Be Ers Webinar Cashatrisk Workingcapital 231009

Managing working capital Cash@Risk
Webinar October 23th, 2009
Contents
Introduction Working capital reduction

Recovery Optimization Transformation
Accounts Payable Accounts Receivable Inventory Summary Contact details
Webinar Cash@ Risk 23/10/2009
Managing working capital: for better and for worse

Cash is back as King Focus shift from the P&L to Balance Sheet
Shareholder Value
P&L Balance sheet
When times are rough, companies must do everything they can to free up cash
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 a large restructuring program Desk research shows that there is a significant potential of untapped capital lying idle up to 500 billion in European companies alone according to some estimates
Revenue Growth Operating Margin

Volume Price Realization Selling, General & Administrative Costs Cost of Goods Sold Income Taxes
Asset Efficiency
Expectations
Company Strengths External Factors
In an economy coming out of recession, financing the upturn also requires tight cash control
With inventories at bare minimum, companies are faced with the challenge of increasing output whilst keeping working capital under control
Accounts Payable
Property, Plant & Equipment (PP&E)
Inventory
Receivables & Payables
Working Capital
Inventory
Accounts Receivable
Definition of Working Capital: The excess of current assets over liabilities, comprising of accounts receivable, inventory minus accounts payable, represents the liquidity a business requires for day-to-day operations.
3
Barriers for optimising Working Capital
Fear of jeopardising relationships and sales by too aggressively chasing customers for payment
Customer & Competition
Fear of a fall in customer service levels unless holding high levels of inventory Customers are given payment discounts even when not paying within terms Competition is giving longer payment terms Concern over the likely response of suppliers and risk to supply following a unilateral decision to extend payment terms Impact on the organisations reputation from negative publicity if extending payment times, particularly for smaller suppliers Individuals or organisational performance metrics do not reflect the importance of cash Unclear responsibility for working capital. It spans a number of functional areas no one individual can be given responsibility Are there benefits available? If we restrict liquidity we impact our ability to operate the business day-today Are the benefits sustainable? We manage working capital levels down at the end of a financial year but they soon rise again afterwards
Suppliers
Working Capital Improvement Opportunities
Control & Responsiblity
Benefits
Managing working capital requires tight control over the cash conversion cycle through the effectiveness and efficiency of three integrated business processes
Receive Invoice Goods Received Days in raw materials inventory Days of WIP Days in finished goods inventory Days in transit
Cash Out ()
Cash Conversion Cycle

Place Invoice
Cash In ()
Purchase-to-Pay
Manage contracts
Raise requisition
Forecast-to-Fulfill
Source Maintain SC strategy Sell
Order-to-Cash
Manage contracts Receive order Handle returns Check credit
Apply terms & conditions
Manage product range
Handle returns Settle complaints Settle rebates Pay invoice

Check terms & conditions
Release order Receive goods Receive invoice Inspect goods Receive & store Ship Forecast demand Plan supply S&OP Plan production Schedule production Store Pick & release Produce Plan inventory
Settle complaints Settle rebates Collect payment Ship order
Place invoice
Pick & pack
Polling question 1
Does your company have a working capital improvement initiative

1. 2. 3. 4. No, we dont have one and dont need one No, we dont have one but I think we could use one Yes, we have a working capital improvement initiative NA / Dont know
Contents Introduction Working capital reduction

Cash@Risk: Working capital reduction through data analysis
Our approach is about finding cash in a short time frame without putting significant efforts in process and system redesign. However, data analyses to recover or optimize cash in the short term may lead to insights to transform related processes in the longer term. Recovery: data analyses on inaccurate, incomplete or double transactions as well as non compliance with contractual terms. Optimization: strengthen customer payment terms & dunning process, considering cash discounts & analyze actual payment versus payment terms, analyze days of supply versus revenue Transformation: process, organization and system redesign
Impact
Transformation
Structural changes
Optimization
Recovery
Quick wins Time & efforts
Cash@Risk toolbox and examples of realised savings
Component Accounts Payable Accounts Receivable Inventory
Realised savings Up to 39% Up to 16% Up to 28%
Contents

Focus on capturing A/P opportunities & tracking benefits rather than implementing sophisticated tools
Typical issues in Purchasing and P-t-P process
Decentralised purchasing means that purchasing power is not leveraged to improve terms and conditions
Buyers are processing low value, routine purchases instead of strategic work to enable negotiation of improved terms and conditions
No well-defined authorisation process exists to ensure conformance to agreed contracts and terms
Payment policies are not followed and payments are made early
Opportunities for delayed VAT or duty payments not identified or realised
Manage contracts & suppliers
Procure goods & services
Receive goods & services
Process accounts payable
Disburse supplier payment
Different terms with the same supplier across the organisation
Off-contract spend leads to unfavourable terms of business
Buyers focus on price and supplier proximity at the expense of payment terms
Receiving processes are not robust and as a consequence goods & services are paid for that may not have been received
Invoices vs. POs variance exceed policy tolerances but are still paid
Payment discounts are not taken when due
Recovery Optimization
Squeeze your suppliers but preserve supply chain integrity

Transformation
10
Accounts payable: Recovery

Opportunities to recover cash in a short time frame are identified by analyzing:
Double payments to suppliers Outstanding credit notes Duplicate payments across entities Incomplete deliveries Returned goods not credited Discounts / rebates not credited Payments in the wrong currency Unrecovered VAT Engagement examples
We used our Cash @ Risk tool to perform accounts payable testing at a company in the travel and leisure industry. We identified double payments, unprocessed discounts, payments in the wrong currency and unrecovered VAT. Further root cause analysis showed that manual interventions performed when the reservation system failed eventually lead to double payments when the reservation system rebooted. Our assistance with recovery and supplier negotiations resulted in a recovery of 2,4% of the total purchase amount. We performed a supplier review for a company in the chemical industry. Based on an analysis of the suppliers sales data, it was noted that the supplier had been selling to other customers at a price lower than the price contractually agreed with our client under a Most Favoured Nations (MFN) clause. Reasons given for these lower prices were exchange rate conversions, second-quality products and import taxes. Our assistance helped the company recover $13,5M of overpayments.
11
Accounts payable: Optimization

Opportunities to increase accounts payable in the medium term are identified by analyzing the A/P per supplier compared to its agreed payment terms.
Actions can be taken on: Payment quality & frequency Payment term negotiation Standards definition & enforcement Evaluation of cash discounts at early payment
Measure actual and best possible

33
Set realistic target

11.500 11.244 700
31
31
11.300
29
28 28 28 28 28
30
11.100
28
W/C ('000 EUR)
27
27
10.900
26
26
25
25
Days 24
26
10.700 250 10.500 100 10.300 50 200
23
23
23
24
22
21
21
21
22
22
22
22
20
19
20
10.100 9.944 9.900
17
9.700
15 Jan Feb Mar Apr Actual DPO May Jun Target DPO Jul Aug Sep Oct Nov Dec
9.500 Actual Average W/C Action 1 Potential Action 2 Potential Action 3 Potential Action 4 Potential Action 5 Potential Optimized Average W/C
Average Actual DPO
Average Target DPO
12
Accounts payable: Optimization (continued)
Take Action !
100 90 80
W/C Improvement ('000 EUR)
100 90 90 80 70 60 60 60 60 52 43 60 50 60 60 60 60 50 40 30 29 22 12
14 9 9 DSO (Days)
70 60 50 40 30 20 15 10
157 48 28
28
30 20 10
9 4
Supplier G0228 16
0
Supplier D0263 Supplier C8003 Supplier O0226 Supplier C0344 Supplier S0077 Supplier E0214 Supplier T0279 Supplier S0264 Supplier B0272
Potential WC
Actual DPO
Target DPO
13
Contents

14
Focus on capturing A/R opportunities & tracking benefits rather than implementing sophisticated tools
Typical issues in customer service and O-t-C process
Pricing is conducted using a non-integrated database. The same customer is offered different terms by different parts of the organisation Claims for VAT on purchases made near the end of accounting period delayed until next period Order entry process not integrated with inventory or production leading to increased safety stock holdings Customers are given payment discounts even when not paying within terms No process owner resulting in a lack of collections focus
Credit limits are inappropriately overridden
Manual or redundant processing steps delay process
Numerous shipment / product disputes resulting in suspense receivables
Receive order or request for quote
Credit authorisation
Order entry
Ship & raise invoice
Payment receipt & cash application
Receivables management & collection
Incomplete order information causing errors later in the process
Customer payment history not visible leading to excessive credit limits
Entry errors cause disputes and drive additional cost and re-work in shipping, handling and returns processing
Shipping and invoicing systems are separate. Invoices are manually re-keyed in billing spreadsheet for distribution to customer delaying process
Collection representatives currently wait until payments are 30 days past due date to begin contacting customers
Unclear spilt of responsibiliti es between sales units and shared service operations

15
Limited visibility / reporting to identify and focus on problem receivables. Not fully leveraging VAT relief opportunities
Push your customers fairly and intelligently
Accounts receivable: Recovery

Opportunities to recover revenue in a short time frame are identified by analyzing:
Completeness of invoicing Accuracy of invoicing Price changes not invoiced Unauthorized discounts Revenue leakage Unbalanced customer terms
Engagement examples
The CFO of a manufacturing company informed us that he was looking for a quick way to detect unrevealed cash. We used our Cash @ Risk tool to scan the receivables. The tool revealed that 0,95% of the production orders had not been invoiced and 0,25% of the invoices showed negative pricing differences with the master price table. Further investigation showed the presence of duplicate volume rebates due to system errors. Our assistance resulted in a net cash gain of 0,55% of the revenues.
16
Accounts receivable: Optimization

Opportunities to reduce accounts receivable in the medium term are identified by analyzing the A/R per customer compared to its agreed payment terms.
Actions can be taken on: Billing quality & frequency Dunning process Dispute Management Payment term negotiation Standards definition & enforcement Payment term rationalization Measure actual and best possible Set realistic target
18,000
11.500
16,522
16,000
11.300
11.244
700
14,093
14,000
13,500 12,713
11.100
13,894 13,744
11,966
11,875
12,118
12,000
'000 EURO
11,842
10,871
10.900
11,435
10,846
11,115
11,162
11,297
9,947
10,000
9,750
W/C ('000 EUR)
10,461
10.700 250 10.500

Focus Top Dunning Potential Customers
7,744
7,902
8,000
8,656
8,887
100
Faster Dunning Other Customers
10.300
6,191
5,673
6,151
6,000
50
Align Invoice Terms Renegotiate Terms Fast Payers
200
10.100 9.900
4,000
9.944
Renegotiate Terms Small Customers
2,000
9.700
0 Jan Feb Mar Apr Actual W/C May Jun Jul Aug Sep Oct Nov Dec
9.500 Actual Average W/C Action 1 Potential Action 2 Potential Action 3 Potential Action 4 Potential Action 5 Potential Optimized Average W/C
Best Possible W/C
Average Actual W/C
Average Best Possible W/C
17
Accounts receivable: Optimization (continued)
DSO (Days)
18
W/C Improvement (GBP)
10.000
15.000
20.000
25.000
30.000
5.000
0 44 51
SLBM Systems 25.764
71
94
TB Davies (Cardiff) 23.948
74
84
Zap
21.694
46
55
SIG Trading
19.184
47 43
Travis PerkinsKeyline 19.052
64
82
Door Panels
18.644
46
59
Potential WC
Bailey Caravans 17.740
47
58
Take Action !
Actual DSO
Marine Harvest Ireland Tarmac Topfloor
13.688
53
68
11.852
46
55
Target DSO
Jackson Bldg Centres
11.700
50
64
Cordek
11.183
36
47
Daewoo Electronics UK
10.332
48
61
Walcon Marine
8.861
64
85
Norbrook Labs
8.587
46 42
Buildbase Limited
8.009
10
20
30
40
50
60
70
80
90
100
Accounts receivable: Optimization - case

Per 2009 the accounts receivable at Company X amounted to 7,5M and had granted an annualized cash discounts of 1,8M. Our review has identified several areas to improve both working capital and the financial cost related to cash discounts. The current baseline is however not substantially deviating from the simulation taking into account the targeted payment term.
Impact Baseline Non-compliance to contractual payment terms: cash discounts taken > 3 days too late Renegotiation of 6 payment terms with a significant cost > the cost of Company X targeted payment term Result Accounts receivable 7.504.651 Cash discount 1.790.467 - 250.135 - 70.939
- 328.701
7.175.950
1.469.393
We would recommend to assess further targeted action to improve the working capital and the P&L: Unrightfully deducted cash discounts (payment date 3 days beyond contractual date) should not be accepted, or should be deducted from the year end discount ( 250.135); The review of 6 specific payment terms could further improve the cash position with 328.701, and could reduce the cash discounts with 70.939. In addition the company should consider rationalizing its current 54 payment terms, and consider increasing the dunning frequency.
19
Contents

20
Focus on capturing inventory opportunities & tracking benefits rather than implementing sophisticated tools
Typical issues in Supply Chain and F-t-F process
Disconnect between forecasting process and Sales and Marketing drives need for additional stock holdings
External pressure to revise forecasts upward leads to inaccuracies
Unstable forecasted requirements & unresponsive suppliers lead to increased stock holdings requirements
Long lead-times result in the need for additional stock holdings to meet variations in customer demand
Multiple inventory locations leading to higher inventory levels, including hidden or off balance sheet inventory
Demand planning
Sales & operations planning
Inventory planning
Manufacturing
Fulfilment
Inventory level inaccuracy results in additional safety stock holding
Demand Planning department adds in gut feel safety stocks just in case
Limited analysis of supply chain performance and capabilities results in increased safety stock holding
Blanket stocking policies drive increases in items with differing demand and profitability characteristics
Stock silos reduces availability and results in double holding of inventory
Limited manufacturing changeover flexibility resulting in need for additional stock buffers
Decrease your inventory structurally to still guarantee service levels
21
Inventory: Recovery
Before any action can be taken to optimize inventory, the accuracy of the inventory levels should be properly controlled. Typical issues are:
Reported scrap BOM accuracy materials movement accuracy Reported obsolete stock Other Engagement examples
Deloitte was requested to optimize the inventory levels of a client. As a first step, the inventory accuracy was investigated based on defined KPIs. Only after improvement of these KPIs, the actual optimization was started.
22
Inventory: Optimization
Opportunities to reduce inventory in a short time frame are identified by the following: Analyzing the weeks on hand versus the revenue generated per item Assessing against industry best practices and averages Providing insight in excess inventory against expectations
Inventory (excluding D-items)
29% 23%
49%
Number of items (excluding D-items)
16% 52%
Resulting in short term, quick win actions per SKU like: Production and or replenishment stop Increasing sales efforts and or price reductions Obsolescence review
23
32%
Inventory: Optimization (continued)

Sample inventory optimization deliverable
20.000.000
Materials not in scope
Obsolete stock
Articles on reservation
Slow moving articles
Fast moving articles
500.000 3.900.000 1.000.000 3.400.000

10.000.000 Potential Amount to reduce: 8.800.000
3.000.000 750.000 1.000.000

Amount to keep: 9.400.000
4.400.000
Some conclusion from this stock analysis were: The stock in the central warehouse could be reduced with 8,8 million euro. The overstock was mainly due to historical orders An accurate stock policy should be developed for slow movers. The reorder points and order quantity were relatively well defined, but real inventory was higher than the calculated inventory level according to the defined reorder points.
24
Polling question 2
Where do you believe the greatest improvements remain in working capital reduction?
1. 2. 3. 4. Accounts Payable Accounts Receivable Inventory NA / Dont know
25
Contents

26
Working Capital opportunities are tackled by a variety of improvements on the three pillars leading to optimised asset efficiency
Receive Invoice Goods Received Days in raw materials inventory Days of WIP Days in finished goods inventory Days in transit
Cash Out ()
Reduce Gap
Place Invoice
Cash In ()
Days Payables Outstanding (DPO)

Recovery Optimise cash discounts against interest gains and ensure discounts /rebates etc are fully exploited Review payments database for possible duplicate payments, invoice errors, VAT under-claimed and liabilities etc. Review Invoices vs. POs variance and protest invoice when tolerance is exceeded Review procedures for timing of tax & duty payments and understand opportunities to defer payment Review the A/P per supplier with its agreed payment terms
Days Inventory Outstanding (DIO)

Analyse supply chain performance and capabilities to reduce safety stock holding. Review BOMs on their accuracy
Days Sales Outstanding (DSO)

Optimise timing for recovery of VAT Track and manage adherence to current terms, including early payment discounts Analyse shipment/product disputes
Optimization
Review safety stock levels and re-order points across different product and customer segments Review policies for slow moving inventory. Set up disposal programmes for obsolete stock
Focus on order management process to ensure no barriers to timely payment contact customers directly when payments are due Eliminate manual or redundant processing steps
Transformation
Redefine purchasing power to improve negotiated terms and conditions Redefine authorizations within the organisation to ensure conformance to terms and conditions negotiated
Review production strategy and planning policies Revise planning processes and responsibilities to improve demand visibility and forecast accuracy Reduce the fragmentation of holding inventory
Align and optimise payment terms and conditions across territories and customers Integrate order entry processes with inventory or production leading to decrease safety stock holdings Align shipping and invoicing systems
27
Polling question 3
Was this webinar useful for you?

1. 2. 3. Yes No NA / Dont know
28
Contents

29
Contact details
Contact
Email
Direct phone
Mobile
Tom Van Cauwenberge
tvancauwenberge@deloitte.com
+32 2 800 22 79
+32 496 57 49 30
Wim Den Haese
wdenhaese@deloitte.com
+32 2 800 24 03
+32 476 49 66 24
Bjorn Borghs
bborghs@deloitte.com
+32 2 800 20 15
+32 475 75 42 86
Or your local Deloitte office
30

Be Ers Webinar Cashatrisk Workingcapital 231009

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Managing working capital Cash@Risk

Webinar October 23th, 2009

Introduction Working capital reduction

Accounts Payable Accounts Receivable Inventory Summary Contact details

Webinar Cash@ Risk 23/10/2009

Managing working capital: for better and for worse

Revenue Growth Operating Margin

Property, Plant & Equipment (PP&E)

Receivables & Payables

Barriers for optimising Working Capital

Customer & Competition

Working Capital Improvement Opportunities

Control & Responsiblity

Webinar Cash@ Risk 23/10/2009

Cash Conversion Cycle

Manage product range

Handle returns Settle complaints Settle rebates Pay invoice

Settle complaints Settle rebates Collect payment Ship order

Pick & pack

Webinar Cash@ Risk 23/10/2009

Does your company have a working capital improvement initiative

Webinar Cash@ Risk 23/10/2009

Contents Introduction Working capital reduction

Accounts Payable Accounts Receivable Inventory Summary Contact details

Webinar Cash@ Risk 23/10/2009

Cash@Risk: Working capital reduction through data analysis

Quick wins Time & efforts

Cash@Risk toolbox and examples of realised savings

Component Accounts Payable Accounts Receivable Inventory

Realised savings Up to 39% Up to 16% Up to 28%

Webinar Cash@ Risk 23/10/2009

Introduction Working capital reduction

Accounts Payable Accounts Receivable Inventory Summary Contact details

Webinar Cash@ Risk 23/10/2009

Opportunities for delayed VAT or duty payments not identified or realised

Manage contracts & suppliers

Procure goods & services

Receive goods & services

Process accounts payable

Disburse supplier payment

Different terms with the same supplier across the organisation

Off-contract spend leads to unfavourable terms of business

Payment discounts are not taken when due

Squeeze your suppliers but preserve supply chain integrity

Webinar Cash@ Risk 23/10/2009

Accounts payable: Recovery

Webinar Cash@ Risk 23/10/2009

Accounts payable: Optimization

Measure actual and best possible

Set realistic target

10.700 250 10.500 100 10.300 50 200

10.100 9.944 9.900

Average Actual DPO

Average Target DPO

Webinar Cash@ Risk 23/10/2009

Accounts payable: Optimization (continued)

Webinar Cash@ Risk 23/10/2009

Introduction Working capital reduction

Accounts Payable Accounts Receivable Inventory Summary Contact details

Webinar Cash@ Risk 23/10/2009

Credit limits are inappropriately overridden

Manual or redundant processing steps delay process

Numerous shipment / product disputes resulting in suspense receivables