Working Capital Review: Best Practices in Order-to-Cash and Procure-to-Pay

Transcription

1 Working Capital Review: Best Practices in Order-to-Cash and Procure-to-Pay Janine Durbin Director; Working Capital Advisor Phone:

2 External Internal Working Capital and Value Capital structure as a driver of shareholder value Increase Transaction Prices Operating Reduce Costs Increase Volume / Market Share Maximize Cash Flow from Invested Capital Reduce Capital Intensity Leverage Financial Risk Management Return of Capital Liquidity Management Optimize Cost of Capital Ratings Profile Cyclical Cushion Maximize Shareholder Value Merger Acquisition Minimize Price Relative to Value of Target Plus Synergy Value Growth M&A M&A Sale Spin-off Carve-out Maximize Corporate Clarity Restructuring M&A 2

3 Strategic Working Capital Create shareholder value by protecting margins through cost control and automated processes Are a public Company Are acquisitive Capture cost synergies through quick and thoughtful integration Have New Leadership Create a vision centered around Treasury/Finance Transformation Build tighter controls in processes and review policies Experienced Fraud If you Have High Growth Overseas Gain control and visibility on international operations 3 Capex is meant to lead to enhanced Sales. Focus on building scalable processes Are planning Large Capex Have a New ERP System Build better, automated processes rather than replicate old, manual processes

4 Taking a Holistic Approach to Working Capital 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. Process Organization: Centralize functions such as Credit, Order Entry, Cash Application, Management and Payment Execution to a corporate level or Shared Service. Organization Policy Technology Process: Ensure streamlined, automated processes are in place with tight controls to mitigate the risk of fraud and reduce the risk of errors. 4

5 Order-to-Cash Cycle

6 Order-to-Cash Cycle Customer Master Order Management Shipment/ Fulfillment Collections Cash Application Centralized Customer Master module that feeds order management system/module Parent-Child Hierarchy set-up in Customer Master to facilitate global exposure reporting Centralized Credit and Collections with standardized policy and procedures that are audited Automated credit review and credit limit decision based on rules established in ERP system Customer Master stores credit limit and standard payment terms Exposure defined as invoices outstanding plus orders to be released plus backlog (if product is customized) No early pay discounts offered 6

7 Order-to-Cash Cycle Customer Master Order Management Shipment/ Fulfillment Collections Cash Application Centralized Order Entry team with consistent procedures on what information to input Purchase Orders received electronically from customers (EDI), integrated into ERP system Orders are auto-released provided exposure is below credit limit and within terms (automated Credit Check) Manually release only those orders that fail credit check once issue has been resolved (credit limit increased) Standard terms from Customer Master feed Order Management systems. Order Management cannot change terms Consider trade credit insurance to mitigate credit risk 7

8 Order-to-Cash Cycle Customer Master Order Management Shipment/ Fulfillment Collections Cash Application Automated signal from Order Management to factory to begin fulfillment process based on requested ship date Prior to shipment release, credit check to ensure within credit limit (esp. if including backlog in exposure) Automate freight costs with lookup tables integrated into Order Management system For inter-company buying/selling, ensure transfer pricing methodology is reviewed annually and takes into consideration where cash may be accumulating 8

9 Order-to-Cash Cycle Customer Master Order Management Shipment/ Fulfillment Collections Cash Application Automate the creation of an invoice upon shipment of goods information sent electronically to customer to decrease paper invoicing (EDI) If customer cannot receive EDI, have ERP system send invoice automatically via or fax Standard terms printed on invoice from Customer Master system with standard invoicing being electronic 9

10 Order-to-Cash Cycle Customer Master Order Management Shipment/ Fulfillment Collections Cash Application Centralized Collections group with global policy and procedures that are audited periodically Check collections flowing to lockbox with data capture to facilitate straight through processing Collections dashboard, workflow and tracking system to make Collections group more efficient ACH collections (with CTX remit) flowing to bank with data capture/file transmission to facilitate straight through processing Check images and invoice information stored for customer service access Nuisance check collections managed by remote deposit for quickest access and availability of the cash Cash collections managed by safe with armored carrier pickup, eliminate banking center deposits System generated tolerance (10% tolerance to existing credit limit) to accommodate small orders A/R discounting/factoring to expedite cash flow Enable e-commerce through website, if applicable 10

11 Order-to-Cash Cycle Customer Master Order Management Shipment/ Fulfillment Collections Cash Application Straight through processing based on electronic invoicing, collecting, application and reconciliation Broad matching criteria (algorithm) to increase straight through processing rate and expedite reconciliation Tolerances in ERP system to allow application of short paid items Drive electronic receipt and application of funds by offering slightly longer terms for ACH payments Rationalize bank accounts, consolidate accounts with fewer banks to reduce costs and assist visibility Prepare root cause analysis for disputes (incorrect amount shipped, incorrect invoice, etc) Leverage website for customers to place order, view order status, outstanding invoices and make payment Utilize collection agencies, etc when needed 11

12 Order-to-Cash Credit, Collection, Receivables Policies Customer Set-up, Credit Fulfillment/ Invoicing Payments Received, Applied Over/Short Pay Resolutions Collections Cash Application Reserves/ Customer Service # of new/existing credit aps processed # or % of customers being auto credit rated cycle time for new customer set-up cycle time for new customer credit reviews error rate for customer set-up 12 EDI % unit cost: invoices processed fulfillment error rate invoice error rate utilization % of web portal % ACH, CTX % Card % Paper auto hit rate % unit cost: payment posting cash app transactions/fte $ unapplied cash average days late (ADD) % of client with non-standard terms average days deductions outstanding (DDO) # or % offered early pay discount total early pay discount amount and its effects on margin # or % of exceptions days sales outstanding (DSO) collection effectiveness index (CEI)* unit cost: collections $ straight through processing (STP) % average days late (ADD) days sales outstanding (DSO) accounts receivable turnover rate (ART) bad debt to sales % time to close the books accounting accuracy cost to service $ # of disputed items # customer service calls types of customer service calls time to resolve CEI = (Beg AR + (Credit sales/n) Ending AR)/(Beg AR + (Credit sales/n) Current AR) x 100

13 Procure-to-Pay Cycle

14 Procure-to-Pay Cycle Vendor Master Data RFP/Contract Negotiation Requisition Receipt Processing Payment Execution Vendor Master Data stored centrally Remittance Data Secure in Vendor Master, or stored at the bank for greater security Website for vendors to update their own remittance and purchasing data Payment Type field in Vendor Master allows for: Wire, Check, ACH and Card payment Standard Payment Terms communicated as ACH and Card payment ERP system capable of sending single electronic payment file (for all legal entities, BUs) 14

15 Procure-to-Pay Cycle Vendor Master Data RFP/Contract Negotiation Requisition Receipt Processing Payment Execution Centralized Procurement negotiating global contracts for volume pricing, better terms, early pay discount Annual vendor financial reviews to ensure continuity of supply (of key components of inventory) Standard Payment Types communicated as ACH and Card payment Negotiate local currency or USD payments with non-us based vendors Payment Terms tied to Payment Type If Supplier wishes to be paid by Check, terms will be 45 days If Supplier wishes to be paid by ACH, terms will be 30 days If Supplier accepts Card payment, terms will be 15 days 15

16 Procure-to-Pay Cycle Vendor Master Data RFP/Contract Negotiation Requisition/ PO Receipt Processing Payment Execution Requisition entered and routed electronically for approval Purchase Order created and delivered electronically to vendors (EDI) Upon receipt of goods or services, system recognizes receipt Due Date auto-populates upon three-match of what was ordered, what was received and what was invoiced B2B ghost card usage for PO-based spend and Purchase Card for non PO-based spend Purchase Card used to replace petty cash and eliminate petty cash accounts 16

17 Procure-to-Pay Cycle Vendor Master Data RFP/Contract Negotiation Requisition Receipt Processing Payment Execution Fully automated, best-in-class firms can process invoices within 3 days Automate three way match (what was ordered, received and billed) received electronically (EDI) to ensure straight through processing Measure % of early pay discounts earned and taken terms verified against what is in Vendor Master, more favorable terms put in Vendor Master 17

18 Procure-to-Pay Cycle Vendor Master Data RFP/Contract Negotiation Requisition Receipt Processing Payment Execution Remove checks and paper-based transmissions, ACH with CTX for remit info and Card Single file submission for all payment types, including B2B card payments Utilize a bank-sponsored T&E Card program to leverage automation, gain control and earn rebate Take advantage of early pay discount Outsource check printing to reduce costs and protect against fraud Daily payment run, pay on due date unless taking early pay discount Compare cost of USD payment vs. local currency payment 18

19 Procure-to-Pay Cycle Vendor Master Data RFP/Contract Negotiation Requisition Receipt Processing Payment Execution Fully automated Procure-to-Pay cycle allows for straight through processing File-based transmissions can auto-reconcile payments Manage only the exceptions; perform root cause analysis on exceptions Track how long it takes to close the books; automation should lead to faster accounting close 19

20 Procure-to-Pay Procurement and Payables Policies Vendor Master Data PO and Receipt Processing Payment Execution Accruals and Customer Service # of vendor scorecards (strategic vendors only) % vendor reviews % payment method: ACH, Card, Check, wire error rate for vendor set-up % electronic PO delivery/edi % of eligible P- card spend # and $ P-card transactions # and $ PO transactions % electronic invoices % straight through processing vs. manual cycle time s per FTE cost per invoice % electronic payments, CTX % payments on time % of available cash discounts taken $ cash discounts taken vs. potential % of payments containing errors days payables outstanding (DPO) # or % exceptions forecast accuracy straight through processing (STP) % time to close the books accounting accuracy # of inquires and problems root cause analysis of inquires and problems % vendors using portal # or % of vendors offering early pay discount 20

21 Treasury-Specific Metrics Accuracy of Cash Forecasts Investment income, Interest expense, bank fees, trustee fees, etc Liquidity and Cash Percent of daily cash balances vs. forecast Percent of non-interest bear cash vs. total cash Percent of restricted cash vs. total cash Days cash available Percent of committed credit vs. total credit available Exposure Management Variance to market rate at time of trade (trade rate market rate at time of trade)/market rate Fixed / Floating rate mix Hedge percent principle value of identified hedged exposures/principle value of total identified exposures Debt Management Short term vs. long term debt mix Debt vs. Equity mix All-in interest rate vs. benchmark Investment Performance Portfolio credit rating (weighted average credit ratings vs. stated policy target) Maturity structure/schedule 21

22 Supplier Segmentation Build Custom Strategies Per Segment- Maximize Cash Flow and Margins Supplier Segmentation What Will I Pay? When Will I Pay? How Will I Pay? Improved Profitability Volume Rebates Early Pay Discounts Benefits Incremental Cash Flow Segment Terms base on payment type Improve DPO and profitability Lower processing expenses Leverage electronic payments Earn rebate with Card program Improve Supplier Relationship Send remittance detail automatically so vendor can auto-post How Will I Send Remit? 22

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