Payments Transformation Through a Working Capital Lens LA Expo BAM… · • Automated invoices; terms verified against what is in Vendor Master, more favorable terms put in Vendor

Payments Transformation Through a Working Capital Lens

Michael Diekmann Director; Working Capital Advisor 213.621.4953 [email protected]

What is it? Accounting vs. Treasury View

Working Capital

CURRENT LIABILITES

CURRENT ASSETS

WORKING CAPITAL

• Short Term Cash (including short term investments)

• Receivables from Operations • Inventory

• Short Term Credit • Payables from Operations

CURRENT LIABILITES

CURRENT ASSETS

WORKING CAPITAL

• Receivables from Operations • Inventory

• Payables from Operations

ADJUSTED WORKING CAPITAL – A Treasury View

WORKING CAPITAL – An Accounting View

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Measuring Working Capital

CASH (Liquidity)

PROCUREMENT Accounts Payables

(Expense) into Cash Outflow

INVENTORY Resources into Finished Goods

SALES Accounts Receivable

(Revenue) into Cash Inflow

Days Payable Outstanding “DPO”

Days Inventory Outstanding “DIO”

Days Sales Outstanding “DSO”

• The period of time, measured in days, in which a company is able to convert its Resources into cash; or how quickly you convert sales into cash

• Improvements in working capital = incremental cash flow

Note: www.qfinance.com; Inventory conversion period: inventory / CGS x 365; Receivables conversion period: receivables / sales x 365; Payables conversion period: accounts payable / CGS x 365

Economists quote the CCC metric as: “one of the most accurate metrics for the real financial health of a company”

The Cash Conversion Cycle (CCC)

CCC = Inventory days (DIO) + Receivables (DSO) – Payables (DPO)

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Working Capital Cycles

Procure-to-Pay • This s the process of procuring resources to make a product or

provide a service for the customer and paying the vendor or supplier

Process Improvement Opportunity Moving from paper-based or manual workflows to electronic. automated

workflows can lead to reduced errors, lower general, selling and administrative expenses and improved reporting to make better decisions

WORKING CAPITAL MANAGEMENT… Can be broken down into two main treasury processes:

Order-to-Cash • This is the process of receiving an order form a customer , invoicing

and collecting form the customer and turning that payment into cash

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Procure-to-Pay Cycle

Sourcing • Develop a sourcing strategy • Negotiate payments types and term

Master Vendor Data • Payment methods (ACH, Card, Check, Wire) • Vendor review; single electronic payment file for all legal entities

Purchase Order & Receipt • Requisition entered and routed electronically for approval • Purchase Order created and delivered electronically to vendors

Invoice Processing • Automated invoices; terms verified against what is in Vendor Master, more favorable terms put in Vendor Master • Measure, monitor and reward taking full advantage of early pay discounts to improve DPO and cash flow

Payment • Eliminate or reduce paper-based transmissions • Single file submission for all payment types • Outsource check printing to reduce costs and protect against fraud

Reconciliation • Straight Through Processing - file-based transmissions, auto-reconcile payments, manage only the exceptions • Capture bank data for improved cash forecasting

Customer Service • Real time access to internal systems & vendor portal • Workflow capabilities to route and resolve requests and problems

Customer Service

Reconcilement Payment Execution

Invoice Processing

PO & Receipt

Vendor Master Data

Sourcing

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Understanding Working Capital Working Capital Management focuses on CASH!

OPTIMIZING CASH

MAXIMIZING CASH

VISIBILITY/ACCESS TO CASH

PROTECTING CASH

ensuring cash is deployed efficiently by lean and automated processes

maximizing cash flow by improving DPO to grow operating cash flow

gaining visibility and access to cash through optimal liquidity structure and forecasting

preserving cash by ensuring risk management policies and processes are in place

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Taking a Holistic Approach to Working Capital Best Practices - Policy, Process, Organization and Technology

Policy: Ensure corporate-wide Treasury/Finance policies are written, communicated and audited. Technology: Leverage your ERP system and bank technology to attain best-in-class levels of automation. Organization: Centralize functions such as Credit, Order Entry, Cash Application, Invoice Management and Payment Execution to a corporate level or Shared Service. Process: Ensure streamlined, automated processes are in place with tight controls to mitigate the risk of fraud and reduce the risk of errors.

Policy

Organization Technology

Process

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Comprehensive Payables View

Check Outsourcing

Check Writing Digital

Disbursements Wire Transfers

T&E; P-Card; Prepaid

ACH ePayables Supply Chain

Finance

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Focus on Segmenting Supplier Base Develop Strategy for each Supplier Segment (Payables)

International Suppliers Large, Strategic Suppliers Suppliers Offering

Early Pay Discounts

Suppliers Accepting “Ghost” Card

Non-PO Based Suppliers

Suppliers Accepting P-Card Suppliers with Lower Credit Strength

Suppliers Requiring Checks

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Managing Working Capital with Cascading Metrics

ACHIEVING THE GOAL!

UNIFIED, COLLABORATIVE TEAM

IDEA GENERATION, CHANGE AGENTS

MORE PRODUCTIVE, ENGAGED TEAM MEMBERS

MORE EXCITED, LOYAL WORKFORCE, TALENT RETAINED

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Working Capital Metrics

▪ Is performance/behavior quantifiable?

▪ Is measurement automated?

▪ Is measurement non-disruptive and cost effective?

▪How many metrics will you have?

MEASURE:

▪ Is measurement being tracked over time?

▪ Is trend data being reviewed and analyzed?

▪ Is performance being re-calibrated over time?

▪Are new metrics needed?

▪What gets measured gets done and what gets rewarded gets done more!

▪Are accomplishments recognized consistently and socially?

▪Celebrate group success!

MONITOR: REWARD:

Measure, Monitor and Reward!

Taking the Steps to Success Establish an active working capital management approach

• Process improvement

• Reduced resource time

• Reduced cost

• Improved cash flow

• Improved DSO / DPO

• Profit center vs. cost center

2. PLANNING

• Internal education / awareness

• System capabilities

• Payment types

• A/P process & terms

• A/R process & terms

• Visibility

• Resource time

• Comprehensive payables

• Comprehensive receivables

• Supplier / Receivables financing alternatives

• Liquidity structures

• Reconciliation / cash application

• Advanced reporting & analytics

• Create awareness

• Identify key stakeholders

• Establish KPIs and accountability

• Implement comprehensive integrated solutions

Optimized Working Capital Management Approach

These steps are instrumental for driving rapid improvement and continued satisfaction

3. Identify Potential Solutions

4. Support Holistic Approach

2. Understand Your Challenges

1. Identify Your Objectives

Success

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Working Capital Landscape

DSO

DPO

Inventory

ERP

TMS

T&E

Cost of Capital

Rationalize/ Standardize/

Automate

Leasing

Capital Markets

Lines of Credit

Supply Chain

Financing Trade

Solutions

Access to Capital

Working Capital Metrics

Systems and Processes

Working Capital

Management

Cross-functional alignment

Cash Management

Control

Visibility

Forecasts

A/R

A/P

Reconciliation

Interest Rate

Counterparty

Sovereign/ Country

FX

Market SOX

Payroll

Legal & Tax

Pooling/ Netting

Investing

Repatriation

Purchasing

Financial Risk Management

Liquidity

Financial Processes

Working Capital Peer Analysis

Working Capital Summary ($ in 000s)Target Client Peer Average Public Peer 1 Public Peer 2

Days Outstanding:

Days A/R 73.4 50.8 43.3 94.7

Days Inv 44.0 68.9 68.2 9.5

Days Payable 36.4 40.3 35.8 12.6

Cash Cycle 81.1 79.3 75.7 91.6

0

10

20

30

40

50

60

70

80

90

100

Days A/R Days Inv Days Payable

VIASAT (VSAT) Peer Average HRS LLL Public Peer 1

Public Peer 2

Target Client Private Peer

Average

Working Capital Historical Trending

2012 2013 2014

AR Days 89 87 73

Inv. Days 73 46 44

AP Days 43 36 36

CCC 120 97 81

Target Client - Working Capital Trend Analysis ($ in '000s)

89 87

73

73

46 44

43 36 36

120

97

81

0

20

40

60

80

100

120

140

2012 2013 2014

Target Client Historical Operating Cycle Days

AR Days Inv. Days AP Days CCC

Cash Conversion Cycle (CCC)

Working Capital Sensitivity Analysis (Weighted Average Cost of Capital [WACC] 7.93% *)

* Cost of Capital by Sector 7.93% * Data Source: NYU Sterns School of Business, January 2015 / S&P Capital IQ, Bloomberg and the Fed

$ shown in '000s Target Client Scenario A Scenario B Scenario CDays Receivables 73 days 72 days 68 days 63 daysDays Inventory 44 days 43 days 42 days 41 daysDays Payable 36 days 37 days 39 days 43 daysCash Conversion Cycle 81 days 78 days 71 days 61 days

Annual Sales $1,351,462 $1,351,462 $1,351,462 $1,351,462COGS, excl. Dep. $991,280 $991,280 $991,280 $991,280Cost of Capital / Debt 7.93% 7.93% 7.93%

AR Days Reduction 1 5 10Inv. Days Reduction 1 2 3AP Days Increase 1 3 7

Total Days Change 3 10 20

AR Reduction $3,703 $18,513 $37,026Inv. Reduction $2,716 $5,432 $8,148AP Increase $2,716 $8,148 $19,011

Total Liquidity Impact $9,134 $32,092 $64,185

AR Capital Efficiency Savings $294 $1,468 $2,936Inv. Capital Efficiency Savings $215 $431 $646AP Capital Efficiency Savings $215 $646 $1,508

Total Capital Efficiency Impact $724 $2,545 $5,090

Estimated Impact from Changes in the Cash Conversion Cycle

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