The Liquidity Crisis – Extending Treasury’s Reach

September 13, 2009

“Never let a good crisis go to waste.”

The liquidity crisis has put cash and liquidity management at the top of senior management’s agenda and thereby presented the opportunity to increase the presence of Treasury within our organizations. We can now effect permanent changes in the way we do business by encouraging our operating and financial colleagues to think about the liquidity implications of the decisions they make.

More businesses fail due to cash flow issues than to lack of profits.

We all know that cash is king; what’s changed is the amount of attention cash is getting within most organizations. So, no time has been better for pursuing Treasury’s agenda within one’s organization.

That which is measured (and reported up) is managed.

7

Most Companies Need To Improve Cash Forecasting

• Research conducted with the National Association of Corporate Treasurers on 85 U.S. and European companies with sales of $14 bn or more found that less than 25% can forecast operating cash flow 2-3 months out within 5% accuracy

• 80% of those companies do not set forecasting accuracy targets

8

Most Companies Need To Improve Cash Forecasting (Cont’d.)

• A mere 15% provide an incentive to improve forecasting accuracy

• With many once stable macroeconomic factors now in flux, companies must increase the scope of variables they consider as well as think about how they relate to not only our organizations, but also to our customers and vendors.

9

Make Periodic Reporting SOP

• Capitalize on CEO and CFO interest in company’s daily liquidity by introducing daily liquidity reporting and monthly forecast variance reporting

• Focus business units on improving forecasting accuracy

• Extend forecasting horizon if less than 13 months out

10

Improve Cash Forecasts

• Understand how the business units construct their forecasts (e.g., critical inputs, underlying assumptions)

• Stress test key assumptions; simulate likely outcomes of potential negative events

11

Improve Cash Forecasts (Cont’d.)

• Engage cross-functional teams with operational involvement as closer relationships with customers and suppliers tend to produce better cash forecasts

• Companies at the top quartile by revenue tend to do a better job of cash forecasting due to their common style of cross-functional teams with significant operational involvement

12

Collaborate With Business Units

• Engage financial colleagues in forecast variance analysis and reporting– Help business units identify and focus on key elements

that drive cash forecast– Build buy-in to developing “report card” to track and,

ultimately, share with both finance and operating management

And, remember . . .

. . . Money Compensates, but Recognition Motivates

Most people like to be recognized for their achievements and will want to be on your short

list of those who are doing a good job.

14

Separate Operating & Excess Cash

(1) Operating Cash: minimum amount needed at all times

(2) Seasonal Cash: additional amount needed during seasonal cycle

(3) Excess Cash: amount available to reinvest or repatriate

15

Engage in Dialogue on Excess Cash

• Explore vehicles to concentrate cash at the regional level to maximize investment return

• Centralize investment decision-making for longer-term maturities

16

Unlock Working Capital From Within Your Business

• CFO.com reported there is €550 bn of trapped liquidity in the top 1,000 European companies and over $750 bn in the top 1,000 U.S. companies

• Over the past 18 months, organically funded companies generated 15-18% in incremental returns and stock price performance was 27% higher than peers that rely more on external borrowing

17

Optimize Dating Programs

• Exclude national accounts• Limit program to seasonal products• Implement dating cutoff• Increase minimum order size• Offer early pay discount• Require new customer partial payment prior to

shipment (e.g., 25%)• Conduct counterparty risk analysis and establish

steps when curstomers’ credit profile falls outside of acceptable ranges

18

Optimize Dating Programs (Cont’d.)

• Delay shipping• Assess finance charges on orders not

paid by due date back to original ship date

• Don’t offer to past due customers• Increase frequency of past due account

reviews; automate calling past dues and delinquency letters

• Scrutinize charge-backs

19

Strengthen Collection Efforts

• Utilize sales personnel to make calls– Have relationship with customer

– Engaged in sales discussions for next season

– Can be very persuasive

• Require payment prior to accepting new orders

• Utilize automation to support process

20

Maximize Cash Inflow

% of Receivables Collected

0%

20%

40%

60%

80%

100%

Dec Jan Feb Mar Apr May June July Aug

12/1 Dating

12/26 Dating

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Result Is Reduced Cash Draw

-45-40-35

-30-25-20-15-10

-505

$ in

Mill

ions

09/09

09/08

09/0709/06

04/0904/08

04/0704/06

22

Enhance Collection Efforts Through Automation

• Ensures timely updating of customer accounts

• Increases transparency over order, invoice and collection cycle to minimize disputes and allow timely resolution

• Speeds receipt and application of cash• Weigh benefits of multiple banking

relationships against the need to support different systems and data formats

23

Ensure A/P Practices Still Valid

• Revisit discount terms and compare effective annual interest rates to current bank yield

• Utilize automation to facilitate taking advantage of favorable payment terms

1/10 net 30 = 18.2%1/10 net 45 = 10.4%1/10 net 60 = 7.3%2/10 net 30 = 36.7%2/10 net 60 = 14.7%2/20 net 90 = 10.5%3/10 net 30 = 55.7%3/10 net 60 = 22.3%3/20 net 90 = 15.9%

People do what you pay them to do…

…not what you tell them to do.

25

0

20

40

60

80

100

120

$ in

Mill

ionsBut, we told them to

manage inventory levels…

49% over budget

Annual bonus measured back orders

and out-of-stocksAnnual bonus measured inventories

Inventory Levels

26

Bonus Plans Must Hold Mgmt Accountable for Working Capital

• Relate DPO to DSO with net working capital standard, e.g., DPO-DSO = 10 days; neutralizes geographic differences

• Keep offsetting activities in check, e.g., inventory levels vs. back orders and out-of-stocks

• Implement working capital chargeback to bonus pool at weighted average cost of capital

That which can be RFP’d…

…should be RFP’d, even if you’re satisfied with your current service provider.

28

Don’t Overlook Opportunities to Reduce Credit Card Related Fees

• Many view credit card processing as a cost of doing business

• Standard industry rates obscure opportunities to cut costs

• Acquired companies may resist transition to different processor and not leverage fully consolidated volume

• The search for a global credit card processor is often led by IT whose primary concern is data interface

29

Treasury Unlocks the Key to Savings

• Terms & conditions of processor contract– Processor fees – Remittance frequency

• Impact credit card issuer fees by exploring more cost effective ways to process transactions, e.g. PIN debit transactions cost less to process and enhance the security of your customer’s personal information

30

Operating Personnel May Not Look Below The Line

So, you’re not going to charge

me any bank fees if I leave all my excess cash in your

bank???

31

Operating Personnel Think Even Less About Taxes Than Interest

• Failure to comply with new contract manufacturing regulations (effective with taxable years of CFCs beginning after 6/30/09) could result in additional SubPart F income

• Absence of P&L impact, if have full inclusion of foreign source income under APB23, could further deflect attention

33

Operating Efficiencies Can Be at Odds With Tax Planning Initiatives

• Collaborate with operating personnel on production planning to ensure no adverse tax implications

• Protect tax-efficient structures such as principal and commissionaires