Working Capital Management

Transcription

1 Dr. Hendrik Vater, CFO DHL Supply Chain Southern Europe Working Capital Management Current Trends and Success Factors in Working Capital Management Results of the ICV Practice Group Working Capital Management ACCID, VI Congress Universidad Abat Oliba CEU Barcelona, 29. May 2015 May 2015 Seite: 1

2 ICV Internationaler Controller Verein The Practice Group Working Capital Management The Practice Group WCM Members of the Practice Group Founded in 2009 in Bonn (Germany) the first ever institutional connection between theory and practice via the participation of representatives from academia and practitioners Development of a basic understanding of working capital management and its value drivers What role does the controller play in working capital management? Discussion and exchange of information on examples of best practices in working capital management Topic Leadership provided at the ICV May 2015 Seite: 2

3 Working Capital Management Scope WCM objectives of companies? Best practice in WCM reporting? WCM status quo in practice: organization, methods, tools Role of supply chain management in WCM? Limits of WCM? Positive/ negative measures? Inventories Undiscovered potential in WCM (delivery times, scrapping, etc.)? Sector-specific differences? Possibilities to control the life cycle by company/ sectors/ business cycle? Best practices In payables, inventories, service levels, receivables Role of IT in WCM? Divisional-/ company-wide winwin situations? Different WCM at different strategic positioning? Working Capital Management (WCM) Payables Substantive questions about WCM Receivables Definition of working capital? Key metrics? Organizational foundation of WCM -> successful for the long run? Effects of globalization on WCM? Effects (liquidity/ profitability) on financial performance? Drivers? Which aspects of WCM are impacted by trade-offs between income statement and balance sheet? Framework for successful WCM? Main problems in practice? Is top management aware of the importance of WCM? Leverage effects? Effects of the financial and economic crisis on WCM and the role of the controller? Role of controlling/ controller in WCM? May 2015 Seite: 3

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5 Companies have not yet implemented the levers of CFO Agenda 2014 consistently Implementation of the CFO agenda in 2014 Focus of Actual vs. CFO-Agenda 2014 Activities planned for ) ) Plan Product Portfolio 66% 1 52% -14% Production 60% 2 44% -16% Controlling & Finance Working Capital Management 3 60% 45% -15% 4 58% 49% -9% Logistics 54% 5 39% -15% Sales & Marketing Innovation & Development 6 52% 38% -14% 7 49% 39% -10% Purchasing 8 50% 40% -9% Administration & Overhead 9 41% 31% -10% The CFO Agenda 2014 has not been consistently implemented All areas remain in the implementation behind the original plans from 2013 Focus CFO-Agenda Secure Very Secure 1) Percentage of companies that plan activities for 2014; 2) percentage of companies that evaluate the actual efficiency of the lever up (4) or very high (5) May 2015 Seite: 5

6 Fundamentally, working capital management (WCM) focuses on five items in the balance sheet Most comprehensive definition WC = current assets - current liabilities Most narrow definition WC = inventories + trade receivables - trade payables May 2015 Seite: 6

7 Definition of WCM based on the ICV Working capital comprises in detail: The current assets tied up in operating activities Whose positions do not earn interest and which Therefore must be financed with interest-bearing capital This narrow, operating definition of working capital management can be expanded for each individual company But when doing so, care must be taken to ensure that the additional positions to be included: Are material and related to operations Are controllable by management Are not interest-bearing Release liquidity and Are short-term in nature (up to 12 months) May 2015 Seite: 7

8 There are several ways to optimize a company s financial performance Focus Measures (examples) Profit Stabilize or increase revenue Lower cost of materials Reduce staff expense Decrease other operating expense Optimizing financial performance Liquidity Working Capital Capital structure Optimize inventories Optimize receivables management Optimize payment terms Lower debt Reduce cost of capital Optimize equity contributions Balance sheet structure Optimize investments (expand capacity, implement technological innovations) Conduct disinvestments May 2015 Seite: 8

9 The Virtuous-cycle of successful Working Capital Management 8 Lower Interest Rates & Debt Level Higher Equity (Shareholder Value) 1 Continuous Focus on key WCM Processes (O2C P2P F2F) 2 Consequences: 7 Better KPIs and Ratings WCM 3 Working capital management measures should always be aimed at achieving long-term sustainability 6 Lower debt levels Lower absolute finance costs Improvements lower the finance needs 4 It s worth it! WCM measures 5 Secondary Resulting Effects May 2015 Seite: 9

10 Current Trends and Success Factors in Working Capital Management May 2015 Seite: 10

11 1 Focus on Processes May 2015 Seite: 11

12 2 Support main KPIs for Working Capital Management with operating drivers A Selection Management level 1 Management level 2 Working capital management performance Working capital structure (absolute / % of sales / DIO+DSO+DPO-days) DSO (granted days of credit) vs. DPO (received days of credit) vs. DIO (inventory on hand) Receivables Payables Inventories Sales breakdown WADTC ("weighted average days to collect") Unbilled receivables Trend of balances in arrears Use of payment terms vs. targeted standards Comparison of contractual payment terms vs. actual practice Breakdown of procurement volumes WADTP ("weighted average days to pay") Payment behaviour Frequency of payment runs Use of payment terms vs. targeted standards Comparison of contractual payment terms vs. actual practice Coverage analysis Inventory aging Inventory coverage Trend of WIP days Segmentation of inventories Management level 3 / Operating departments Risk structure customer portfolio Procurement channels ABC analysis / top suppliers Number of payment-term codes used Invoice sizes Doubtful accounts & bad debt losses Collections via external partners Payment methods Unjustified deductions Complaints about defects, reasons, and resolution times Credit notes Payment allocation Number of payment-term codes actually used ABC analysis Top procurement categories / top suppliers Use of purchase order numbers Procurement channels & automatically generated purchase orders Incoming invoices and processing times Invoice sizes Structure of early & late payments Complaint management Payment behaviour towards top suppliers Top materials Coverage radar ABC analysis Inventory structure vs. sales Utilisation deviations Adjustment planning Availabilities Fulfilment ratios Alignment of the supply chain Delivery times Processing speeds Reasons and triggers for delays Deliveries in arrears Product segmentation May 2015 Seite: 12

13 3 Harmonizing the divergent interests and priorities of the functions and business units... Department Traditional departmental objective Departmental Inclination / Desire Negative consequences on working capital Sales Maximize revenue Wide variety Readily deliverable Attractive payment terms for customers Large inventory of finished goods Long collection periods for receivables Production Minimize production costs High machine utilization Large lots Limited variety Supply security Large inventory of work in progress and finished goods Purchasing Reduce purchase prices Large order quantities High supply security Rapid payments to suppliers High raw materials inventories Low supplier payables Source: based on Losbichler / Mahmoodi (2012) May 2015 Seite: 13

14 Functions 4 Typical responsibilities of the WCM components, with highly diverse interests along the value chain How are the responsibilities currently organized in your company? N = 99 Payables Raw materials Responsible for Work in progress Finished goods Receivables No responsibility Purchasing Production Logistics Sales Other Size of the circle = number of times mentioned Source: Horvath & Partners (2013) May 2015 Seite: 14

15 5 Supply Chain Finance as a win-win opportunity 1 Supplier send invoice to buyer 2 Buyer Checks and approves invoice and sends it on to 3 rd party platform 4 Supplier Decides if invoice should be paid prior to maturity 3 Invoice is included in platform Platform/ 3 rd Party Intermediary 6 Pays the bank according to agreed terms and conditions 5 Bank pays supplier before maturity according to agreed SCF-conditions Bank May 2015 Seite: 15

16 6 DHL offers inventory financing through an on- and offbalance sheet solution On-balance sheet solution Off-balance sheet solution Bank/Investor Role: Provides credit Bank/Investor Role: Provides credit OpCo financing agreement Loan agreement Custodian agreement Asset (re-) purchase agreement OpCo Role: Purchases and owns inventory Custodian and servicing agreement Customer Role: Receives financing Custodian services Sharing information for collaterals DHL Role: Custodian, facilitator for customer/bank Customer Role: Repurchases inventory Custodian services Sharing information for collaterals DHL Role: Custodian, facilitator for customer/bank An asset based lending (ABL) program for small to mid sized companies which offers: A secured loan with customers inventory in DHL operated warehouses taken as collateral Faster and cheaper financing cost due to DHL acting as custodian to the collateral An IFRS compliant concept for large cap companies which enables: True sale and shift of inventory ownership to an operating company Cash and working capital optimization Improvement of financial KPIs, e.g. ROCE May 2015 Seite: 16

17 7 Working Capital and Risk Management Working Capital and Risk Management in conjunction contribute to increase the company s value Liabilities Assets Third Party Liabilities Risk of default Foreign exchange risk Liquidity risk (cash flow) Foreign exchange risk Market price risk (unsecured) Capacity risk (large inventory stocks) Inventory risk Loss of stock, uninsured accidents Seasonality Foreign exchange risk Risk of damaging the company s reputation Supply-stop risks Single-sourcing risk Sustainable business relationships strategic partnerships with key suppliers Successful and sustainable WCM does not only improve cash flow and financial results, but is also a decisive success factor to conduct risk management May 2015 Seite: 17

18 Outlook Thank you very much for your attention! May 2015 Seite: 18