Cash & Working Capital Optimisation
.
Unlocking cash from within
Companies’ balance sheets:
What should directors be
doing?
Richard Hawes
Deloitte Regional Head of
Reorganisation Services
©2008 Deloitte Touche Tohmatsu.
Cash and Working Capital Optimisation
Why 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:
Enterprise Cost Reduction
(ECR) Mapped to the
Enterprise
Value of
Map
Optimising working capital (and therefore cashflow) is one of the
core drivers
Is there an alternative to borrowing more?
shareholder value……
SHAREHOLDER VALUE
Revenue Growth
Volume
Price
Realization
Operating Margin
Selling,
General &
Admin (SG&A)
Cost of
Goods Sold
(COGS)
Income Taxes
Asset Efficiency
Property, Plant
& Equipment
(PP&E)
Inventory
Receivables
& Payables
Expectations
Company
Strengths
External
Factors
………….its about making the best use of assets and
ultimately about saving money.
©2008 Deloitte Touche Tohmatsu.
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……
Inventory
Working Capital in use
Debtors
Creditors
Potential benefit?
“European
companies have
over €500 billion
locked up in excess
working capital”
• 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
Deloitte analysis
©2008 Deloitte Touche Tohmatsu.
Enterprise Cost Reduction
(ECR) Mapped to the
Enterprise Value Map
How to spot when cashflow is not being managed tightly
Ask 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
©2008 Deloitte Touche Tohmatsu.
Enterprise Cost Reduction
(ECR) Mapped to the
Enterprise Value Map
What should companies be aiming to do?
They should be looking to move away from this …
Daily bank balance before C&WCO
15
10
£'m
5
0
(5)
1
3
5
7
9
11
13
15
17
19
21
23
25
27
29
31
Day
(10)
(15)
(20)
£10-£15m can
be released
without
restricting
normal
operations
Bank balance
Facility Limit
©2008 Deloitte Touche Tohmatsu.
Enterprise Cost Reduction
(ECR) Mapped to the
Enterprise Value Map
What should companies be aiming to do?
To this……….
Daily bank balance after C&WCO
10
£'m
5
0
1
3
5
7
(5)
More headroom
9
11
13
15
17
19
Day
Lower financing costs
21
23
25
27
29
31
More availability for other uses
(10)
(15)
Bank balance
Facility Limit
So why is this so difficult?!!!
©2008 Deloitte Touche Tohmatsu.
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:
Liquidity:
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’.
Look for other one-off cash
generation opportunities outside
of stock / debtors / creditors
(for example VAT accruals, sale
of surplus assets, extracting
value from property etc)
Efficiency: Assess the ‘true’
cash requirement of the business.
Generate liquidity via best practice
working capital management
and smoothing of cash flows.
©2008 Deloitte Touche Tohmatsu.
Planning
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
Management Reporting Framework
Medium term plan
Phased monthly FY07/08
Phased quarterly FY09+
Integrated
Profit & Loss
Balance Sheet
Cash Flow
Re-forecasting frequency
(Monthly – high level
Quarterly – detailed)
• 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 nonessential areas of spend.
13 week
Cash Flow Forecast
(updated weekly/monthly
and on a bottom-up basis)
Monthly Management
Accounts
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
©2008 Deloitte Touche Tohmatsu.
Efficiency
Efficiency:
Assess the ‘true’ cash requirement of the business. Generate liquidity via
best practice working capital management and smoothing of cash flows.
Inventory
Working Capital in use
Debtors
Creditors
Potential benefit?
Multiple divisions or locations
Working capital cycle / Seasonality
©2008 Deloitte Touche Tohmatsu.
Efficiency
Typical issues: Inventory / Stock
“We turn our stock fast and obsolescence is not an issue………”
Understand
individual
product
profitability
Disconnect
between
forecasting
process and
Sales and
Marketing
drives need for
additional stock
holdings
Range
Planning
Cost of
capital
employed
for each
product
Demand
Planning
Demand
Planning
department
adds safety
stocks “just in
case” or too
much weight is
given to bulk
discounts
External
pressure to
revise forecasts
upward leads to
inaccuracies
Sales &
Operations
Planning
Limited analysis
of supply chain
performance
and capabilities
results in
increased
safety stock
holding
Unstable
forecast
requirements &
unresponsive
suppliers lead
to increased
stock holdings
requirements
Inventory
Planning
‘Fill the
warehouse’
Blanket
production or
stocking
policies drive
increases in
items with
differing
demand and
profitability
characteristics
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 or
‘double holding’ of
some stock lines
Manufacturing
Too many
lines / SKUs
leading to
excess
inventory
levels
Fulfilment
Limited
manufacturing
changeover
flexibility
resulting in
need for
additional stock
buffers
Inventory
Holding
Old or slow
moving stock
not addressed
or actively
managed
©2008 Deloitte Touche Tohmatsu.
Efficiency
Typical issues: Debtors / Accounts Receivable
“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
Claims for VAT on
purchases made near
the end of
accounting period
delayed until next
period.
Customer setup not
properly
controlled (or
driven by sales
dept. rather
than finance).
Credit checks
not performed
Receive Order
or Request
for Quote
Incomplete
order
information
causing errors
later in the
process
Order entry
process not
integrated with
inventory or
production
leading to
increased safety
stock holdings
Credit
Authorisation
Credit limits are
inappropriately
overridden.
Customer
payment history
not visible
leading to
excessive credit
limits
Order
Entry
Entry errors
cause disputes
and drive
additional cost
and re-work in
shipping,
handling and
returns
processing
Not fully leveraging
VAT relief
opportunities
Manual or
redundant
processing
steps delay
process
Ship & Raise
Invoice
Shipping and
invoicing
systems are
separate.
Invoices are
manually rekeyed delaying
process
No process owner
resulting in a lack
of collections
focus.
Customers are
given payment
discounts even
when not paying
within terms
Inefficient dispute
resolution process
and focus
Payment
Receipt& Cash
Application
Collection
representatives
wait until
payments are
30 days past
due date to
begin contacting
customers
Receivables
Management
& Collection
Unclear split of
responsibilities
between sales
managers and credit
control (finance)
Limited visibility /
reporting to identify
and focus on problem
receivables
©2008 Deloitte Touche Tohmatsu.
Efficiency
Typical issues: Creditors / Accounts Payable
“We have standard supplier terms and pay suppliers in accordance with this. We
don’t want to risk supply by stretching payment………”
Decentralised
purchasing means that
purchasing power is not
leveraged to improve
terms and conditions
Different
terms with the
same supplier
across the
organisation
Off-contract
spend leads to
unfavourable
terms of
business
Each division or
buyer purchase
in silo rather
than having a
strategic view of
what will
maximise
cashflow for the
business as a
whole
Manage
Contracts &
Suppliers
Buyers focus on
price and
supplier
proximity at the
expense of
payment terms
(P&L vs
Cashflow)
Procure
Goods &
Services
No control
over nonessential
‘maverick’
spend
No well-defined
authorisation
process exists
to ensure
conformance to
agreed
contracts and
terms
Receive
Goods &
Services
Receiving
processes are
not robust and
as a
consequence
goods &
services are
paid for that
may not have
been received
Payment
policies are not
followed and /
or payments are
made early
Process
Accounts
Payable
‘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
Disburse
Supplier
Payment
Payment
discounts are not
taken when due
©2008 Deloitte Touche Tohmatsu.
Enterprise Cost Reduction
Liquidity
(ECR) Mapped to the
Enterprise
Think out of the box to unlock one-off cash wins from many areas
of the Value Map
Liquidity:
business………some examples
Tax cashflows:
Treasury and facilities:
• VAT: Programs to
accelerate input tax /
decelerate output tax.
• Funding: Ensuring that
the business has the correct
facilities to match the
cashflow profile of the
business.
• Capital allowances:
Generating cash from
retrospective reviews of
capital allowances claims.
•Treasury: Cash pooling
and smoothing to maximise
headroom.
• 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).
• Financial Risk
Management: Minimise the
risk of cashflow volatility via
the use of suitable financial
instruments.
Working Capital vs P&L:
Underutilised assets:
• Accounts Receivable
(Sales): Ensure credit
control and customer take
on best practice - not just
chasing sales.
• 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.
•Inventory (COS):
Minimise SKU’s, range
management, understand
product profitability and
demand forecasting.
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.
•Supply chain /
Accounts payable
(Overheads):
Consolidation of supplier
base to maximise
purchasing and payment
efficiency.
©2008 Deloitte Touche Tohmatsu.
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.
©2007 Deloitte Touche Tohmatsu.
Tax Cash
Savings.
• Ben Powell
• 11 February 2008
©2007 Deloitte Touche Tohmatsu.
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.
©2007 Deloitte Touche Tohmatsu.
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
©2007 Deloitte Touche Tohmatsu.
Member of
Deloitte Touche Tohmatsu