©2008 Deloitte Touche Tohmatsu. Cash & Working Capital Optimisation. Richard Hawes Deloitte...

©2008 Deloitte Touche Tohmatsu.

Cash & Working Capital Optimisation.

Richard HawesDeloitte Regional Head of Reorganisation Services

Unlocking cash from within Companies’ balance sheets:

What should directors be doing?

Cash and Working Capital OptimisationWhy is this so relevant to lenders / stakeholders?

1. They don’t want the money they have lent to a company to be mismanaged or lost and therefore they expect the company to be good at managing it:

2. Evidence suggests that an assessment of this helps to spot the winners from the losers:

• 3 of the top 5 internal causes for corporate decline per recent studies are;

• Poor management (consistently the number one cause)

• Inadequate financial control and information, especially around cashflow

• Poor working capital management and cost control

3. Restructuring a business is expensive – lenders should not have to fund it all / take all the risk:


Price RealizationVolume Company

StrengthsExternal Factors

Cost of Goods Sold

(COGS)

Selling, General &

Admin (SG&A)Inventory

Property, Plant& Equipment

(PP&E)

Receivables& Payables

S H A R E H O L D E R V A L U E

Revenue Growth ExpectationsOperating Margin Asset Efficiency

Enterprise Cost Reduction (ECR) Mapped to the Enterprise Value Map

Income Taxes

Is there an alternative to borrowing more?Optimising working capital (and therefore cashflow) is one of the core drivers of shareholder value……

………….its about making the best use of assets and ultimately about saving money.


• Cash is the lifeblood of business

• Working capital is one of the few remaining areas which can deliver significant cash to the business in a relatively short period of time, without the pain and time required to achieve a large change or restructuring programme

• Research shows there is a vast quantity of untapped capital currently lying idle, just waiting to be realised

“European companies have over €500 billion

locked up in excess working capital”

Deloitte analysis

Why focus on Cash & Working Capital? Companies have untapped sources of funding sitting on their balance sheets. However their first port of call when they need money is often the bank……

Working Capital in use

Inventory Debtors

Creditors

Potential benefit?



How to spot when cashflow is not being managed tightlyAsk yourself is there………..• A high level of working capital tied up for the size or type of business

• A sudden future funding requirement which is not to meet a strategic goal or long term investment

• Breach or potential breach of cash related covenants

• A lack of cash flow visibility i.e. need for more robust cash flow forecasting tools and controls over cash (profit verses cash)

• Inconsistent cash flow management between different subsidiaries or divisions of a group (leading to 'cash calls' back to head office)

• High or deteriorating debtor days

• Pressure from suppliers for more timely payment

• A proliferation of stock keeping units or stock levels across multiple sites

• Large unexplained fluctuations or volatility in cashflow putting pressure on facilities

• A potential future breach of bank facilities or a lack of headroom in current facilities



What should companies be aiming to do?They should be looking to move away from this …

Daily bank balance before C&WCO

(20)

(15)

(10)

(5)

0

5

10

15

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31

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£'m

Bank balance Facility Limit

£10-£15m can be released

without restricting

normal operations


Daily bank balance after C&WCO

(15)

(10)

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0

5

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1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31

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£'m

Bank balance Facility Limit


So why is this so difficult?!!!

More headroom More availability for other usesLower financing costs

What should companies be aiming to do?To this……….


How should companies approach it?The devil is in the detail. Firstly robust and accurate visibility over cashflow needs to be established, then every category in the balance sheet needs to be reviewed and challenged…..

Planning: Establish greater visibility and control over cash via accurate

forecasting and planning. This helps to identify areas for further investigation and instils

a ‘cash culture’.

Efficiency: Assess the ‘true’ cash requirement of the business. Generate liquidity via best practice

working capital management and smoothing of cash flows.

Liquidity:Look for other one-off cash

generation opportunities outsideof stock / debtors / creditors

(for example VAT accruals, saleof surplus assets, extracting

value from property etc)


Planning: Robust forecasting of cash is core to enable fact based decision making and to drive working capital improvements……..

OBJECTIVES

Prepare a robust rolling short term cashflow forecast which:• Identifies timing of surplus cash generation and /

or cash shortfall positions

• Raises the profile of cash management across the business and instils a cash culture

• Identifies key areas for cash generation, working capital initiatives and discretionary expenditure by business unit

• Reviews, monitors and challenges cash performance

• Embeds cash management within each organisation with regular cash calls at its centre to ensure accountability

• Provides foundation for fact based allocation of funds

• Instils visibility and accountability over non-essential areas of spend.

Management Reporting Framework

Medium term planPhased monthly FY07/08 Phased quarterly FY09+

IntegratedProfit & Loss

Balance SheetCash Flow

Re-forecasting frequency (Monthly – high level Quarterly – detailed)

Commentary packs to be prepared:

• YTD/Period actuals vs forecast

• Operational issues• Cost reduction

progress/benefits tracking

• Monitoring of KPIs including capex, working capital

• Monthly dashboard containing leading/ lagging indicators of performance improvement programme

Taking account of the following:

• Unwinding of opening b/s

• Overlay agreed trading projections

• Monthly report and action plan

• Daily/weekly flash reports to track performance and variance analysis (directional view)

Consolidated reporting pack to include variance analysis, action points, allocation of

responsibilities and deadlines

13 weekCash Flow Forecast

(updated weekly/monthly and on a bottom-up basis)

Monthly Management Accounts

Medium term planPhased monthly FY07/08 Phased quarterly FY09+

IntegratedProfit & Loss

Balance SheetCash Flow

Re-forecasting frequency (Monthly – high level Quarterly – detailed)

Commentary packs to be prepared:

• YTD/Period actuals vs forecast

• Operational issues• Cost reduction

progress/benefits tracking

• Monitoring of KPIs including capex, working capital

• Monthly dashboard containing leading/ lagging indicators of performance improvement programme

Taking account of the following:

• Unwinding of opening b/s

• Overlay agreed trading projections

• Monthly report and action plan

• Daily/weekly flash reports to track performance and variance analysis (directional view)

Consolidated reporting pack to include variance analysis, action points, allocation of

responsibilities and deadlines

13 weekCash Flow Forecast

(updated weekly/monthly and on a bottom-up basis)

Monthly Management Accounts

Planning


Efficiency: Assess the ‘true’ cash requirement of the business. Generate liquidity via best practice working capital management and smoothing of cash flows.

Efficiency

Working Capital in use

Inventory Debtors

Creditors

Potential benefit?

Multiple divisions or locations Working capital cycle / Seasonality


Demand Planning Demand Planning

Sales & Operations

Planning

Sales & Operations

Planning

Inventory Planning

Inventory Planning Manufacturing Manufacturing

Typical issues: Inventory / Stock

Fulfilment Fulfilment

Long lead-times result in the need for additional stock holdings to meet variations in customer demand

Long lead-times result in the need for additional stock holdings to meet variations in customer demand

Unstable forecast requirements & unresponsive suppliers lead to increased stock holdings requirements

Unstable forecast requirements & unresponsive suppliers lead to increased stock holdings requirements

External pressure to revise forecasts upward leads to inaccuracies

External pressure to revise forecasts upward leads to inaccuracies

Multiple inventory locations leading to higher inventory levels or ‘double holding’ of some stock lines

Multiple inventory locations leading to higher inventory levels or ‘double holding’ of some stock lines

Demand Planning department adds safety stocks “just in case” or too much weight is given to bulk discounts

Demand Planning department adds safety stocks “just in case” or too much weight is given to bulk discounts

Limited analysis of supply chain performance and capabilities results in increased safety stock holding

Limited analysis of supply chain performance and capabilities results in increased safety stock holding

‘Fill the warehouse’ Blanket production or stocking policies drive increases in items with differing demand and profitability characteristics

‘Fill the warehouse’ Blanket production or stocking policies drive increases in items with differing demand and profitability characteristics

Limited manufacturing changeover flexibility resulting in need for additional stock buffers

Limited manufacturing changeover flexibility resulting in need for additional stock buffers

Disconnect between forecasting process and Sales and Marketing drives need for additional stock holdings

Disconnect between forecasting process and Sales and Marketing drives need for additional stock holdings

Too many lines / SKUs leading to excess inventory levels

Too many lines / SKUs leading to excess inventory levels

Efficiency

“We turn our stock fast and obsolescence is not an issue………”

Range Planning

Range Planning

Understand individual product profitability

Understand individual product profitability

Cost of capital employed for each product

Cost of capital employed for each product

Inventory Holding

Inventory Holding

Old or slow moving stock not addressed or actively managed

Old or slow moving stock not addressed or actively managed


Receive Order or Request

for Quote

Receive Order or Request

for Quote

Credit Authorisation

Credit Authorisation

Order Entry Order Entry

Ship & Raise Invoice

Ship & Raise Invoice

Payment Receipt& Cash

Application

Payment Receipt& Cash

Application

Receivables Management & Collection

Receivables Management & Collection

“Its so simple, its all about chasing payment when due……………”

Pricing is conducted using a non-integrated database. The same customer is offered different terms by different parts of the organisation

Pricing is conducted using a non-integrated database. The same customer is offered different terms by different parts of the organisation

Customer set-up not properly controlled (or driven by sales dept. rather than finance). Credit checks not performed

Customer set-up not properly controlled (or driven by sales dept. rather than finance). Credit checks not performed

Incomplete order information causing errors later in the process

Incomplete order information causing errors later in the process

Credit limits are inappropriately overridden.

Customer payment history not visible leading to excessive credit limits

Credit limits are inappropriately overridden.

Customer payment history not visible leading to excessive credit limits

Customers are given payment discounts even when not paying within terms

Customers are given payment discounts even when not paying within terms

Limited visibility / reporting to identify and focus on problem receivables

Limited visibility / reporting to identify and focus on problem receivables

Unclear split of responsibilities between sales managers and credit control (finance)

Unclear split of responsibilities between sales managers and credit control (finance)

No process owner resulting in a lack of collections focus.

Inefficient dispute resolution process and focus

No process owner resulting in a lack of collections focus.

Inefficient dispute resolution process and focus

Collection representatives wait until payments are 30 days past due date to begin contacting customers

Collection representatives wait until payments are 30 days past due date to begin contacting customers

Manual or redundant processing steps delay process

Manual or redundant processing steps delay process

Shipping and invoicing systems are separate. Invoices are manually re-keyed delaying process

Shipping and invoicing systems are separate. Invoices are manually re-keyed delaying process

Entry errors cause disputes and drive additional cost and re-work in shipping, handling and returns processing

Entry errors cause disputes and drive additional cost and re-work in shipping, handling and returns processing

Order entry process not integrated with inventory or production leading to increased safety stock holdings

Order entry process not integrated with inventory or production leading to increased safety stock holdings

Claims for VAT on purchases made near the end of accounting period delayed until next period.

Not fully leveraging VAT relief opportunities

Claims for VAT on purchases made near the end of accounting period delayed until next period.

Not fully leveraging VAT relief opportunities

Typical issues: Debtors / Accounts Receivable Efficiency


“We have standard supplier terms and pay suppliers in accordance with this. We don’t want to risk supply by stretching payment………”

Manage Contracts &

Suppliers

Procure Goods & Services

Receive Goods & Services

Process Accounts Payable

Disburse Supplier Payment

Off-contract spend leads to unfavourable terms of business

Off-contract spend leads to unfavourable terms of business

Payment policies are not followed and / or payments are made early

Payment policies are not followed and / or payments are made early

No well-defined authorisation process exists to ensure conformance to agreed contracts and terms

No well-defined authorisation process exists to ensure conformance to agreed contracts and terms

Buyers focus on price and supplier proximity at the expense of payment terms (P&L vs Cashflow)

Buyers focus on price and supplier proximity at the expense of payment terms (P&L vs Cashflow)

Decentralised purchasing means that purchasing power is not leveraged to improve terms and conditions

Decentralised purchasing means that purchasing power is not leveraged to improve terms and conditions

Each division or buyer purchase in silo rather than having a strategic view of what will maximise cashflow for the business as a whole

Each division or buyer purchase in silo rather than having a strategic view of what will maximise cashflow for the business as a whole

Receiving processes are not robust and as a consequence goods & services are paid for that may not have been received

Receiving processes are not robust and as a consequence goods & services are paid for that may not have been received

‘End of month’ payment culture is instilled rather than looking at the commercial reality of when each supplier could be paid

‘End of month’ payment culture is instilled rather than looking at the commercial reality of when each supplier could be paid

Opportunities for delayed VAT or duty payments not identified or realised

Opportunities for delayed VAT or duty payments not identified or realised

Payment discounts are not taken when due

Payment discounts are not taken when due

Different terms with the same supplier across the organisation

Different terms with the same supplier across the organisation

Typical issues: Creditors / Accounts Payable

No control over non-essential ‘maverick’ spend

No control over non-essential ‘maverick’ spend

Efficiency


Working Capital vs P&L:• Accounts Receivable (Sales): Ensure credit control and customer take on best practice - not just chasing sales.•Inventory (COS): Minimise SKU’s, range management, understand product profitability and demand forecasting.•Supply chain / Accounts payable (Overheads): Consolidation of supplier base to maximise purchasing and payment efficiency.


Liquidity: Think out of the box to unlock one-off cash wins from many areas of the business………some examples

Liquidity

Tax cashflows:• VAT: Programs to accelerate input tax / decelerate output tax. • Capital allowances: Generating cash from retrospective reviews of capital allowances claims.• Tax efficient financing Reduce the borrowing cost via structuring facilities in a tax efficient manner (such as tax efficient hedging to achieve a low interest rate).

Underutilised assets:• Accelerated M&A: Divestment of non-core areas of the business via an accelerated transaction process to quickly realise cash.• Property and Real Estate: Cashflow maximisation from property portfolios via negotiation of better terms or releasing cash via transactions.• Cash generation: Sale of surplus assets.

Treasury and facilities:• Funding: Ensuring that the business has the correct facilities to match the cashflow profile of the business. •Treasury: Cash pooling and smoothing to maximise headroom.• Financial Risk Management: Minimise the risk of cashflow volatility via the use of suitable financial instruments.

Data Integrity / Management Information:• Financial modelling: A forecast model can provide management with better visibility over cash and highlight non-essential spend.• Data Quality: ‘Garbage in garbage out’ – Data and systems need to provide the information necessary to make management decisions.


Conclusion: Companies need to be proactive in this area“The wisdom of hindsight, so useful to analysts and some shareholders, is sadly denied to practicing businessmen”

• Given current market conditions it is fundamental for any management team and the Companies stakeholders that cashflow is being optimised..

• Companies need to be proactively driving cash benefits not just looking at profitability performance.

• It seems to be on every Board Agenda at the moment but do Finance Directors understand the complexity of it and have the time / resource to pursue all areas?

• Companies need to look ‘within’ before looking to extend external borrowings.


Tax CashSavings.• Ben Powell

• 11 February 2008


Tax Savings – Case Studies

1. VAT deferral

Commercial Vehicle Dealer - Deferral of £500k on sales for 3 months

Engineering firm - Cash injection of £1.2m by estimating increased input VAT recovery

Retailer - imminent VAT liability of £3m deferred over 12 months using “Time to Pay” Agreement negotiated with HMRC

2. VAT Refunds/Savings

Consumer Product manufacturer - Errors worth £800k identified back to 1973 – deadline of 31 March 2009 to submit.


Tax Savings – Case Studies

3. Employment Taxes

UK group with 4,000 employees - Cash flow issues:

“SMART” Pensions – company savings of £500k pa + employee savings £350k

Approved Performance Share Plans - savings of £200k pa

Some redundancies - making tax efficient enhanced redundancy policy

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©2008 Deloitte Touche Tohmatsu. Cash & Working Capital Optimisation. Richard Hawes Deloitte...

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