Southern California AFP Luncheon

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1 Working Capital Unharness your Cash Flow Southern California AFP Luncheon Michael Diekmann Director, Bank of America Merrill Lynch October 10, 2014

2 Understanding Working Capital Working Capital... = Current Assets Current Liabilities How much cash is tied up in the operation of an organization. Best-in-class organizations are working to optimize their working capital which translates to efficiently and effectively managing payables and receivables Optimize working capital by OPTIMIZING RECEIVABLES OPTIMIZING PAYABLES BETTER MANAGING LIQUIDITY Optimizing days sales outstanding (DSO) Lowered financing costs Reduced transaction and FX risk Streamlined processing Optimizing days payable outstanding (DPO) Lowered borrowing costs Reduced transaction and FX risk Streamlined processing Enhanced cash flow management Optimizing visibility and control Minimized idle cash balances Reduced operating risk 2

3 A holistic view of working capital management The Cash Conversion Cycle (CCC) Economists quote the CCC metric as: one of the most accurate metrics for the real financial health of a company Operating Cycle Working Capital Cycle Cash Conversion Cycle Cash-to-Cash Cycle Cash Conversion Cycle CASH (Liquidity) Days Sales Outstanding DSO SALES Accounts Receivable (Revenue) into Cash Inflow PROCUREMENT Accounts Payables (Expense) into Cash Outflow Days Payable Outstanding DPO INVENTORY Resources into Finished Goods Days Inventory Outstanding DIO CCC = Inventory days (DIO) + Receivables (DSO) Payables (DPO) The period of time in which a company is able to convert its Resources into cash; or how quickly you convert sales into cash Note: Inventory conversion period: inventory / CGS x 365; Receivables conversion period: receivables / sales x 365; Payables conversion period: accounts payable / CGS x 365

4 Working Capital Trends -14 Days DSO Best in class companies collect from clients 2 weeks faster. +10 Days DPO Best in class companies pay suppliers 10 days slower. -49% +1.7T Best in class companies have 49% less money tied up in inventories. The increase in cash on hand in Source: 2012 CFO/REL Working Capital Scorecard

5 Working Capital Management Lines of Credit Supply Chain Financing Control Visibility Forecasts A/R A/P Legal & Tax DPO Capital Markets Trade Solutions Working Capital Metrics Leasing Access to Capital Cash Management Working Capital Management Financial Processes Liquidity Payroll Pooling/ Netting Repatriation Reconciliation Investing Purchasing DSO Inventory Cost of Capital Interest Rate SOX Financial Risk Management Counterparty Market FX Sovereign/ Country T&E Systems & Processes TMS Rationalize/ Standardize/ Automate ERP

6 The many facets of working capital Financial Processes Treasury Billing Accounts Receivable Collections Accounts Payable General Ledger Reconciliation Payroll Purchasing

7 The many facets of working capital Liquidity Investing ZBA Structures Pooling/Netting Repatriation of cash Access to Capital Lines of Credit Capital Markets Leasing Supply Chain Financing Trade Solutions

8 The many facets of working capital Financial Risk Management Counterparty Risk Interest Rate Risk Sovereign/Country Risk Market Risk FX Risk Compliance Risk Reputation Risk "When written in Chinese, the word crisis is composed of two characters. One represents danger and the other represents opportunity." - John F. Kennedy

9 The many facets of working capital Systems and Processes ERP TMS or Cash Setting Method Online Bank Tools T&E Purchasing Billing Other Rationalize, Standardize and Automate To get the most out of these tools it is important to rationalize your systems and processes. Standardize your systems and processes and automate as much as possible.

10 The many facets of working capital Cash Management Control - You cannot manage what you do not own. Visibility - You cannot manage what you cannot see. Forecasting - An accurate cash forecast is essential Access to systems and information Open and honest communication The past is not always indicative of the future. Only when the tide goes out do you discover who s been swimming naked. - Warren Buffett

11 Understanding Working Capital Working Capital Management focuses on CASH! MAXIMIZING CASH maximizing cash flow by improving DSO and DPO to grow operating cash flow OPTIMIZING CASH ensuring your cash is deployed efficiently by lean and automated processes VISIBILITY/ACCESS TO CASH gaining visibility and access to cash through optimal liquidity structure and forecasting PROTECTING CASH preserving cash by investing wisely and by mitigating the risk of fraud and errors 11

12 Working Capital Trends CENTRALIZATION One Policy, Process and Technology across all groups and subs STANDARDIZATION Payroll, Accounts Payables, Accounts Receivable, Acquisitions AUTOMATION Remove manual steps, focus on technology enablement, ERP, TWS ELECTRONIFICATION Remove paper-based transmissions, focus on host-to-host EDI Fewer Errors, Tighter Controls Prevent Risk of Fraud Process Efficiencies = Cost Savings Better Data Management, Reporting, Decisioning 12

13 Procure-to-Pay Cycle Payables Sourcing Vendor Master Data PO & Receipt Invoice Processing Payment Execution Reconcilement Customer Service Sourcing Develop a sourcing strategy Negotiate payments types and term Master Vendor Data Payment methods (ACH, Card, Check, Wire) Vendor review; single electronic payment file for all legal entities Purchase Order & Receipt Requisition entered and routed electronically for approval Purchase Order created and delivered electronically to vendors Invoice Processing Automated invoices; terms verified against what is in Vendor Master, more favorable terms put in Vendor Master Measure, monitor and reward taking full advantage of early pay discounts to improve DPO and cash flow Payment Eliminate or reduce paper-based transmissions Single file submission for all payment types Outsource check printing to reduce costs and protect against fraud Reconciliation Straight Through Processing - file-based transmissions, auto-reconcile payments, manage only the exceptions Capture bank data for improved cash forecasting Customer Service Real time access to internal systems & vendor portal Workflow capabilities to route and resolve requests and problems 13

14 Optimizing accounts payable 71% Of all invoices received in accounts payable departments today are via paper. Source: Ardent Partners The State of the AP Market: Not Broken, Needs Fixing June % The risk free return (APR) associated with taking early pay discounts. 73% Companies who have a strategy for converting paper-based transactions for payments to electronic. Source: Treasury & Risk 2012 Going Green Survey 2012

15 Order-to-Cash Cycle Receivables Customer Master File Order Management Invoice Creation Cash Application Collections Past Due Reconciliation Reporting Customer Service Customer Master File Centralized customer master that feeds order management with hierarchy set-up facilitate global exposure reporting Customer master stores credit limit, standard payment terms and payment method Order Management Purchase Orders received electronically from customers, integrated into ERP system Orders are auto-released provided exposure is below credit limit and within terms Invoice Creation Automate the creation of an invoice sent electronically upon shipment of goods (decrease paper invoicing) If customer cannot receive file-based transmission, have ERP system send invoice automatically via or fax Standard payment terms printed on invoice from Customer Master system with standard invoicing being electronic Cash Applications Straight through processing based on electronic invoicing, collecting, application and reconciliation Customer-specific cash application rules housed within ERP system Minimize and rationalize bank accounts, consolidate accounts with fewer banks to reduce costs and assist visibility Collections Past Due Centralized Collections group, measure, monitor and reward collection to terms with periodic audit Check & ACH collections flowing to Lockbox/bank with data capture to facilitate straight through processing Reconciliation/Reporting Automate daily reconciliation ; straight through processing and manage exceptions only Write off analysis to determine if there are any customer or process trends that need to be addressed Capture bank data for improved cash forecasting Customer Service Real time access to internal systems Workflow capabilities to route and resolve requests and problems 15

16 Optimizing Receivables 43% Of businesses have customers 90 days or more past due. Source: FundingGates % Companies who have a strategy for converting paper-based transactions for receipts to electronic. Source: Treasury & Risk 2012 Going Green Survey X Companies who accept card payments have a 10X shorter order to cash cycle than payment by ACH, Wire or Check. Source: MasterCard & Kaiser Associates-Commercial Card Acceptance Cost Benefit, November 2012

17 Working Capital. working for you Cash Flow and Cost of Capital Impact Estimated Savings and Cash Flow Improvements in the Cash Conversion Cycle Company with $200MM in annual revenue ($ in 000's) CURRENT 1 Day 3 Days 6 Days Annual Sales $200,000 $200,000 $200,000 $200,000 COGS $175,000 $175,000 $175,000 $175,000 Weighted Average Cost of Capital 9.5% 9.5% 9.5% AR Days Reduced AP Days Increased Total Days Saved AR Cash Flow Impact $548 $1,644 $3,288 AP Cash Flow Impact $479 $1,438 $2,877 Total Cash Flow Impact $1,027 $3,082 $6,164 AR Cost of Capital Savings $52 $156 $312 AP Cost of Capital Savings $46 $137 $273 Total Potential Savings $98 $293 $586

18 Working Capital. working for you Cash Flow and Cost of Capital Impact Estimated Savings and Cash Flow Improvements in the Cash Conversion Cycle Company with $500MM in annual revenue ($ in 000's) CURRENT 1 Day 3 Days 6 Days Annual Sales $500,000 $500,000 $500,000 $500,000 COGS $440,000 $440,000 $440,000 $440,000 Weighted Average Cost of Capital 9.5% 9.5% 9.5% AR Days Reduced AP Days Increased Total Days Saved AR Cash Flow Impact $1,370 $4,110 $8,219 AP Cash Flow Impact $1,205 $3,616 $7,233 Total Cash Flow Impact $2,575 $7,726 $15,452 AR Cost of Capital Savings $130 $390 $781 AP Cost of Capital Savings $115 $344 $687 Total Potential Savings $245 $734 $1,468

19 Working Capital. working for you Cash Flow and Cost of Capital Impact Estimated Savings and Cash Flow Improvements in the Cash Conversion Cycle Company with $1B in annual revenue ($ in 000's) CURRENT 1 Day 3 Days 6 Days Annual Sales $1,000,000 $1,000,000 $1,000,000 $1,000,000 COGS $875,000 $875,000 $875,000 $875,000 Weighted Average Cost of Capital 9.5% 9.5% 9.5% AR Days Reduced AP Days Increased Total Days Saved AR Cash Flow Impact $2,740 $8,219 $16,438 AP Cash Flow Impact $2,397 $7,192 $14,384 Total Cash Flow Impact $5,137 $15,411 $30,822 AR Cost of Capital Savings $260 $781 $1,562 AP Cost of Capital Savings $228 $683 $1,366 Total Potential Savings $488 $1,464 $2,928

20 Working Capital Goals What Goals Does Your Firm Want to Achieve? Operating Cash Flow Changes in Working Capital Cash Conversion Cycle DSO + DIO DPO Prevent Fraud/Tighten Controls Margins Gross Margin EBITDA Margin Gain Market Share Incremental Cash Flow Cost Reduction Tighter Controls Fewer Errors Better Reporting 20

21 Best practices in working capital Focus on long term solutions Have clear goals and measure them Centralize and Standardize Globally Benchmark Optimization is a journey, not a destination

22 Taking the Steps to Success Establish an active working capital management approach Success 1. Identify Your Objectives Process improvement Reduced resource time Reduced cost Improved cash flow Improved DSO / DPO Profit center vs. cost center 2. Understand Your Challenges Internal education / awareness System capabilities Payment types A/P process & terms A/R process & terms Visibility Resource time 3. Identify Potential Solutions Comprehensive payables Comprehensive receivables Supplier / Receivables financing alternatives Liquidity structures Reconciliation / cash application Advanced reporting & analytics 4. Support Holistic Approach Create awareness Identify key stakeholders Establish KPIs and accountability Implement comprehensive integrated solutions Optimized Working Capital Management Approach These steps are instrumental for driving rapid improvement and continued satisfaction 22

23 QUESTIONS 23

24 Notice to Recipient "Bank of America Merrill Lynch" is the marketing name for the global banking and global markets businesses of Bank of America Corporation. Lending, derivatives and other commercial banking activities are performed globally by banking affiliates of Bank of America Corporation, including Bank of America, N.A., member FDIC. Securities, strategic advisory, and other investment banking activities are performed globally by investment banking affiliates of Bank of America Corporation ("Investment Banking Affiliates"), including, in the United States, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Merrill Lynch Professional Clearing Corp., both of which are registered as broker-dealers and members of SIPC, and, in other jurisdictions, by locally registered entities. Merrill Lynch, Pierce, Fenner & Smith Incorporated and Merrill Lynch Professional Clearing Corp. are registered as futures commission merchants with the CFTC and are members of the NFA. Investment products offered by Investment Banking Affiliates: Are Not FDIC Insured * May Lose Value * Are Not Bank Guaranteed. This document is intended for information purposes only and does not constitute a binding commitment to enter into any type of transaction or business relationship as a consequence of any information contained herein. These materials have been prepared by one or more subsidiaries of Bank of America Corporation solely for the client or potential client to whom such materials are directly addressed and delivered (the Company ) in connection with an actual or potential business relationship and may not be used or relied upon for any purpose other than as specifically contemplated by a written agreement with us. We assume no obligation to update or otherwise revise these materials, which speak as of the date of this presentation (or another date, if so noted) and are subject to change without notice. Under no circumstances may a copy of this presentation be shown, copied, transmitted or otherwise given to any person other than your authorized representatives. Products and services that may be referenced in the accompanying materials may be provided through one or more affiliates of Bank of America, N.A. We are required to obtain, verify and record certain information that identifies our clients, which information includes the name and address of the client and other information that will allow us to identify the client in accordance with the USA Patriot Act (Title III of Pub. L , as amended (signed into law October 26, 2001)) and such other laws, rules and regulations. We do not provide legal, compliance, tax or accounting advice. Accordingly, any statements contained herein as to tax matters were neither written nor intended by us to be used and cannot be used by any taxpayer for the purpose of avoiding tax penalties that may be imposed on such taxpayer. 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Changes in rates of exchange between currencies may cause the value of investments to decrease or increase. We have adopted policies and guidelines designed to preserve the independence of our research analysts. These policies prohibit employees from offering research coverage, a favorable research rating or a specific price target or offering to change a research rating or price target as consideration for or an inducement to obtain business or other compensation. Copyright 2014 Bank of America Corporation. Bank of America N.A., Member FDIC, Equal Housing Lender. 24

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