Hunting for Hidden Treasure –
with your banker!
Ernest L. Smith, SVP
BBVA Compass
Treasury Management Services
TREASURY MANAGEMENT
Agenda
1
2
3
4
5
Definition of Working Capital
Costs of Working Capital
Quantifying Benefits
Receivable Solutions
Payable Solutions
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TREASURY MANAGEMENT
The Classic Definition of Working
Capital
In accounting textbooks Working Capital is
defined as:
Current Assets – Current Liabilities
Assets expected
to convert to
cash in 365 days
or less
Liabilities
payable in 365
days or less
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TREASURY MANAGEMENT
Our Definition of Working Capital
• The amount of cash
needed to adequately
support your firm’s
operations and objectives
4
TREASURY MANAGEMENT
The Cash Conversion Cycle of a Business
5
TREASURY MANAGEMENT
What Impacts Working Capital Needs?
Direct
Indirect
•
•
•
•
•
• Availability of Funds
• Efficiency
• Cost of funds
Sales
Growth
Receivables
Disbursements
Float
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TREASURY MANAGEMENT
The Costs or Working Capital
Current Asset Financing Strategies
7
v4.0 © 2013 Association for Financial Professionals. All rights reserved.
Session 4: Module 3, Chapter 8 - 7
TREASURY MANAGEMENT
The Costs of Working Capital
Debt
• Term Debt
• Revolving/Seasonal Debt
• Open Account
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TREASURY MANAGEMENT
The Costs of Working Capital
Equity - More expensive than debt
• Interest is tax deductible, dividends are not
• Shareholders expect higher rate of return than
debtholders
• Funds might otherwise be invested in higher
return projects
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TREASURY MANAGEMENT
Cost of Debt
• Interest on a bond over its life = yield to maturity (YTM).
• After-tax cost of debt: interest payments are expense for
tax purposes.
• Example: Marginal tax rate of 30% and YTM of 5% on
newly issued debt.
After-tax rD = rD (1  T)
= 0.05 (1  0.30) = 0.035 = 3.5%
After-tax rD = After-tax cost of debt
rD = Yield to maturity on newly issued debt (before tax)
T = Company's marginal income tax rate
10
v4.0 © 2013 Association for Financial Professionals. All rights reserved.
Session 11: Module 5, Chapter 20 - 10
TREASURY MANAGEMENT
Cost of Common Equity
• CAPM can estimate the market’s required rate
of return on equity.
• Example: rRF = 0.04, rM = 0.10 and β = 1.2.
rE = rRF (r
M
r RF) ß
=0.04  (0.10  0.04)(1.2) = 0.112 = 11.2%
Where:
rE = Required rate of return on stockholder's equity
rRF = Expected rate of return on risk-free asset (US T-bill rate)
rM = Expected return on market portfolio (S&P 500 index)
ß = Beta value for company's stock
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v4.0 © 2013 Association for Financial Professionals. All rights reserved.
Session 11: Module 5, Chapter 20 - 11
TREASURY MANAGEMENT
Weighted Average Cost of Capital
• Weighted average of cost of funds for
company
• Using cost of debt and equity in prior slides:
WACC = WDrD 1  T  + WErE
= 0.333  0.05  1  0.3  +  0.667  0.112  = 0.0864 or 8.64%
WACC = Weighted average cost of capital
W = Percent, or weight, of each financing source (D = debt and E = Equity)
in relation to the sum of debt and equity financing
rD (1  T) = After -tax cost of debt
rE = Cost of equity (common stock and retained earnings)
12
v4.0 © 2013 Association for Financial Professionals. All rights reserved.
Session 11: Module 5, Chapter 20 - 12
TREASURY MANAGEMENT
How Your Banker Can Help
Receivables
• Lockbox
• Remote Deposit
• Merchant
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TREASURY MANAGEMENT
Two Sides of Float
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TREASURY MANAGEMENT
Financial Analysis
2010
2011
2012
Revenue
20,007
20,489
23,114
Cost of sales and operations
15,230
16,040
17,798
Gross Profit
4,777
4,449
5,316
24%
22%
23%
G&A expense
1,628
1,596
1,525
Other operating expense
1,983
1,940
2,549
Total operating
3,611
3,536
4,074
EBITDA
1,166
913
1,242
6%
4%
5%
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TREASURY MANAGEMENT
Financial Analysis
2012
($000)
Revenue
Value of one day’s collection
23,114
÷365
63.32
This means that reducing receivable turnover by one day will free up $63K in working capital.
We can multiply that WC savings by the WACC to quantify savings.
If we assume we reduce the receivable turnover by 5 days and our WACC is 10%, the value of
improvements could be calculated as:
$63,320 * 5 * 10% = $31,663 annually
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TREASURY MANAGEMENT
Two Sides of Float
Merchant
Lockbox
Remote
Deposit
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TREASURY MANAGEMENT
Healthcare Solutions
 Receivables solutions manage complex collections
 Data management solutions transform reporting
Healthcare Receivables Solution
1
8 18
TREASURY MANAGEMENT
How Your Banker Can Help
Payables
• Commercial Card
• Outsourcing
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TREASURY MANAGEMENT
20
Integrated Payables: How It Works
2
wire formatted
for processing
3
Wire instruction sent
to beneficiary bank
4
Wire payment to
payee’s account
Check mailed to payee
3
4
Payee
presents
check for
payment
check printed
2
Positive Pay file
created and sent
Payment
file sent
1
Integrated
Payables
NACHA formatted file
created and sent
ACH
3
2
ACH
payment to
payee’s
account
Customer
workstation
Funds loaded to
card
3
2
Payee uses
card at
merchant
Authorization
and settlement
through card
network
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TREASURY MANAGEMENT
21
The Costs of Paying By Check?
Industry averages run between $1.95 to $5.40 per check payment (source:
eCypress LLC, July 2014)
• Checks have hard costs
Variable Hard Costs
Postage
Check Stock
Envelopes
Printer toner, staples, supplies
Total
Low
$0.49
$0.09
$0.05
$0.05
$0.68
High
$0.49
$0.25
$0.25
$0.20
$1.19
Variable Labor Costs
$0.67
$2.84
Variable Fixed Asset Costs
$0.66
$1.42
Total Paper Check Costs
$2.01
$5.45
Includes check run processing; distribution for authorization, signatures and review;
collation; error resolution and reruns; stuff, seal and address envelopes; apply
postage; take to mail stream
Pro rata utilities: depreciation on printers, workstations, maintenance contracts, etc.
Costs above do not include costs to settle remittance/payment to the payer and payee
financial institutions and any other partners or providers.
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TREASURY MANAGEMENT
e-Invoicing: How Does It Work?
1
2
3
4
5
Invoices retrieved from
dedicated PO Box
Supplier provides
good/service
Supplier sends invoice
Invoices retrieved from
dedicated email
Invoices retrieved from
dedicated fax
9
Approved invoice
and/or GL data sent to
system nightly to
generate payment file
to Integrated Payables
8
Approve
Reject
Forward
Comment
Email
Update
Assign
22
Documents prepped
and scanned
7
Index the following
fields: Vendor Name,
Invoice #, Invoice Date,
Amount, PO Number
(other fields available)
6
• Routing to vendor-specific
approvers
• Routing based on PO fields
• Routing based on receiver data
• Automated approvals
• User approval limits
• Escalation up organizational
hierarchy
• Timed reminder emails
Route invoice
according to
invoice routing
rules, including:
Vendor data, PO, &
Receiver data sent via
SFTP nightly, if
possible
Match invoice to
Vendor, PO, Receiver
data if available
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TREASURY MANAGEMENT
Put Your Banker to Work!
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