What Every Management Accountant Needs to be Doing

Transcription

1 What Every Management Accountant Needs to be Doing Richard J Block North East Regional Council 3rd Annual Fall Conference Mystic, Connecticut September 21, 2010

2 Liquidity for Growth: Major Themes Liquidity = Optimizing Working Capital Sustained improvement in Working Capital performance yields: Increases in Cash and Reductions in Cost Improved Working Capital performance should be an objective in good times as well as bad. Management Accountants should be a leader/leading participant in efforts to optimize working capital.

3 Liquidity for Growth: Performance Terminology Working Capital not often measured as a composite. Separate metrics for: Accounts Receivable; (Days Sales Outstanding or DSO) Inventory; (Turns or IDS = Inventory Days of Supply), and Accounts Payable (Days Payable Outstanding or DPO) Composite Working Capital Metric typically either: Days of Working Capital (DWC) A/R, Inventory, & A/P: All measured in days of based on revenue Cash to Cash Cycle time (C2C) A/R measured in days of revenue; Inventory measured in days of cost of goods sold Payables measured in days of cost of goods sold and other appropriate costs.

4 C2C: # days from Payment for Purchases to Collection from Customer Cash-to-Cash 3 DPO IDS 2 Smaller = Better DSO 1 1. Days of Sales Outstanding (DSO): # of days it for a customer to pay. 365 * (Ave A/R, last 4 qtrs) / (Annual Sales or Sales last 4 quarters) 2. Inventory Days of Supply (IDS): # of days of inventory in the company. 365 * (Ave Inv, last 4 qtrs) / (Annual COGS or COGS last 4 quarters) 3. Days of Payables Outstanding (DPO): # of days for inv purch to be paid. 365 * (Ave A/P, last 4 qtrs) / (Annual COGS + D Inv; or COGS + D Inv last 4 qtrs) DSO + IDS DPO = C2C

5 Liquidity for Growth: Working Capital Performance 2009 was one of the worst years ever for working capital performance Average Days of Working Capital (DWC) for 1,000 of the largest U.S. public companies jumped 8.2%...that rise marks the biggest DWC deterioration in the last five years. In 2010, 83% of 115 surveyed companies are citing Working Capital Optimization (WCO) as a high priority...[vs.] 65% of respondents [in Aberdeen s 2008 WCO study] Working Capital Survey; CFO Magazine & REL Consulting Group, June Working Capital Optimization (WCO) Study; Aberdeen Group, May 2010

6 Liquidity for Growth: Working Capital Performance (cont.) 2009: 38.3 days 2008: 35.4 days D 2008: 8.2% Best-in-Class (top 20%): 21 days Industry Ave (middle 50%): 59 days Laggards (bottom 30%): 70 days 2010 Working Capital Survey; CFO Magazine & REL Consulting Group, June Working Capital Optimization (WCO) Study; Aberdeen Group, May 2010

7 Cash-to-Cash Cycle Time (C2C): Is a day worth a lot?

8 C2C : Is a day worth a lot? HP DSO IDS DPO (57) (52) (53) (59) (52) (51) C2C D days (6) (4) $M (1,209) (824) Our working capital requirements depend upon our effective management of the cash conversion cycle, which represents effectively the number of days that elapse from the day we pay for the purchase of raw materials to the collection of cash from our customers. Is a 6 day reduction in C2C important with a -3% decline in yr/yr revenue at constant 24% margins? Source: 2009 HP 10-K

9 C2C : Is a day worth a lot? Dell DSO IDS DPO (82) (67) (80) (78) (77) (73) (70) C2C (36) (25) (36) (42) (44) (42) (40) D (11) 11 $M (1,239) 1,481 Is an 11 day decrease in C2C important with a -13% decline in yr/yr revenue at constant 18% margins? Key Performance Metrics: Our cash conversion cycle for the fiscal quarter ending January 30, 2010 improved from the fiscal quarter January 30, 2009, and was consistent with the fiscal quarter ended February 1, 2008, as our direct business model allows us to maintain an efficient cash conversion cycle, which compares with that of others in our industry. Source: 2010 Dell 10-K

10 C2C : Is a day worth a lot? Dell DSO IDS DPO (82) (67) (80) (78) (77) (73) (70) C2C (36) (25) (36) (42) (44) (42) (40) D (11) 11 $M (1,239) 1,481 Is an 11 day decrease in C2C important with a -13% decline in yr/yr revenue at constant 18% margins? from k Our direct business model allows us to maintain an efficient asset management system in comparison to our competitors. We are capable of minimizing inventory risk while collecting amounts due from customers before paying vendors, thus allowing us to generate annual cash flows from operating activities that typically exceed net income. Source: 2010 Dell 10-K

11 C2C : Becoming Mainstream Why are HP and Dell highlighted? Recognizable Co s who have embraced and achieved C2C excellence despite their size Demonstrate that value of a day of working capital is significant Demonstrate why C2C improvements are valuable when margins are under competitive pressures! Apple s 2009 C2C: -51 days; while growing Rev 12.5% and improving GM% from 34% to 36%.

12 C2C or DWC: VIP (Very Important Performance metric) Working-capital performance is a good indicator of discipline and [overall] rigor within a company. Matthew Farrell, CFO of Church & Dwight; CFO Magazine, June 2009 It s good news that so many companies, caught in the cash crisis and credit, finally recognized that they can secure a substantial amount of cash from working capital. Mark Tennant, President, Americas REL Consulting Group; CFO Magazine, June 2009

13 Effective Measure of Working Capital Performance Becoming mainstream C2C : Why so useful? Useful & Powerful Measurement: Easy to Remember Easy to Benchmark; Improvement is easy to quantify: 1 Day of W/C typically > $100K C2C Improvement Opportunities are Actionable

14 C2C: What actions do the best in class take?

15 C2C : Where is the pressure coming from? 2/3 of 400 companies surveyed indicate outside (stakeholder) pressure, not internal management efforts were greatest reason to improve working capital performance! Source: 2007 Aberdeen Group Working Capital Optimization Study

16 C2C : What to improve when? Improved in isolation often does not produces sustainable results Focus Today: < Inv & DSO & > DPO Focus Tomorrow: > DPO, > ST Fin, Move Inv, > ST Invest Source: 2007 Aberdeen Group Working Capital Optimization Study

17 C2C : What s Changed since 2007? Definition of Average C2C 2005 thru 2007 Maturity C2C Return on Capital Class > = < > = < Best in Class Top 20% 21 days 11 Days 92% 8% 0% 90% 10% 0% Industry Ave Middle 50% 59 days 54 Days 54% 45% 1% 58% 38% 4% Laggards Bottom 30% 70 days 64 Days 18% 53% 29% 3% 45% 52% Supply Chain and Financial Management Maturity of 400 companies surveyed in 2007 % s above indicate % of companies, by maturity class, whose C2C & ROWC improved, stayed the same, or declined from 2005 to Source: 2010 & 2007 Aberdeen Group Working Capital Optimization Study

18 C2C : What actions are the Best-in Class taking? Best in Work Cap Improvement Strategies Average Laggards Class Reduce Inventory 79% 68% 54% Reduce DSO 54% 55% 66% Increase DPO 29% 34% 37% More effectively invest cash short term 13% 4% 17% More effectively use short term financing 8% 14% 20% Total DWC 21 days 59 days 70 days Source: 2010 Aberdeen Group Working Capital Optimization Study

19 C2C What s behind the Best-in-Class actions? Working Capital Improvement Strategies Best-in-Class Companies were more likely to be: Performance Management 30% more likely as all others to use cash conversion metrics (Companies using cash conversion metrics 2x as likely to reduce the C2C cycle) Process Capabilities DSO Improving % of perfect orders delivered to customers Improving customer service & on-time delivery DPO Implementing BOTH extended pmt terms & early pmt discounts with Suppliers IDS Increasing visibility and control over inventory flows Implementing JIT inventory programs Adopting statistical approaches to calcuate inventory stock targets Have the capability to determine safety stock at critical nodes in supply chain Have the ability to replenish inventory based on customer demand Have the ability to segment inventory based on custoemr service req'ts Source: 2010 Aberdeen Group Working Capital Optimization Study

20 C2C What s behind the Best-in-Class actions? Working Capital Improvement Strategies Best-in-Class Companies were more likely to be: Knowledge Management 2x more likely as Laggards to have online visibility into shipments & intransit inv 2x more likely as Laggards to have online visibility into financial supply chain events such as Ordering, invoicing, payment status Technology Companies using A/R or A/P automation technologies 80% more likely to have online visibility into their financial supply chains Organization Capabilities 25% more likely to have a cross-functional team to manage working capital improvements, including finance Source: 2010 Aberdeen Group Working Capital Optimization Study

21 C2C What s behind the Best-in-Class actions? There s been no magic to reducing working capital at Church & Dwight No extra manpower, no software additions. It was purely a matter of making more of an effort. Matthew Farrell, CFO of Church & Dwight Working Capital Scorecard, CFO Magazine, June 2009 # days % D DSO 32-22% -6% IDS 30-15% -4% DPO 28 2% -6% TOTAL DWC 34-30% -5%

22 Improving Working Capital : When Cost Reductions Come First

23 C2C : Specific steps to get started First: Benchmarking Cash Conversion Efficiency Quantify potential cash opportunities! Show me the money! Second: Customer or Vendor working capital improvement project Third: Thorough Working Capital Process Review

24 C2C: Benchmarking

25 Medical Inst & Supplies / Medical Appliances & Equipment ZOLL - Zoll Medical Corporation MDT - Medtronic, Inc. BSX - Boston Scientific Corporation CLZR - Candela Corporation NURO Neurometrix, Inc. HAE Haemonetics Corporation HOLX Hologic, Inc. COV - Covidien SMA -Symmetry Medical Inc. SYK - Stryker Corporation VSCI - Vision Sciences Inc. PMTI - Palomar Medical Technologies, Inc. Note: Massachusetts HQ

26 Medical Inst & Supplies / Medical Appliances & Equipment ZOLL MDT BSX CLZR NURO HAE HOLX COV SMA SYK VSCI PMTI DSO IDS DPO C2C ROWC % 28% 69% -101% -26% -99% 47% -63% 80% 9% 87% -279% 123% Opn CF % Rev 9% 26% 15% -8% -18% 15% 22% 7% 8% 18% -96% 19% NI% 9% 21% -25% -10% -19% 15% -17% 20% 2% 24% -94% 27% Rev $M $ 398 $ 13,515 $ 8,050 $ 148 $ 45 $ 516 $ 1,674 $ 9,910 $ 291 $ 6,718 $ 9,949 $ 124 GM% 53% 75% 69% 45% 73% 50% 53% 54% 18% 68% 14% 69% Ranking C2C ROWC % Opn CF % Rev NI% $M Cash (Reductions) / Increases if Best C2C Achieved Total WC $M D $ (27) $ (1,252) $ (212) $ (21) $ 1 $ (35) $ (35) lowest $ 33 $ (271) $ (223) $ 1 Cash Opportunities: $21M to $1.25B!

27 C2C Benchmarking: Why is this the first step? Identification of Competitors: Is always important. Identifies non-competitive working capital processes Creates an outside enemy and minimizes the inside enemies. Identification of Cash opportunities: Can be eye-opening and galvanizing.

28 C2C Benchmarking: Easy to Measure; Difficult to Achieve Identification of Cash opportunities is relatively easy but achieving lasting Working Capital reductions are a bit tougher, why? Typical Working Capital reductions efforts focus on the individual C2C components: DSO IDS DPO

29 C2C: Customer / Vendor Profitability Improvement

30 C2C: How to Make Less Difficult to Achieve Combine Key Supplier or Customer profitability with Return on Working Capital analysis for each Supplier or Customer Combination evaluation can quickly: Identify potential problems Provide focused direction improving speed of a Major BCPR effort Target solutions and Realize cash Can be completed in 6-8 weeks!

31 Adjusted Gross Margin Objective: Rank Suppliers/Customers & determine drivers of their performance. High High Adjusted Gross Margin Low or Negative Working Capital Protect High Adjusted Gross Margin High or Positive Working Capital Modify terms or inventory practices Outcome: Supplier / Customer Profitability and ROWC Analysis Low Low Adjusted Gross Margin Low or Negative Working Capital Low Drive volume; Keep terms & inv. practices Working Capital Low Adjusted Gross Margin High or Positive Working Capital High Analysis Duration: ~ 6-8 weeks ROWC = Adj GM (GM Inv Hnd, Ord Ful, & Stor) / (A/R + Inv A/P)

32 C2C: Business Cross-Process Re-engineering (BC-PR)

33 C2C Benchmarking: Easy to Measure; Difficult to Achieve Sustainable Working Capital Improvements achieved only when Business Cross-Process Re- Engineering (BC-PR) is employed BCPR is often a difficult, frustrating, and lengthy. Often motivation wanes before improvements implemented and savings realized.

34 BCPR: Work Cap Processes & Typical Areas of Evaluation Working Capital Area Business Process to be Evaluated Areas of Evaluation 1) Collections history Customer Order 2) Shipment Quality Days Sales Outstanding to 3) Customer Order Process / Sales Forecast DSO Cash Collection 4) Sales / Customer IT systems 1) Forecasting / Order taking 2) Postponement & Inventory build signals 3) Demo equipment Inventory 4) Eng Change Orders Inventory Days of Supply Forecast 5) Part #'s IDS to 6) Product design Customer 7) Inventory Obsolescence Delivery Easy: C2C calculations Difficult: Assess and redesign of major C2C process areas Cash Red ns & Cost Savings achieved from improvements in these opn s areas! 8) Product Returns 9) Customer delivery 10) Shipment expediting 11) Mfg Information Technology Operating Systems 1) Supplier Reliability Days Payable Outstanding Supplier Order 2) Delivery Reliability DPO to 3) Vendor management Supplier Payment 4) Procurement coord w/ Customer/Product Demand 5) Procurement Information Technology Systems

35 C2C: Not just for Product Manufacturing Companies C2C can also be used for software and service companies who don t have inventory! While processes for providing services aren t costed and capitalized (GAAP req d for companies with inventory); these processes can still be analyzed in a C2C-like fashion. Examples: Insurance Company: (Claims and New Customer Appraisal / Renewal) 3rd Party Healthcare Provider: (Receivables optimization) Any service provider: (Warranty Services, Returns, CRM)

36 C2C: Easy to Measure; Difficult to Achieve These BC-PR efforts take time and resources before any indication that change is necessary. Time, Resources, and Change are common and significant obstacles in achieving success. Comprehensive BC-PR efforts often indicate new / enhanced software is required. New or enhanced software also require significant time, significant resources, and significant management Often do not produce desired results quickly

37 C2C: Summary

38 C2C: An Actionable Early warning Signal Great indicator of short term trends in operating efficiency Metric that is easy to remember and benchmark Easily opens conversation to specific operating areas and current operating practices Is actionable; offering significant Cash and Cost savings Analyze Customer or Supplier profitability and ROWC to Identify who is causing C2C problems and Target short-term improvements.

39 C2C and Africa: The Essence of Survival Every morning in Africa, a gazelle wakes up. It knows it must run faster than the fastest lion or it will be killed. Every morning in Africa, a lion wakes up. It knows it must outrun the slowest gazelle or it will starve. It doesn t matter whether you are a gazelle or a lion Every morning you d better start running!

40 Liquidity for Growth What Every Mgmt Acct Needs to be doing Questions?