the best possible scenario.
Measurement Standard Method Benchmark
Cash Conversion
Cycle (CCC)
Days Sales Outstanding (DSO) +
Days Sales in Inventory (DSI) -
Days Payables Outstanding (DPO)
Days Sales Outstanding Benchmark (DSOB) +
Days Sales in Inventory Benchmark (DSIB) -
Days Payables Outstanding Benchmark
(DPOB)
22
Cash Conversion Cycle Review (Model Output)
Data from AR, AP and Inventory Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14
Days Sales Outstanding (DSO) 28.00 59.00 72.20 77.53 78.40 85.20 88.65
Days Payables Outstanding (DPO) 28.00 59.00 72.20 77.83 81.57 78.30 86.40
Days Forecasted Sales of Inventory (DFSI) - Next 3
months sales 21.75 19.48 30.21 49.29 42.93 42.93 42.47
Days Sales Outstanding Benchmark (DSOB) 28.00 40.47 46.78 56.85 62.46 67.29 74.69
Days Payable Outstanding Benchmark (DPOB) 28.00 40.40 50.12 51.20 57.52 47.12 46.55
Days Forecasted Sales of Inventory Benchmark (DFSIB) 30.00 30.00 30.00 30.00 30.00 30.00 30.00
Total Debtors Book Value R 1 200 000 R 3 000 000 R 5 280 000 R 6 560 000 R 6 940 000 R 7 230 000 R 7 510 000
Total Creditors Book Value R 500 000 R 1 200 000 R 1 390 000 R 1 490 000 R 1 256 000 R 1 461 000 R 1 759 000
Total Inventory Value R 910 000 R 910 000 R 1 330 000 R 2 170 000 R 1 890 000 R 1 890 000 R 1 890 000
Debtors Delinquency Index Target Value R 0 R 942 352 R 1 858 902 R 1 749 789 R 1 411 320 R 1 520 397 R 1 182 772
Payables Efficiency Achievement Value R 0 R 378 374 R 425 159 R 509 840 R 370 327 R 581 757 R 811 265
Inventory Efficiency Achievement Value -R 345 435 -R 491 099 R 9 348 R 849 348 R 569 348 R 569 348 R 554 835
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Inventory Efficiency Achievement Value -R 345 435 -R 491 099 R 9 348 R 849 348 R 569 348 R 569 348 R 554 835
DSOB Value R 1 200 000 R 2 057 648 R 3 421 098 R 4 810 211 R 5 528 680 R 5 709 603 R 6 327 228
DPOB Value R 500 000 R 821 626 R 964 841 R 980 160 R 885 673 R 879 243 R 947 735
DFSIB Value R 1 255 435 R 1 401 099 R 1 320 652 R 1 320 652 R 1 320 652 R 1 320 652 R 1 335 165
Working Capital Performance
Measurement Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14
Cash Conversion Cycle (CCC) days 21.75 19.48 30.21 49.00 39.76 49.84 44.72
Cash Conversion Cycle Benchmark (CCCB) 30.00 30.07 26.66 35.65 34.94 50.16 58.14
Cash Conversion Cycle Index (CCC/CCCB) 72.48% 64.80% 113.30% 137.43% 113.81% 99.35% 76.92%
Cash Conversion Cycle (CCC) value 1 610 000 2 710 000 5 220 000 7 240 000 7 574 000 7 659 000 7 641 000
Cash Conversion Cycle Benchmark (CCCB) value 1 955 435 2 637 121 3 776 909 5 150 703 5 963 658 6 151 011 6 714 658
Value Locked up in Working Capital Efficiencies -345 435 72 879 1 443 091 2 089 297 1 610 342 1 507 989 926 342
23
Section 4 – Users of the System
User Process Benchmarks used
AuditorsYear-end review of Accounts Receivables
Delinquency Index (DSO/DSOB)
Debtors Delinquency Index Target Value
Year-end review of Accounts Payable Payables Efficiency Index (DPO/DPOB)
Due Diligence Investigations /
M&A
Review of risk in Accounts Receivable Delinquency Index (DSO/DSOB)
Review of risk in Accounts Payables Payables Efficiency Index (DPO/DPOB)
Review of trend in Forecasted Cash
Conversion Cycle Cash Conversion Cycle (CCC) days
Calculation of increased cash flow prior to
Acquisition All Efficiency Indexes
Benchmarking the risk portion of Factoring
Accounts Receivable
Days Sales Outstanding (DSO)
Delinquency Improvement Target (DSO to
DSOB)
Days Sales Outstanding Benchmark (DSOB)
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Risk FinanceAccounts Receivable Days Sales Outstanding Benchmark (DSOB)
Extentions taken in Accounts Payables Payables Efficiency Index (DPO/DPOB)
Business Management /KPI's
Review of Accounting Functions for inclusion
in Monthly Management Report
Delinquency Index (DSO/DSOB)
Payables Efficiency Index (DPO/DPOB)
Inventory Efficiency Index (DFSI/DSIB)
Cash Conversion Cycle Index (CCC/CCCB)
Monthly Benchmarking Accounting Functions
and Review of KPI's
Delinquency Improvement Target (DSO to
DSOB)
Payables Efficiency Achievement (DPO to
DPOB)
Inventory Efficiency Achievement (DFSI to
DSIB) -Below/Above
Forecasting tool for calculation of Working
Capital values in Balance Sheet
Days Sales Outstanding Benchmark (DSOB)
Days Payable Outstanding Benchmark (DPOB)
Days Forecasted Sales of Inventory Benchmark
(DFSIB)
Effect of growth/decline of Sales and
Purchases mix on Cash flow
Days Sales Outstanding Benchmark (DSOB)
Days Payable Outstanding Benchmark (DPOB)
24
Auditors
The risk of delinquency is always a major cause of concern at year-end. The DSOB
provide a benchmark, calculated at source (invoices), of this delinquency risk.
Substantive audit tests should quantify this risk as well but will also increase the
audit fee significantly.
An example using the Doubtful Debt Provision and Provision for Credit Notes can
be illustrated as follows (year-end Aug 2014) :
Balance Sheet Jun-14 Jul-14 Aug-14
Accounts Receivable Balance R 6 940 000 R 7 230 000 R 7 510 000
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Accounts Receivable Balance R 6 940 000 R 7 230 000 R 7 510 000
Less :
Provision for Doubtful Debts (10% of AR as example) -R 694 000 -R 723 000 -R 751 000
Provision for Credit Notes (5% of Turnover as example) -R 130 000 -R 130 000 -R 130 000
Nett Accounts Receivable Balance R 6 116 000 R 6 377 000 R 6 629 000
Original DSO on Accounts Receivable 78.40 85.20 88.65
Recalculated DSO on Nett Accounts Receivable 69.09 75.15 78.25
Days Sales Outstanding Benchmark (DSOB) 62.46 67.29 74.69
Risk not Provided for in Accounts Receivable (days) 6.63 7.87 3.56
DSOB Value R 5 528 680 R 5 709 603 R 6 327 228
Risk not Provided for in Accounts Receivable (value) R 587 320 R 667 397 R 301 772
25
Due Diligence / M&A
The Working Capital Trend in the period preceding a merger is as important as the
actual valuation done during the Due Diligence.
Early collection of Accounts Receivable and extension of supplier payments in
Accounts Payable in the period just before the effective date of the acquisition, will
place the buyer in a cash negative position and may require additional Working
Capital funding. Use of the AR Delinquency Index and Payables Efficiency Index
trends will indicate the above scenario.
Benchmark Review May-14 Jun-14 Jul-14 Aug-14
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Benchmark Review May-14 Jun-14 Jul-14 Aug-14
Delinquency Index (DSO/DSOB) 136.38% 125.53% 95.00% 80.00%
Payables Efficiency Index (DPO/DPOB) 152.02% 141.81% 180.00% 250.00%
Debtors Delinquency Index Target Value R 1 749 789 R 1 411 320 R 1 140 639 R 797 195
Payables Efficiency Achievement Value R 509 840 R 370 327 R 630 192 R 1 092 757
Index movement (AR-AP) R 1 239 949 R 1 040 994 R 510 448 R -295 563
Cash flow Implication for Purchaser compared to 4 months ago R -1 535 512
26
Risk Finance
Debtors Factoring is often used by companies to fund current of future cash
flow requirements. The providers of these funds use scoring systems to
evaluate the risk of the ceded or factored Debtors Book.
Benchmarking against Industry Standards is the most common used method.
Although this provide a broad industry benchmark, the monthly fluctuations in
revenue as well as the customer mix in respect of credit terms within a
company can obscure this comparison.
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company can obscure this comparison.
The Delinquency Index provide an accurate risk index of the Debtors Book on a
monthly basis using each customer’s individual credit term calculated from
invoiced turnover.
The Delinquency Index Target Value also give a monetary value of risk of the
Debtors Book provided as security for the funding.
27
Risk Finance (2)
An illustration of the monthly comparison between DSO, Industry Standard
and DSOB :
Risk Scoring May-14 Jun-14 Jul-14 Aug-14
Days Sales Outstanding (DSO) 77.53 78.40 85.20 88.65
Industry Benchmark (60 days or 30 Days statement) 60.00 60.00 60.00 60.00
Days Sales Outstanding Benchmark (DSOB) 56.85 62.46 67.29 74.69
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Index DSO to Industry Standard 129.22% 130.67% 142.01% 147.76%
Index DSOB to Industry Standard 94.75% 104.09% 112.14% 124.49%
Total Debtors Book Value R 6 560 000 R 6 940 000 R 7 230 000 R 7 510 000
Risk value DSO to Industry Standard R 1 483 474 R 1 628 776 R 2 138 681 R 2 427 310
Debtors Delinquency Index Target Value R 1 749 789 R 1 411 320 R 1 520 397 R 1 182 772
Difference in Risk Value between methods -R 266 315 R 217 455 R 618 283 R 1 244 538
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Business Management / KPI’s
The major benefit from using the benchmarks is for management of
companies and the formulation of employee incentives. The metric is against
the performance of the company as an operating entity and its internal credit
policies and that of its suppliers.
Monthly Performance Indicators available for use by Management :
Management Reviews Benchmark
Key Performance Indicator
(KPI) Performance Group
Accounts Receivable
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Days Sales Outstanding (DSO)
Days Sales Outstanding
Benchmark (DSOB)
Debtors Delinquency Index
Target Value Credit Controller
Credit
Manager Company
Division/
Group
Accounts Payable
Days Payables Outstanding
(DPO)
Days Payable Outstanding
Benchmark (DPOB)
Payables Efficiency
Achievement Value
Creditors
Admini
Financial
Manager Company
Division/
Group
Inventory
Days Forecasted Sales of
Inventory (DFSI) - Next 3
months sales
Days Forecasted Sales of
Inventory Benchmark
(DFSIB)
Inventory Efficiency
Achievement Value Buyer
Operations/
Financial
Manager Company
Division/
Group
Working Capital
Cash Conversion Cycle (CCC)
days
Cash Conversion Cycle
Benchmark (CCCB)
Value Locked up in Working
Capital Efficiencies Company
Division/
Group
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Business Management (2)
Using the DSOB and DPOB as guidelines, an accurate value for Accounts
Receivable and Accounts Payable can be forecasted.
This will highlight potential cash flow problems in the future year.
An example of the calculated Forecast Accounts Receivable value :
Sep 2014 Oct 2014 Nov 2014 Dec Onward
Credit Turnover incl VAT/Sales Tax by
Payment Term R 100 000 R 400 000 R 300 000
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Payment Term R 100 000 R 400 000 R 300 000
DSOB Value calculated based on above 80.00 90.00 85.00
Average Prior 3 Month Delinquency Index
(suggested) at start of budget process 123.62% 123.62% 123.62%
Accounts Receivable Forecast Value R 329 644 R 1 435 546 R 1 050 740
The Delinquency Index can be reduced or increased in future months based on
management’s estimate of effectiveness of the Credit Control department.
The same method can be used to calculate Accounts Payable.
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Information Required
All information required for the calculation of the benchmarks in this publication
should be readily available from any accounting system.
Report/Information required Alternative Report
Accounts Receivable
Turnover incl VAT by Payment Term AR Module Invoice register + AR Master Payment Term
Debtors Age Analysis or Ageing Report AR Module Standard Report
No Customer Names required
Copyright 2015 Mantramax Pty Ltd -
All rights reserved
No Customer Names required
Accounts Payable
Purchases incl VAT by Payment Term AP Module Invoice register + AP Master Payment Term
Accounts Payable Age Analysis AP Module Standard Report
No Supplier Names required
Inventory
Inventory Valuation IC Module Standard Report
31
Contact information for Initial Reviews and Monthly
Reports :
Wessel Roux
Cape Town, South Africa
Copyright 2015 Mantramax Pty Ltd -
All rights reserved
Cape Town, South Africa
Cell +27 (0) 82 852 9924
Fax +27 (0) 86 689 1093
Email [email protected]
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