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: Ernie@360thoughtleadership.com

LinkedIn: http://www.linkedin.com/in/erniehumphrey

THANK YOU!

http://www.360thoughtleadership.com