Raising Your Cash IQ to Optimize Working Capital - FINAL
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Transcript of Raising Your Cash IQ to Optimize Working Capital - FINAL
Raising Your Cash IQ to Optimize
Working Capital
Ernie Humphrey, CTP
CEO, 360 Thought Leadership Consulting
LEARNING OBJECTIVES
Improve your company’s understanding of
the impacts that the “hows and whys” of
cash flows have on your company’s
bottom line
Identify inefficiencies in your company’s
current working capital management
strategy
Develop and deliver a quality
working capital management business
plan to company leaders
Identify the benefits to your company in
improving the visibility of cash balances,
cash inflows and cash outflows
OUR AGENDA
Working Capital Overview
Elevating your Cash IQ: The Key to Working Capital Management
Ernie’s ABCs of Success
Final Thoughts & Resources
Creating a Working Capital Battle Plan & Selling it
Executing Your Working Capital Battle Plan
Identifying Opportunities to Improve Working Capital Management
WORKING CAPITAL (WC): DEFINITION
FOR THE PURPOSES OF THIS COURSE:
Working Capital =
Current Assets – Current Liabilities
Current Assets- cash, accounts
receivable (AR), short-term
investments, inventory
Current Liabilities- accounts payable
(AP), short-term notes payable
WORKING CAPITAL MGMT: INHERENT HURDLES
Common Inherent Barriers to Optimizing Working Capital:
Key working capital components are managed
in silos
There is a lack of visibility into real-time working
capital component values (cash, AR, AP)and
the dynamics of working capital movements
(payments, receipts, etc.)
Information relative to working capital is housed
in disparate systems, often in different locations,
and sometimes in different countries
Company leaders do not view working capital
management as strategic
Company leaders do not understand the hard
dollar cost of ineffective working capital
management
WORKING CAPITAL: COMPONENT TARETING
Identifying the Right Component (s):
Map the relationships within and across all
processes
People
Process
Technology
Create a set of matrices to assist you in
identifying opportunities and in assembling a
battle plan to define the scope of project
IDENTIFYING COMPONENT OPPORTUNITIES
It all starts with visibility. Consider the visibility of
working capital components
Identify areas for which your department
currently has control
Identify areas that your department may
influence, but not control
Identify areas that your department does not
currently influence
Start with Cash as CASH IS KING!
WORKING CAPITAL: COMPONENT TARETING
Cash is King: Elevating your Cash IQ
Understand where cash is coming
and going
Why it is coming and/or going
there
How it is coming and/or getting
there
How long cash takes to arrive
and/or get there
Who controls cash movements &
why
WORKING CAPITAL: COMPONENT TARETING
Cash is King:
Review and map existing internal processes for
all movements of cash
Cash Out
Accounts Payable
Checks, Wires, ACH
Tax & Dividend Payments
Inter-Company Payments
Investments
Short Term
Cash-In
Accounts Receivable
Checks, Wires, Inter-Company Payments
CASH CONTROL: A CASE STUDY
Indianapolis, IN
Treasury Center
United States
Canada
Netherlands
China
Australia
Mexico
Japan
Taiwan
Germany
Treasury Center
Germany Italy
Czech
Republic
South
Africa
CASH CONTROL: DOMESTIC RECEIPTS
Master Account
Chicago
Lockbox Harris
Chicago
Lockbox Chase
Chicago
Lockbox BofAMisc. Checks
Intercompany
Electronic
Funds Receipts
Accounts Receivable
Electronic Funds
ReceiptsCanada Lockbox
CASH CONTROL: DOMESTIC DISBURSEMENTS
Master Account
Corporate
Accounts Payable Account
Corporate
Payroll Account
Subsidiary
Accounts Payable Account
Medical
Account
Dividend
Account
Electronic
Payments
Petty CashPurchase CardsShort Term
Investments
ZBA ZBA ZBA
CASH CONTROL: INTERCOMPANY RECEIPTS
Corporate Parent Co.
Australia
Subsidiary
Japan
Subsidiary
German
Subsidiary #1
Sales Office
Mexico
Maquila
Mexico
German
Subsidiary #2
International
Holding Co.
USD USD
US
D
US
D
US
D
CASH CONTROL: INTERCOMPANY DISBURSEMENTS
Parent Company
Czech. Republic GermanyMexico
Taiwan China
EU
R
NTW
USD
CASH CONTROL: CHINA FUNDING
Parent
Suzhou ICBC
USD Capital
Parent
Suzhou ICBC
USD Receipts
Parent
Suzhou ICBC
RMB Disbursements
Parent
Suzhou ICBC
USD Debt
Subsidiary
Agriculture Bank of China
RMB- VAT payments
Parent
Operating Expenses
USD
USD
USD
CASH CONTROL: INTERNATIONAL OPERATIONS
Indianapolis, IN
Treasury Center
United States
Canada
Netherlands
China
Australia
Mexico
Japan
Taiwan
Germany
Treasury Center
Germany Italy
Czech
Republic
South
Africa
German Parent
Deutsche Bank
EUR/USD Account
German ParentIntercompany Electronic
Funds Receipts
German ParentMiscellaneous Checks
and Bank Deposits
German ParentAccounts Receivable
Electronic Funds Receipts
EU
R
German ParentABN AMRO
EUR Account
German ParentABN AMRO
USD Account
USD
German ParentAccounts Receivable
Check Receipts
EU
R
CASH CONTROL: GERMANY SUBSIDIARY RECEIPTS
German Parent
Deutsche Bank
EUR/USD Account
German Parent
Intercompany
Electronic
Funds Disbursements
German Parent
AP Electronic Funds
Disbursements
German ParentWachovia USD
Disbursements Account
German Parent
AP
Checks
German ParentABN AMRO
EUR Account
German ParentABN AMRO
USD Account
EU
R
USD
CASH CONTROL: GERMANY SUB. DISBURSEMENTS
International Parent
Germany
Czech Republic Parent CompanySouth Africa
Italy
Sub. #1
Italy
Sub. #2
EU
R
EU
R
EU
R
CASH CONTROL: GERMAN SUB INTER CO. RECEIPTS
International Parent
Germany
International
Holding Co.
U.S.
Parent CompanyCzech Republic South Africa
USD
EU
R
U.S.
Holding Co.
USD
EU
RItaly
EU
R
CASH CONTROL: GERMAN SUB INTER CO. DISBURSEMENTS
South Africa
RAND Account
South Africa
USD Receipts
Parent Properties
RAND Account
South Africa
Customers
Operating
ExpensesR
AN
D
Lease PaymentsGerman Sub.
& South Africa
Customers
RA
ND
RA
ND
USD
South Africa
RAND Account
German Sub.
Customers
RA
ND
CASH CONTROL: SOUTH AFRICA
WORKING CAPITAL: COMPONENT TARETING
Process Flow Diagram Example:
Outgoing Wire Transfers*
*Source: www.knowledgeleader.com
Need for a wire
transfer is
identified through
the AP process.
Employee needing
the transfer contacts
Accounting and
notifies them by
(day) of need
for a wire transfer.
Financial Accounting Coordinator (FAC)
sends reports to Company 1 on (day),
showing total disbursements and cash
receipts anticipated to hit the bank
account the following week. This
includes checks previously mailed.
W ire transfers are detailed by day.
Initiator goes into
Money Manager
System and prepares
the wire transfer the
following (day).
Releaser enters
Money Manager
System and
completes wire
transfer later that
day.
Wire transfers
are paid out
of the
Disbursement
account.
Confirmation
printed
by Initiator.
Confirmation given
to Recipient and
Appropriate
Manager.
Confirmation and
Voucher
package provided
to AP for recording.
Wire recorded by
AP personnel
as a manual check.
AP
WORKING CAPITAL: COMPONENT SELECTION
Can you “see” it ?Can you measure it ?Can you monitor it ?Can you benchmark it ?Can you “sell it” ?
COMPONENTS FOR CONSIDERATION: CASH
Can you “see” it ERP, Treasury Work Station, Bank Platform
Can you measure it Information Reporting
Can you monitor it Analytical Tools, Staff
Can you benchmark it Liquidity Ratios (Peer Comparisons)
Can you “sell it” Cash is “King”- the Cost of Cash
VISIBILITY
CASH EFFICIENCY
Cash Conversion Cycle = DSO + DIO − DPO
Where,
DSO= Days Sales Outstanding
= 365/Accounts Receivable turnover (ART)
Where ART= Net Credit Sales/ Average AR
DIO= Days Inventory Outstanding
= 365/inventory turnover ratio (ITR)
Where ITR= Cost of Goods Sold/ Aver. Inventory
DPO= Days Payable Outstanding (PTR)
= 365/payables turnover ratio
Where PTR= Total Purchases/Average AP
PEER BENCHMARKING
Consulting firms
Accounting firms /
Professional advisers
System Providers/ Banks
Professional organizations
DYI- small peer group
5 PEER BENCHMARKING BEST PRACTICES*
Benchmarking needs to be practical
Time commitments will dictate the scope
Select areas to benchmark where people
want to over perform
Avoid benchmarking with competitors
Tie benchmarking to departmental and
company goals
*Courtesy of Chis Hanson, Assistant Treasurer, Brocade Communications
COMPONENTS FOR CONSIDERATION: A/R
Can you “see” it ERP
Can you measure it Information Reporting
Can you monitor it Analytical Tools, Staff
Can you benchmark it DSO, Cash Cycle (Peer Comparisons)
Can you “sell it” Quantify the Cost of Terms
VISIBILITY
ACCOUNTS RECEIVABLE METRICS
Days Sales Outstanding (DSO)- expresses the average number of
days it takes a company to convert its accounts receivables into
cash:
DSO= 365/Accounts Receivable turnover (ART)
Where ART= Net Credit Sales/ Average AR
Best Possible Days Sales Outstanding (BPDSO)- utilizes only a
company’s current (non delinquent) receivables to approximate the
shortest amount of time a company should expect in terms of turning
over receivables. This metric It is compared to DSO and its relative
alignment with a company’s terms of sale.
BPDSO= (Current Receivables / Net Credit Sales) X (# of Days)
True DSO (TDSO)- calculates the actual number of days credit sales are
unpaid by tracking individual invoices to the month of sale.
TDSO= (invoice amount / net credit sales for the month in which the
sale occurred) x number of days from invoice date to
reporting date
ACCOUNTS RECEIVABLE EDUCATION
The Cost of Extending Terms (CET)- the cost to your company of
allowing sales professionals to extend payment terms on open invoices.
CET= (Cost of Capital/365) * # of Days Terms Extended * Invoice Amt.
Where Cost of Capital= a company’s specific cost of capital
An example, a sales rep decides he needs to hit his quota and does so
by offering a customer 45 day terms instead of the standard 30 days so
he can close a deal for $500K. If we assume the cost of capital to the
company is 10% then the CET is $2,054.80. Essentially this decreases the
net margin contribution of the sale by $2,054.80 when considering the
cost of capital for this company.
Sales reps should have specific guidance on what they can and can’t do
relative to changing payment terms. In general, approval should be required by
the VP, Sales, and it is also good practice to ensure that this person truly
understands the cost of giving certain terms. Incentives should be in place to get
customers to pay as soon as possible, and penalties, even as far as termination,
for offering sales terms outside of policy parameters should be in place.
COMPONENTS FOR CONSIDERATION: A/P
Can you “see” it ERP
Can you measure it Information Reporting
Can you monitor it Analytical Tools, Staff
Can you benchmark it Days’ Payable, Cash Conversion Cycle
Cash Turnover Ratio
Can you “sell it” Quantify the Cost of Not Taking Discounts
VISIBILITY
ACCOUNTS PAYABLE METRICS
Days Payables Outstanding (DPO)- expresses the average number of
days it takes a company to pay its suppliers
DPO= 365/Accounts Payable Turnover (APT)
Where APT= Net Credit Sales/ Average AR
Percentage of Early Discounts Captured (PEDC)- the efficiency of
companies in terms of taking advantage of discounted terms offered
by company suppliers.
PEDC= (Total Discounts Taken in $ / Total Amount of AP Balances Eligible for Discount)
Goods Received Not Invoiced- captures the dollar amount of goods a
company has received, but has yet to be invoiced for by suppliers.
Some discount terms may be based on the receipt of payment
reactive to when goods are received. Therefore, companies may have
an incentive to get goods invoiced, so they can get into the accounts
payable process for payment. However, this may not be a concern for
cash strapped companies who are in no hurry to “start” the clock in
terms of payments.
CASH IS KING
Cash VisibilityDetermine the Cost of Cash Movements
Understand F/X exposures
Identify Natural Hedging Opportunities
Raise Your Order to Cash IQ
Raise Your PO to Payment IQ
Understand the hows and whys of AP, AR
and Inventory account dynamics
Cash ControlThe Right People have the Ability to Move
Funds and Impact the Effectiveness of
Working Capital Management
WORKING CAPITAL BATTLE PLAN
34
Create a business plan and present it to
those who will be asked to “invest” in
your project
Obtain “buy in” and access to internal
expertise, up and down the org chart
Detail components of the business plan
A world class business plan clearly
conveys your personal dedication and
vision to all investors
CONSTRUCTING YOUR BATTLE PLAN
Define the scope of the project
Develop a “project forecast”
Design the project so it has flexibility and
engage colleagues who will be
affected by this project or a future
project
Leverage the expertise of those outside
your department and engage bank
and technology solution provider
partners
Provide all invested parties tangible
benchmarks to monitor how the project
directly benefits their departments in addition
to your organization
CONSTRUCTING YOUR BATTLE PLAN
36
Review all relevant internal process diagrams
and matrices
Identify areas of opportunity for internal and
external collaboration
Focus on synergies and look to devise a
working capital enterprise versus a working
capital component solution
Identify internal resources and potential
technology enhancements that offer benefits
beyond a single working capital component
CONSTRUCTING YOUR BATTLE PLAN
Involve all internal parties affected by the
scope of your project
Identify internal acceptance hurdles up front
and “jump over them” in the executive
summary
Create a vision and lay out exactly what it will
take to realize your vision
Expected results should include measurable
benefits for all invested parties
CREATING “BUY IN” FOR YOUR PLAN
The groundwork is already laid in the
construction of your business plan
A world class business plan is VERY
PERSUASIVE!
Engage outside resources and professional
peers as necessary to learn how others have
successfully implemented a working capital
enterprise versus a single component solution
Talk about it ---- generate a buzz
PLAN EXECUTION: MAKING IT HAPPEN
Clearly define roles, responsibilities, AND
accountability with internal AND external
stake holders
Define clearly how all pieces of the project
“fit” and the role that each vested party plays
in successful execution
Create and monitor benchmarks of success,
and communicate them on an ongoing basis
Don’t take your “eye off the ball”
ERNIE’S ABCs OF SUCCESS
PeopleYour most valuable assets
Internal & Consultants
ProcessIn order to effectively manage working capital you need
well-defined and efficient processes
CommunicationYou need to be able to earn “buy-in” for any investments
relevant to working capital optimization by communicating value effectively with passion.
CollaborationThere is no “I” in Success
Alignment- working capital can’t be effectively
managed in silos
TechnologyKey for efficiency & fuels success, but NOT magic
RESOURCES
Proformative- Online resources, webinars, and
Proformative Academy Courses
The Accounts Payable Network – Online network of
over 50,000 AP professionals and resources
LinkedIn – Connecting with Peers and Subject Matter
Experts
LinkedIn Groups
Working Capital Management Group
Treasury Management Network
Chief Financial Officer (CFO) Network
Accounts Payable Professionals
Accounts Receivables Professionals
Treasury Technology Network
RESOURCES
Slideshare.net- Search and you shall find a valuable
PowerPoint Presentation
YouTube- Search and you shall almost always find
exactly how to do Something
Professional Associations
Association for Financial Professionals
The Institute of Finance Operations
International Accounts Payable Professionals (IAPP)
International Accounts Receivable Professionals (IARP)
National Association of Purchasing and Payables
(NAPP)
The Association for Work Process Improvement (TAWPI)
The National Association of Credit Managers
CLOSING THOUGHTS
The key to effective working capital
management is understanding cash, and
cash movements inside and out.
Identify opportunities by looking across the
working capital spectrum--- not in isolation
at one component of working capital
If you can’t see it, measure it, and monitor it
then you CAN’T effectively manage it.
Visibility is a must!
Investing in more effectively managing cash
can deliver dividends on many fronts
World class cash management can fuel
competitive advantage
Ernie Humphrey,
CEO, 360 Thought Leadership Consulting
E-Mail: [email protected]
LinkedIn: http://www.linkedin.com/in/erniehumphrey
THANK YOU!
http://www.360thoughtleadership.com