Payments Transformation Through a Working Capital Lens. Michael Diekmann Director; Working Capital Advisor

Transcription

1 Payments Transformation Through a Working Capital Lens Michael Diekmann Director; Working Capital Advisor michael.b.diekmann@gmail.com

2 Working Capital What is it? Accounting vs. Treasury View WORKING CAPITAL An Accounting View CURRENT ASSETS CURRENT LIABILITES WORKING CAPITAL Short Term Cash (including short term investments) Receivables from Operations Inventory Short Term Credit Payables from Operations ADJUSTED WORKING CAPITAL A Treasury View CURRENT ASSETS Receivables from Operations Inventory CURRENT LIABILITES Payables from Operations WORKING CAPITAL

3 Measuring Working Capital The Cash Conversion Cycle (CCC) CCC = Inventory days (DIO) + Receivables (DSO) Payables (DPO) CASH (Liquidity) Days Sales Outstanding DSO SALES Accounts Receivable (Revenue) into Cash Inflow Days Payable Outstanding DPO PROCUREMENT Accounts Payables (Expense) into Cash Outflow INVENTORY Resources into Finished Goods Days Inventory Outstanding DIO The period of time, measured in days, in which a company is able to convert its Resources into cash; or how quickly you convert sales into cash Improvements in working capital = incremental cash flow Economists quote the CCC metric as: one of the most accurate metrics for the real financial health of a company 3 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 Cycles WORKING CAPITAL MANAGEMENT Can be broken down into two main treasury processes: Order-to-Cash This is the process of receiving an order form a customer, invoicing and collecting form the customer and turning that payment into cash Procure-to-Pay This s the process of procuring resources to make a product or provide a service for the customer and paying the vendor or supplier Process Improvement Opportunity Moving from paper-based or manual workflows to electronic. automated workflows can lead to reduced errors, lower general, selling and administrative expenses and improved reporting to make better decisions 4

5 Procure-to-Pay Cycle 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 5

6 Understanding Working Capital Working Capital Management focuses on CASH! OPTIMIZING CASH ensuring cash is deployed efficiently by lean and automated processes MAXIMIZING CASH maximizing cash flow by improving DPO to grow operating cash flow VISIBILITY/ACCESS TO CASH gaining visibility and access to cash through optimal liquidity structure and forecasting PROTECTING CASH preserving cash by ensuring risk management policies and processes are in place 6

7 Taking a Holistic Approach to Working Capital Best Practices - Policy, Process, Organization and Technology Policy: Ensure corporate-wide Treasury/Finance policies are written, communicated and audited. Technology: Leverage your ERP system and bank technology to attain best-in-class levels of automation. Organization: Centralize functions such as Credit, Order Entry, Cash Application, Invoice Management and Payment Execution to a corporate level or Shared Service. Process Policy Organization Technology Process: Ensure streamlined, automated processes are in place with tight controls to mitigate the risk of fraud and reduce the risk of errors. 7

8 Comprehensive Payables View Check Writing Check Outsourcing Digital Disbursements Wire Transfers ACH T&E; P-Card; Prepaid epayables Supply Chain Finance 8

9 Focus on Segmenting Supplier Base Develop Strategy for each Supplier Segment (Payables) Suppliers Offering Early Pay Discounts International Suppliers Large, Strategic Suppliers Suppliers Accepting Ghost Card Non-PO Based Suppliers Suppliers Accepting P-Card Suppliers Requiring Checks Suppliers with Lower Credit Strength 9

10 Managing Working Capital with Cascading Metrics ACHIEVING THE GOAL! UNIFIED, COLLABORATIVE TEAM IDEA GENERATION, CHANGE AGENTS MORE PRODUCTIVE, ENGAGED TEAM MEMBERS MORE EXCITED, LOYAL WORKFORCE, TALENT RETAINED 10

11 Working Capital Metrics Measure, Monitor and Reward! MEASURE: Is performance/behavior quantifiable? Is measurement automated? Is measurement nondisruptive and cost effective? How many metrics will you have? MONITOR: Is measurement being tracked over time? Is trend data being reviewed and analyzed? Is performance being recalibrated over time? Are new metrics needed? REWARD: What gets measured gets done and what gets rewarded gets done more! Are accomplishments recognized consistently and socially? Celebrate group success! 11

12 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 2. PLANNING 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

13 Working Capital Landscape Cross-functional alignment Supply Chain Financing Capital Markets DSO Lines of Credit DPO Leasing Access to Capital Working Capital Metrics Trade Solutions Control Visibility Cash Management Working Capital Management Forecasts A/R Financial Processes Liquidity A/P Legal & Tax Payroll Reconciliation Pooling/ Netting Purchasing Repatriation Inventory Cost of Capital Systems and Processes Financial Risk Management Investing FX T&E Rationalize/ Standardize/ Automate TMS ERP Interest Rate SOX Market Counterparty Sovereign/ Country 13

14 Working Capital Peer Analysis 100 Private Peer Public Public VIASAT Target (VSAT) Client Peer Average HRS LLL Average Peer 1 Peer Days A/R Days Inv Days Payable Working Capital Summary ($ in 000s) Target Client Peer Average Public Peer 1 Public Peer 2 Days Outstanding: Days A/R Days Inv Days Payable Cash Cycle

15 Working Capital Historical Trending Target Client - Working Capital Trend Analysis ($ in '000s) AR Days Inv. Days AP Days Cash CCC Conversion Cycle (CCC) Target Client Historical Operating Cycle Days AR Days Inv. Days AP Days CCC

16 Working Capital Sensitivity Analysis (Weighted Average Cost of Capital [WACC] 7.93% *) Estimated Impact from Changes in the Cash Conversion Cycle $ shown in '000s Target Client Scenario A Scenario B Scenario C Days Receivables 73 days 72 days 68 days 63 days Days Inventory 44 days 43 days 42 days 41 days Days Payable 36 days 37 days 39 days 43 days Cash Conversion Cycle 81 days 78 days 71 days 61 days Annual Sales $1,351,462 $1,351,462 $1,351,462 $1,351,462 COGS, excl. Dep. $991,280 $991,280 $991,280 $991,280 Cost of Capital / Debt 7.93% 7.93% 7.93% AR Days Reduction Inv. Days Reduction AP Days Increase Total Days Change AR Reduction $3,703 $18,513 $37,026 Inv. Reduction $2,716 $5,432 $8,148 AP Increase $2,716 $8,148 $19,011 Total Liquidity Impact $9,134 $32,092 $64,185 AR Capital Efficiency Savings $294 $1,468 $2,936 Inv. Capital Efficiency Savings $215 $431 $646 AP Capital Efficiency Savings $215 $646 $1,508 Total Capital Efficiency Impact $724 $2,545 $5,090 * Cost of Capital by Sector 7.93% * Data Source: NYU Sterns School of Business, January 2015 / S&P Capital IQ, Bloomberg and the Fed

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