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Cash is back in fashion,
but is it here to stay?
Insights from 2009 research into
cash and wo...
Insight from 2009 research into cash and working capital

In 2009 KPMG in the UK commissioned CFO Research Services, an...
Insight from 2009 research into cash and working capital   


Executive Summary                      ...
Insight from 2009 research into cash and working capital

Executive summary

    KPMG’s second annual cash survey has f...
Insight from 2009 research into cash and working capital   

Insight from 2009 research into cash and working capital

         Stakeholders turn up the
         heat on cash

Insight from 2009 research into cash and working capital   

Survey results comfirm that increased    “Equity investors...
Insight from 2009 research into cash and working capital

Forecasting still not
up to scratch

    The increased spotli...
Insight from 2009 research into cash and working capital   

                  How companies are
10      Insight from 2009 research into cash and working capital

     (debtors, inventory and creditors). Fewer
Insight from 2009 research into cash and working capital              11

1        Insight from 2009 research into cash and working capital

     Figure 5. Respondents’ top concerns include wor...
Insight from 2009 research into cash and working capital       1

For the time being, though, most of
the company’s ope...
1     Insight from 2009 research into cash and working capital

     That sentiment has been echoed              “So ah...
Insight from 2009 research into cash and working capital          1

respondents link cash flow targets to        Figur...
1     Insight from 2009 research into cash and working capital

     Smaller companies feel
     the squeeze
     Our r...
Insight from 2009 research into cash and working capital   1

The road ahead

As we look forward, it is clear pressure ...
1      Insight from 2009 research into cash and working capital

     when times are difficult; 44 percent of       The...
Insight from 2009 research into cash and working capital             1

A total of 350 finance executives were...

Roger Bayly                                                      Angel Martin Torres
Partner                 ...
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Cash Is Back In Fashion 2009 Uk Survey


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Cash Is Back In Fashion 2009 Uk Survey

  1. 1. C AS H M A N AG E M E NT Cash is back in fashion, but is it here to stay? Insights from 2009 research into cash and working capital management A DV I S O RY
  2. 2. Insight from 2009 research into cash and working capital In 2009 KPMG in the UK commissioned CFO Research Services, an Economist Group business, to conduct research into cash and working capital management. The research is based on survey responses from 350 finance executives from large European and US organizations, covering all major industries. The annual revenue of the organizations ranged from US$250m to over US$20b in the United States and from £250m to over £20b in Europe and Canada. CFO Research Services conducted the survey and the interview program for this research; however, all content, views and opinions outlined in this report are the responsibility of KPMG in the UK. About the authors Our contributors Andrew Ashby Roger Bayly Associate Partner Partner KPMG in the UK KPMG in the UK Andrew has more than 12 years of Roger joined KPMG in 1998. He specializes Guy Rudolph professional services experience in the areas in operational restructuring and turnaround Group Financial Controller of sales, marketing, SGA cost reduction of businesses in the consumer and Vodafone Group and cash and working capital management. industrial markets sector. Roger works with He graduated in Economics and Corporate management teams to create and execute Chris Allen Finance from Brunel University and started operational restructuring programs. Head of Working Capital his career as an equity analyst with Kleinwort Vodafone Group Benson. Andrew joined KPMG to lead the He has worked with numerous companies, corporate cash and working capital practice. from multi-billion dollar global businesses Andrea Crenna to £50 million single site operations. Roger Chief Financial Officer He specializes in helping companies improve has led projects aimed at all areas of the cash flow from operations. Prior to KPMG Indesit Company Profit and Loss and cash flow including he was the US and then European President new product development; supply chain Gerard van Kesteren of a specialist consulting company focusing reorganization; site consolidations and Chief Financial Officer on cash and working capital management. outsourcing; rationalization of back office Kuehne Nagel Andrew works with companies to help them identify opportunities for improving functions, property moves and operational improvement initiatives. Paul Reilly their visibility and control of cash flow Chief Financial Officer around the business and supporting them Recently, Roger has led a major operational with programs to release cash locked up in Arrow Electronics restructuring for a FTSE 100 scale industrials working capital, tax, capex and other assets. business aimed at taking out 15 percent Robert Ryder Andrew has been involved in over 40 working of the cost base and improving cash Chief Financial Officer capital programs either as the project leader performance. Roger started his career as an Constellation Brands or advisor. Many projects have been global engineering apprentice with Jaguar Cars. requiring effective program management He graduated in Engineering at Cambridge and co-ordination of multiple teams in different regions. The majority of projects University and worked on a range of Jaguar have been focused on the implementation of and Ford programs. sustainable improvements in working capital, achieved by driving behavioural change across businesses. Gottfried Wohlmannstetter
  3. 3. Insight from 2009 research into cash and working capital Contents Contents Executive Summary 4 Stakeholders turn up the heat on cash 6 Forecasting still not up to scratch 8 How companies are responding to the cash management challenge 9 Smaller companies feel the squeeze 16 The road ahead 17
  4. 4. Insight from 2009 research into cash and working capital Executive summary KPMG’s second annual cash survey has found that companies have pushed cash generation up the agenda in response to the changing demands of analysts, lenders and ratings agencies. As was predicted in last years survey, many stakeholders have placed increased pressure on companies to maximize cash generation. Where many companies last year to 28 percent. Indeed a third of While tightening customer credit were most worried about the rising respondents exceeded their cash flow lines remains a priority, in many cost of debt, they are now responding forecasts this year. While it’s always cases necessitated by greater default to the demands of their banks and better to exceed forecasts than miss, risk, more companies have turned other stakeholders to improve cash poor accuracy necessitates higher their attention to slashing capital management. The majority of lenders credit facilities than may be required expenditure as a key lever for cash have been looking for evidence that restricting cash available for other preservation. Sixty-four percent of companies have explored all self help business opportunities. The survey respondents have cut or stopped options before turning to external highlights that cash flow forecasting capital expenditure programs in the sources for additional funding. remains a key weakness for many last 12 months and 63 percent expect organizations, despite a significant this to continue for the next two years Companies have reacted by turning increase in the use of short term as companies deal with the economic up the heat on working capital to forecasts. Later in the report we uncertainty. This focus on restricting release any available cash back to highlight some of the common investment does not play well for a the business. While only 37 percent drivers of low forecast accuracy. sustained economic recovery in the of respondents had implemented a short term. working capital improvement program While some companies have been last year, over half of all companies able to reduce working capital as a Despite all the focus on cash, many surveyed have now instigated an result of this increased focus, over companies are still failing to explore improvement program. According to 40 percent of respondents reported all opportunities for cash generation. this survey of 350 CFOs in the US, deteriorating trends suggesting The research demonstrated that UK and Europe, cash management there is still a lot of work to do. This improvement programs typically is the number one priority for more may reflect the tactics employed by focus on operating working capital, than a quarter of the respondents (28 companies in last years survey to treasury and capital expenditure. Few percent), while a further 58 percent improve working capital. The major companies are seeking improvements describe it as one of the top priorities focus was on stretching supplier from indirect tax and duty, property for the business as a whole. payment terms and squeezing and pensions, all of which could customer credit lines. In this situation provide much needed cash flow. Greater focus on cash is having there are always winners and losers. Tax is one of the biggest cash flow a positive impact on cash flow items for many companies and a forecasts; while only 14 percent of The survey results and interviews review of operating processes could companies said they had hit their conducted for this year’s survey yield significant results. targets last year, this has now jumped suggest alternative tactics at play.
  5. 5. Insight from 2009 research into cash and working capital 64% Looking forward respondents are not Key data: positive about the future: the majority • 54 percent of respondents said the expect no improvement in working main trigger for focusing on cash capital over the next 12 months. was pressure from stakeholders, Companies seem most concerned compared with just 19 percent about customers stretching payment OF COMPANIES ARE REDUCING OR last year; terms and getting into financial STOPPING CAPITAL EXPENDITURE difficulty and suppliers demanding • 72 percent missed cash flow AND 43 PERCENT ARE TIGHTENING faster payment. They also foresee a forecasts this year, compared with CREDIT LINES significant deterioration in customer 86 percent in 2008; 53% performance, with 55 percent • 41 percent saw a deterioration in expecting an increase in their bad debt working capital; exposure over the next two years. • 53 percent of respondents have It is clear the focus on cash and instigated a working capital working capital management from improvement program this year, stakeholders is here to stay, at least for OF RESPONDENTS HAVE INSTIGATED compared with just 37 percent the next 12 – 24 months. Companies A WORKING CAPITAL IMPROVEMENT last year should seek to maintain clear visibility PROGRAM THIS YEAR, COMPARED on cash and ensure that the business • In response to the tightening credit WITH JUST 37 PERCENT LAST YEAR is planning appropriately for any signs market: 64 percent are reducing of economic recovery. or stopping capital expenditure; 63 percent are seeking to improve What remains to be seen is whether cash generation and 43 percent are companies have been successful at tightening credit lines to customers embedding cash into the operating (multiple choice). culture. When the economy eventually recovers it will be clear how many companies have achieved sustainable improvement in their working capital. Our prediction is many companies have not and there should be a rapid growth in capital employed as companies adjust to greater economic prosperity.
  6. 6. Insight from 2009 research into cash and working capital Stakeholders turn up the heat on cash 1. As the global financial and economic crisis wears on, many companies are still struggling. Amid unrelenting profitability pressure and tight financing conditions, cash remains scarce. Research conducted for this report, Guy Rudolph, Group Financial The results of our most recent survey part of KPMG firms ongoing Controller at U.K. mobile telephony indicate this concern for cash is documentation of cash and working operator Vodafone Group, highlights widespread among companies in capital management practices the importance of the shift of focus North America and Europe. around the world, indicates clearly towards cash management a focus A majority of survey respondents that CFOs and their teams are that Vodafone, like other companies, (58 percent) say that cash sharpening their focus on cash and has intensified in recent months: management ranks among their working capital. Their efforts, aimed at “Following the appointment of our companies’ top strategic priorities, freeing cash on their balance sheets CEO (Vittorio Colao) in July 2008, with more that a quarter (28 percent) and providing evidence of good we issued an updated strategy for citing cash management as their management to internal and external the group that November, he says. ” “number one priority” Similar results . stakeholders have shown a marked “The first plank of the strategy is are seen for working capital, with escalation since KPMG published The to strengthen our free cash 63 percent placing working capital Importance of Preserving Cash in a flow generation. ” management as a high priority, and 28 Downturn in November 2008. percent, the “highest priority” . Figure 1. Respondents are most likely to cite stakeholder pressure as their companies’ primary motivation for increasing attention on working capital. What is the main trigger for your organization to increase its focus on working capital? 60 1 – Pressure from stakeholders (banks, board analysts, credit rating agencies) 50 2 – To pay down debt 3 – Reduced access to debt 40 4 – To fund acquisitions % respondents 5 – Rising cost of debt 6 – To return cash to shareholders 30 7 – Performance against peers 20 10 0 1 2 3 4 5 6 7
  7. 7. Insight from 2009 research into cash and working capital Survey results comfirm that increased “Equity investors, before expenditures, and 49 percent saying pressure from the board and from the crisis, very seldom that economic conditions will cause lenders, analysts, ratings agencies, their companies to restrict investment, raised questions about and other stakeholders is a primary it’s clear that satisfying stakeholders motivation for companies’ renewed the balance sheet,” isn’t the only reason companies are efforts to improve cash and working “If everything looked OK, they were working hard to extract cash from their capital management. (See Figure 1.) perfectly happy.” balance sheets. In some cases, these That is a stark contrast to pre-crisis efforts can help companies avoid at times, according to Andrea Crenna, But with 63 percent of survey least some of the hard choices that CFO at Italian appliance maker Indesit respondents saying that the prolonged face them as they seek to maintain Company. He says, frankly, economic downturn will force competitive advantage and to position their companies to reduce capital themselves for the eventual recovery.
  8. 8. Insight from 2009 research into cash and working capital Forecasting still not up to scratch The increased spotlight on cash is forcing companies to improve cash flow visibility. In the last 12 months this has driven greater use of short term cash flow forecasting measures to highlight what is happening to the cash in the business. Survey results indicate an improvement percent or more. Certainly recent be engaged and held accountable for in cash flow forecasting over the past sales volatility has made cash flow inputting to the forecast. year, but respondents report that forecasting harder, however KPMG It’s important to remember that forecast performance still isn’t up to scratch. firms repeatedly see the same issues accuracy is likely to be initially poor. A gap is apparent between the affecting forecast accuracy. Failure to To improve requires a structured process importance that companies are engage the operation and key functions of challenging assumptions, measuring attaching to forecasting, and their and implement a robust governance and reporting on variances and reviewing ability to forecast accurately in current process are the most common causes feedback with the stakeholders to volatile conditions. Eighty-six percent of inaccuracy. While responsibility educate them on how to increase of respondents to last year’s survey for cash flow forecasting falls to accuracy. Effective operational cash flow said their companies had missed their finance, the people making decisions forecasting is a valuable management cash flow forecasts. This year, nearly in the business and managing day tool and it can enable companies to make three quarters (72 percent) say their to day operations (including sales, informed decisions, it is therefore worth companies missed their cash flow procurement, accounts payable, tax, investing the time and effort to get forecasts in the last 12 months, with etc), hold the key to timely and accurate it right. 24 percent missing forecasts by 20 data input. These functions should Figure 2. Most respondents to this year’s survey say their companies use short-term cash-flow forecasting methods. Which of the following describes the type of cash flow forecasting that your organization uses? 60% 1 – Rolling short-term receipts and payments (e.g. daily/weekly for the next 13 weeks) 50% 2 – Daily treasury cash forecast (e.g. 2-4 weeks) 3 – Rolling funds flow (e.g. monthly for the next 12 months) 40% 4 – Funds flow (e.g. monthly to the year end) % respondents 5 – We don’t use cash flow forecasting 6 – Other 30% 20% 10% 0% 1 2 3 4 5 6
  9. 9. Insight from 2009 research into cash and working capital How companies are responding to the cash management challenge As pressure on the enterprise grows to improve cash management, a majority of responding companies (53 percent) have or are in the process of conducting working capital improvement programs. Results show that companies that Vodafone is one company tackling put a figure on the results Vodafone is ran a working capital improvement its working capital by means of a hoping for from the program however, program in the last five years are more structured program. It launched its analyst estimates point to a reduction likely to have lower working capital working capital offensive as part of in working capital in the range of compared with their peers who haven’t the first plank of its new strategy £300 million for the financial year to run such a program (43 percent of free cash flow generation launched end March 2010. This is potentially those who have run a working capital in late 2008. The program, led by the a significant contribution to the improvement program vs. 34 percent company’s Head of Working Capital, company’s targeted free cash flow of those who have not). (See Figure 3.) Chris Allen, started as a pilot in two of £6.0 – 6.5 billion. countries; now, armed with a tool kit It’s likely that a growing number of Despite the increase in programs to of about 100 ideas to improve working enterprises will initiate such programs improve performance, companies capital performance, he is rolling and that more companies should see appear to be leaving cash on the table. the program across all the regions tangible results in the coming months. The majority of programs focus on the Vodafone operates in. Mr. Allen won’t traditional operating working capital, Figure 3. Survey results show that working capital improvement programs have yielded positive results. Compared to three years ago, has your organization’s working capital decreased? 60% Decrease in working capital 1 – All respondents 50% 2 – Respondents who have implemented a working capital management improvement program in past 5 years 40% 3 – Respondents who have NOT implemented a working capital management improvement program in past % respondents 5 years 30% 20% 10% 0% 1 2 3
  10. 10. 10 Insight from 2009 research into cash and working capital (debtors, inventory and creditors). Fewer companies are looking to tax, real estate, and pensions in order to release cash. inventory is not just as simple as stopping production and selling through stock. “It’s easy to reduce inventories. But you have Receivables management— Improving credit and collections processes These are potentially huge areas of to find the right balance between that Our survey indicates rising concern about opportunity which can often be under and smooth production processes, and receivables: 47 percent see customers’ exploited, but could help companies quality of service for your customers. It’s stretching payment terms as the top release much needed cash. not just a question of cutting. For some ” pressure on working capital, up from companies, the financial and economic 38 percent a year ago. Throughout the 1 Inventory management— Fine tuning production and sales processes crisis may raise the question whether their business models are flexible enough to respond to shocks in survey, respondents express concern with managing receipts from customers and the power that buyers have over customer demand. For many senior finance executives sellers’ working capital. Sixty-three looking to tackle their working capital Better sales planning can also help percent of respondents anticipate that management practices, inventory may companies gain control of their customer pressure to stretch payment be the first place to start. Already, our inventories, according to our sources. Paul terms will be acute in the year ahead, survey shows that many companies have Reilly, CFO at U.S. supply chain services ranking first or second among their top realized improvements in working capital company Arrow Electronics, recently pressures (see Figure 4). Similarly, 41 in the past year through better control of looked at the causes of slow moving percent of respondents are concerned inventories. A manufacturer like Indesit inventory that are tied to sales activities. that their customers will fall into financial typifies this trend. Says CFO Mr. Crenna: In cases that are related to customer difficulty. These findings raise the “We were starting from a point [12 to 18 relationships for example, if a customer question; if companies have appropriate months ago] of high inventories, due to were consistently having trouble tools in place to spot potential financial the slowdown of the market in the final forecasting its own sales and buying difficulty among counterparties and to part of 2008. So we fine-tuned production patterns Arrow executives approached the act proactively to minimize exposure. at the beginning of the year. In 2008 we customer directly to work more closely In addition, are companies arming the ended up with 1.4 million units, and we with them, in hopes of reducing the sales force with ideas on how to manage are planning to reduce this by 500,000 safety stock that Arrow needed to hold for payment term discussions. units, by reducing production by over the client. In the case of internal problems 20 percent. ” for example, if Arrow’s sales staff were regularly overstating expected sales in In some instances, companies are order to ensure ample stock if they landed 41% fine-tuning their production capacities by a big order, the finance and marketing stalling production for a time, sending teams reassured their colleagues in the workers home on almost full pay or sales function. As Mr. Reilly puts it, “We moving staff to a shorter working would go to the sales teams and say, ‘We week. These short-term measures help can prove to you that we can ensure the companies stay in position to respond inventory you need is within our to a change in circumstances, such as company. We have a system that is OF RESPONDENTS ARE CONCERNED a sudden uptick in demand. Mr. Crenna 99.9 percent reliable.” WITH THAT THEIR CUSTOMERS WILL is the first to point out that managing FALL INTO FINANCIAL DIFFICULTY
  11. 11. Insight from 2009 research into cash and working capital 11 55% 63% OF EXECUTIVES EXPECT BAD DEBT TO MOUNT UP IN THE NEXT 24 OF RESPONDENTS ANTICIPATE THAT CUSTOMER PRESSURE TO STRETCH MONTHS PAYMENT TERMS WILL BE ACUTE IN THE YEAR AHEAD Figure 4. Respondents express concern with receivables in a “buyer’s market.” Over the next 12 months, what do you think will be the top three pressures on your organization’s working capital performance? 80 1 – Customers stretching payment terms 2 – Customers getting into financial difficulty 3 – Suppliers demanding shorter payment terms 60 4 – Business complexity 5 – Increasing your product offering % respondents 6 – Supporting suppliers who are facing 40 financial difficulty 7 – Expansion into new global markets 8 – Rising commodity prices 9 – Longer lead times resulting from low - 20 cost country sourcing 0 1 2 3 4 5 6 7 8 9 Delinquencies are on the rise; fully 55 he says. “It’s a stop-go, stop- Others, such as Arrow Electronics, percent of executives surveyed for this go, exercise in trying to avoid are fine-tuning their internal processes. research said they expected bad debts overexposure, while not losing When reviewing customer payment to mount in the coming 24 months, sales or market share. Some ” patterns, Arrow’s CFO Mr. Reilly says, as customers file for bankruptcy or companies are optimizing their he noticed many delinquent invoices otherwise default on payment. “I product and service offerings in an were not paid on time because of consider the biggest risk bad debt, ” effort to squeeze more performance some dispute or discrepancy. In says Mr. van Kesteren of Kuehne out of accounts receivable. Vodafone, response, the company started Nagel. Accordingly, he says that for example, is looking at service calling customers 10 days ahead of around 60 percent of the company’s design: having end-customers pay the due date, to clear up any receivables are now insured, up in advance rather than in arrears for outstanding issues. At the same from 50 percent a year ago. In this some aspects of their service. time, the company has been working difficult situation, Mr. Crenna of “It makes a month’s difference to to resolve the root causes of any Indesit explains how CFOs are torn the collection of a sizeable chunk of disputes or discrepancies in its own between bolstering the top-line and our revenues, says Mr. Allen, Head ” processes and systems. “So we preserving the bottom line: “We have of Working Capital at Vodafone. became more efficient and built quality to be selective in terms of credit to For a company of Vodafone’s size, in the front end, he says. “ ” And we customers. But you don’t want to be that’s no trifling contribution to were also calling companies, not after so selective that you stop selling. It’s a cash flow. they went delinquent, but before they trade off between risk and sales, ” went delinquent. ”
  12. 12. 1 Insight from 2009 research into cash and working capital Figure 5. Respondents’ top concerns include worries about customer payments. Has the economic environment adversely affected your organization in any of the following ways? 12% 31% 28% 19% 10% Customers delaying payment of their bills Customer and/or suppliers experiencing 12% 28% 33% 18% 10% financial difficulty Increased pressure from stakeholders 16% 19% 30% 17% 18% (lenders, analysts, credit rating agencies) to improve cash generation 8% 21% 22% 23% 26% Increased cost of credit 13% 15% 19% 23% 30% Reduced access to credit 5% 15% 26% 31% 23% Suppliers demanding earlier payment of invoices 0% 20% 40% 60% 80% 100% 5 very affected 4 3 2 1 not affected Payables – Treading with care earlier payment of invoices, and a ” majority of respondents place it at the low end of the scale. (See Figure he says, “and that we maintain a strong, diversified supplier base. ” While survey results reflect an Still, in order to extract more from 5.) In a difficult economy, however, almost palpable concern with its payables without paying suppliers some companies are cautious about receivables, finance executives late, Vodafone is scrutinizing its stretching payments particularly seem less concerned with payables. internal payment processes by looking with critical suppliers for fear of When asked about the economic through contract terms with a fine- pressing a supplier to the brink of downturn’s effect on their businesses, tooth comb, ensuring payment details failure. Mr. Rudolph of Vodafone, respondents were most likely to are correctly entered in the finance which is one of the world’s largest assign high adverse effect scores to function’s IT systems, and reviewing telecommunications operators, says “customers delaying payments of the timing of weekly payment runs his company understands the power their bills” and “customers and/or relative to contract terms, to eliminate that goes with being such a large suppliers experiencing financial early payments. Mr. Allen says that company, and is careful to handle this difficulty. Far fewer, only 20 percent, ” the company is moving to a shared with care. “It’s very, very important for assigned such high adverse/ affect services model that will standardize us that we have a choice of suppliers, ” values to “suppliers demanding its procurement practices.
  13. 13. Insight from 2009 research into cash and working capital 1 For the time being, though, most of the company’s operating units still have stand-alone purchasing functions. As a weaker suppliers sooner, in exchange for better pricing. Says CFO Mr. Reilly: “We looked at those on an individual Engaging the organization in cash management Pulling the levers of working capital result, he says, “each finance function supplier basis, to determine what is all well and good – in theory. In has slightly different ways of going we should do from a good economic practice, however, it’s unlikely a finance about processing and paying invoices, sense, from a good business sense, to function can do this in isolation. and there is usually scope for refining ensure that each company benefited Those who report running a working each in turn.” from whatever transactions we struck. ” capital improvement program say that At Arrow Electronics, the finance One idea that is gaining traction is “consistent executive sponsorship” is function is not only looking at how supply chain financing. This is where the key to success. “The recession has best to extend payables but it’s also a company leverages its credit rating helped me convey the full importance using its own financial strength as a to enable suppliers access to faster of working capital management to the source of advantage in dealing with payment at a lower cost than the owners and to secure their support, ” suppliers. Specifically, the company is supplier could obtain financing. It is comments one survey respondent. reviewing whether it is getting the best likely this will continue to gain exposure deal from prompt payment discounts; over the next 12 months. it is also offering to pay financially Figure 6. Executive sponsorship is key to managing working capital. How would you rank the importance of the following factors in achieving a positive result from your organization’s working capital improvement program? 54% 29% 9% 3% 5% Consistent executive sponsorship 43% 39% 15% 2% Clear reporting and KPIs on working capital 34% Alignment of working capital goals with 39% 18% 5% 3% departmental and individual goals 34% 38% 21% 4% 3% Communication to reinforce messages 32% 10% 19% 9% 6% Dedicated team 21% 32% 26% 16% 5% Correct incentives 5% 14% 28% 25% 28% External support 0% 20% 40% 60% 80% 100% 5 very important 4 3 2 1 not important % respondents that have run a working capital improvement program in the past five years
  14. 14. 1 Insight from 2009 research into cash and working capital That sentiment has been echoed “So ahead of time, we have to get eliminate the distortions that can throughout the interview program the sales guys on board and agree on creep into such working capital carried out as part of this research. For a strategy for engagement. In some ” metrics. Some are moving from his part, Mr. van Kesteren of Kuehne companies, finance is also leveraging single, end-of-period figures to Nagel says that due to the change the sales team’s contacts to secure more frequent measures, or in the economic environment, he now high level access to delinquent rolling averages. sits down once a week with the group customers. Most of the CFOs CEO and with specialist working interviewed for this survey agree, Mr. Reilly of Arrow Electronics capital staff from the finance function, though, that sales staff should not who has moved to more frequent to discuss working capital receivables, get too involved. Their job, CFOs point measures to keep closer tabs on mostly. These meetings typically take out, is to sell. working capital up to two hours, indicating the degree “ The ideal I would like performance: “Many Using folks can move the of top-level commitment to working to get to, is a weighted standardized, lever for one day at capital discipline. average working capital easy-to- the end of the quarter. Furthermore, our research indicates understand metric, which avoids But we’re trying to that the finance function is metrics is critical measurement at a specific look at more data increasingly cutting across silos in the to including point in time.” points throughout enterprise in efforts to tighten working line-of-business the quarter. In the ” capital. One priority is managing the executives in Mr. Ryder of Constellation Brands, past year, Arrow tensions between sales and finance working capital, has moved from an where sales wants to be sure of a say senior finance managers. end-of-quarter metric, to a four-point sale, and finance wants to be sure of Education is of paramount average for each quarter that gauges collecting cash from a sale. “In some importance, too, as working capital working capital levels at the beginning organizations, the sales team sees the may be a new concept for many of the quarter, and at the end of each credit team as ‘sales prevention’ or operations staff. “We had quite a of the three subsequent months. ‘commission control.’ What they mean decentralized organization, and there Accordingly, the company’s annual by that is that we are passing up good were several different calculations metrics now include 13 data points sales because they are not risk takers for all of those things, explains Mr. ” throughout the year. in the receivables area, says Mr. ” Ryder of Constellation Brands. “We Reilly of Arrow Electronics. spent a reasonable amount of time In an effort to overcome these on education, and on standardizing calculation methodologies. ” Incentives, incentives, incentives: Linking cash performance and pay tensions, companies appear to be involving the sales team more closely Many finance executives are sticking As finance increasingly includes in bringing working capital into line. to the basic measures of the three operational managers in efforts “The first call that a customer will levers of working capital, expressed to manage working capital, many make, after getting a credit call from in relation to sales DIO, DSO, DPO companies are linking more you, is to your sales guy, says Robert ” or variants on these. In many cases, variable compensation to cash flow Ryder, CFO of U.S. wine, beer, and they are trying to make these metrics related measures. But surprisingly, spirits company Constellation Brands. more timely and more reliable, and perhaps, only 36 percent of survey
  15. 15. Insight from 2009 research into cash and working capital 1 respondents link cash flow targets to Figure 7. A minority of companies link cash flow to variable compensation. management compensation. However, anecdotal evidence from the interview Are cash flow targets part of the management teams’ incentives package at program suggests that use of such your organization, and, if so, what percentage of the package is linked to variable compensation linked to cash those targets? flow measures is expanding. Arrow Electronics is one company Yes, 25% or more linked 12% that has recently rolled out cash flow targets into its long term incentive compensation plans, according to its 6% Yes, 16 - 20% linked CFO Mr. Reilly. “We felt it was critical to our financial strength, financial 3% Yes, 11 - 15% linked foundation, and competitiveness, to have more cash and greater liquidity, ” 8% Yes, 6 - 10% linked he says. “So we modified our compensation plans. At Vodafone, ” 7% Yes, 0 - 5% linked meanwhile, 25 percent of managers’ annual bonus was linked to free cash flow in 2008; since then, the figure has 64% No risen to 35 percent. Such incentive compensation plans 0 20 40 60 80 are apparently bearing fruit. Of those survey respondents that have variable a steady decrease of total working employed in the regional business. compensation linked to cash flow capital intensity, he says. ” A high level of working capital in targets, 42 percent say In the case of Kuehne Nagel, Mr. van the regional unit drives down its their working capital “We make people Kesteren says that profit, which in turn is reflected in decreased versus three regional managers the manager’s bonus. The bonus responsible, we give may have a monthly element appears highly leveraged: years ago. Among those with no incentive them the information, base salary in the “The regional manager can earn US$ compensation linked we give them the region of US$ 20,000, if he does the right thing, ” to cash flow targets, transparency—then 10,000-15,000. The says Mr. van Kesteren. Embedded in the figure was lower: we reward them with company operates a the organization, such arrangements just 37 percent. Mr. bonus scheme linked are likely to ensure a lasting focus on money if they do the van Kesteren is one to regional earnings. cash efficiency. right thing.” The corporate center executive who says he Mr. van Kesteren of has seen the benefits levies a capital Kuehne Nagel: of his company’s charge between compensation plan. “We started this the EBIT and EBT lines of the income in 2005, and since then, we have had statement, based on the capital
  16. 16. 1 Insight from 2009 research into cash and working capital Smaller companies feel the squeeze Our research shows clearly that smaller companies are feeling the brunt of the financial and economic crisis. (See Appendix for details on company size segmentations.) It’s also plain that smaller companies trail behind larger ones in their working capital efforts. Consider payables. Smaller companies and large companies. Accordingly, come even as a possible recovery usually buy less and, therefore, have just 30 percent of respondents who in business conditions appears on less purchasing power, so they often work for smaller companies are the horizon. feel greater pressure to pay than their linking employee remuneration to Given restricted access to financing, large counterparts. “Vendors are quick cash performance, versus 55 percent it’s possible that small companies will to cut us off if we slow payments, ” from the largest companies. face fresh financing challenges as says a finance executive who works It’s little wonder, then, that smaller the economy recovers. It is therefore for a company in the automotive companies are less optimistic about critical that they adopt some of the sector with US$250 million-$500 future cash savings from working tactics used by larger companies to million in annual revenues. capital, than their larger peers: manage their working capital. It’s a similar picture in receivables. while 53 percent of the largest Here, 50 percent of small companies companies foresee an improvement 37% say they expect customers’ stretching in their working capital in the coming payment terms to be a top pressure 12 months, among the smallest on working capital. Smaller companies companies the figure is just often have less bargaining power than 37 percent. their larger counterparts in collections Why the stark contrasts? The most efforts. likely explanations are all tied to the And it’s worth noting that in scale and scope of smaller companies. OF THE SMALLEST COMPANIES forecasting, the smallest companies Small companies are less likely to FORESEE AN IMPROVEMENT IN in the respondent pool appear to prevail in negotiations and disputes THEIR WORKING CAPITAL IN THE be doing worse than the largest with suppliers and customers that COMING 12 MONTHS COMPARED TO companies; 49 percent of respondents are large. Another reason may be 53 PERCENT OF LARGE COMPANIES 30% who work for the smallest companies that fewer small companies have reported missing forecasted cash sophisticated IT platforms in place, flow in the past year, compared with leaving finance staff with fewer tools 40 percent of respondents from the with which to work. A third possibility largest companies. is that some smaller companies, with fewer staff in the finance function, And smaller companies are less likely don’t have the resources to dedicate to run a working capital management OF RESPONDENTS WHO WORK FOR to managing working capital. improvement program than larger SMALLER COMPANIES ARE LINKING ones: only 48 percent of smaller Whichever factors are at play, it’s likely EMPLOYEE REMUNERATION TO CASH companies say they have run such a smaller companies will continue to PERFORMANCE, VERSUS 55 PERCENT program, versus two-thirds of medium feel the pressure for some time to FROM THE LARGEST COMPANIES.
  17. 17. Insight from 2009 research into cash and working capital 1 The road ahead As we look forward, it is clear pressure to improve cash management will remain a corporate priority for at least the next 12-24 months. It is likely to take longer than many anticipate for economic output to return to pre-credit crunch levels. Maintain close visibility and control business in the coming months. It can contracts around the world and the of cash: It is just as important to keep a enable management to keep a check on funding of the pension scheme. close eye on cash as the economy show sales expectations and help ensure the Monitor prepayments in the business signs of recovery. Previous upturns organization is not gearing up for to assess if any could be spread over indicates that companies often get into an artificial recovery. time. In the same way that procurement cash flow difficulty in trying to respond are typically focused on negotiating Challenge the status quo to unlock to an upturn in demand as working the best price, the tax department is trapped cash: One of the biggest capital builds and places strain on focused on optimizing the tax rate, not obstacles to improving working capital financial headroom. One of the keys is on cash management. is overcoming organizational barriers ensuring the company acts rationally on to change. “That’s the Focus on the first sign of recovery. In some cases, a small uptick in orders may simply way we’ve always done “ There are always a sustainability: it” is not acceptable as , Driving sustainable be the effect of re-stocking, following million reasons why a justification for not improvement in cash a period of de-stocking rather than an operational business changing. Companies management is not underlying recovery managers can’t commit easy. For one thing, that really move the in trade. needle on their working to working capital managing working How do companies ensure they capital will drive their improvement. It is the capital spans the react appropriately? By maintaining a managers to examine role of finance to guide entire organization good handle on what customers are the existing operating requiring strong management through the doing, for one thing. Says Mr. Ryder model and look for alignment across of Constellation Brands: “We’ll get at alternative ways of obstacles to decreasing functions to work that analytically. We try to correlate IRI working that limit cash working capital.” towards a common and Nielson data, which is measuring requirements. These Mr. Ryder of Constellation Brands, goal. Indeed, many consumer spending, and we have a could range from how finance people say general feel for how much inventory is companies contract with customers to that if the finance function does not at retail and at distributors. So it’s not an assessing make versus buy options for keep up the pressure, improvements exact science, but we can assess supply the business. in working capital practices don’t stick. and demand trends. This helps us to “There are always a million reasons In addition to challenging the operating gauge inventory levels to ensure that we why operational business managers model, aim to ensure all areas of will be able to meet the demand for our can’t commit to working capital cash flow have been reviewed and products. ” improvement, says Mr. Ryder of ” opportunities for improvement assessed. Constellation Brands. “It is the role of Continued focus on driving accurate In addition to the debtors, inventory finance to guide management through short term cash flow forecasts can and creditors, review activities around the obstacles to decreasing working provide an effective management indirect tax, transfer pricing and excise capital. This may be especially true ” tool to see what is happening in the duty, the management of property
  18. 18. 1 Insight from 2009 research into cash and working capital when times are difficult; 44 percent of The foundations include: processes and practices genuine respondents who have run a working management discipline that becomes • Roles and responsibilities for cash capital improvement campaign in the “business as usual” that could yield need to be clearly defined and last five years say that it’s harder for lasting benefits, even as pressure from ownership assigned for cash and their organizations to drive working stakeholders eases, and management’s working capital at each point in capital improvements in the current focus returns to growth. the process; economic environment. (Only 23 percent Mr. Allen of Vodafone is one executive of those respondents say that it’s • Reporting and KPIs should be planning to maintain a sharp focus on easier to improve working capital in this consistent across the business and working capital practices: “We need to environment.) provide clear visibility of performance make sure that everything we achieve, and insight into changes; As finance seeks to maintain its focus we lock in and keep. And we will be on working capital management in • Targets and objectives need to be looking to do that in 2010. The pressure ” the coming year, it’s clear that variable embedded into individual’s goal from stakeholders to maintain working compensation plans are likely to setting, not just at the top of the capital discipline is likely to remain well remain an important tool. For his part, organization but down to the into 2010, of course. Mr. Allen points out Vodafone’s Group Financial Controller, shop floor; that the cash generated from a working Mr. Rudolph, says, “We will continue capital project is essentially a “one-time • Controls and policies need to be to maintain the incentives, and the win. Analysts and investors, he says, ” established that govern behavior metrics, and challenging people through vary in their approach to valuing the and set parameters for decision the performance management cycle, ” cash flow generated by working capital making; and he says. “ And everyone is incentivized improvements, as these cash flows are to maximize free cash flow, and they • Cash is a consistent item on the not recurring. really understand the need. How does ” management agenda at meetings. Conclusion Kuehne Nagel’s Mr. van Kesteren plan Finally share ideas and successes. to keep working capital at the forefront So it seems cash is likely to stay in Whether you’re in a large global of his colleagues’ minds in the coming fashion for some time to come. Those business or small enterprise share year? His answer is plain: “By paying companies that continue to thrive leading practices and insights to help. them money to do the right thing. ” through all economic cycles are those Cash management is good business that recognize that cash never loses To drive sustainable change there are practice: For one thing, few senior its appeal. several key foundations to consider. finance executives expect the pressures Addressing one element in isolation will on working capital to ease in the years not yield results. All elements should be ahead. For another thing, it may be adopted to truly change the business. that improvement efforts embed good
  19. 19. Insight from 2009 research into cash and working capital 1 Appendix A total of 350 finance executives were surveyed by CFO Research Services through an online questionnaire in June 2009. Almost every major industry is represented. Here is further information about the respondents. Which of the following best In which country is your describes your job title? position held? Which of the following best In which country is your position held? describes your job title? 5% 7% 5% 11% 10% 50% 18% 62% 33% CFO or finance director Controller Continental Europe* United States VP of finance Treasurer United Kingdom Canada Other Percentage of respondents Percentage of respondents U.S. Respondents? Respondents from responses from executives in *Data from Continental Europe includes Canada, the Austria, Belgium, Bulgaria, Czech Republic, Denmark, Estonia, Finland, United Kingdom and Continental What were your organization’s worldwide revenues in Gibraltar, greece,recentIceland, Ireland, Italy, France, Germany, its most Guernsey, fiscal year? Latvia, Lithuania, Malta, Netherlands, Norway, Poland, Portugal, U.S. Respondents. EuropeSweden, Switzerland and Turkey. the United Russia, Spain, Respondents from Canada, Kingdom and Continental Europe. 2% 6% 7% 3% 6% 4% 10% 6% 17% 59% *Data from Continental Europe includes 74% responses from executives in Austria, 7% Belgium, Bulgaria, Czech Republic, Denmark, Estonia, Finland, France, Germany, Gibraltar, Greece, Guernsey, US$250m - $500m $500m - $1b US$250m - $500m $500m - $1b Iceland, Ireland, Italy, Latvia, Lithuania, $1b - $5b $5b - $10b $1b - $5b $5b - $10b Malta, Netherlands, Norway, Poland, $10b-$20b $20b+ $10b-$20b $20b+ Portugal, Russia, Spain, Sweden, Percentage of respondents Percentage of respondents Switzerland and Europe.
  20. 20. Roger Bayly Angel Martin Torres Partner Partner KPMG in the UK KPMG in Spain Tel: +44 (0) 207 694 6424 Tel: +34 914 563 524 Andrew Ashby Giulio de Lucia Associate Partner Partner KPMG in the UK KPMG in Switzerland, Tel: +44 (0) 207 694 3231 Tel: 41 44 249 30 60 Drew Koecher Fergal Power Partner Partner KPMG in the US KPMG in Hong Kong Tel: +1 214 840 2576 Tel: +852 3121 9844 Peter Wiegand Bina Mehta Partner Senior Manager KPMG in Germany KPMG in Canada Tel: +49 30 2068 4348 Tel +1 604 691 3237 Jacqueline Bongartz Stephen Cheesewright Associate Partner Director KPMG in the Netherlands KPMG in Australia Tel: +31 20 656 8311 Tel: +61 (3) 9288 5645 Cyril Schlup Stephen Vaughan Director Director KPMG in France KPMG in Australia Tel: +33 (0) 1 5568 6094 Tel: +61 (2) 9295 3899 Federico Bonanni Partner KPMG in Italy Tel: +39 02 676 431 The information contained herein is of a general nature and is not intended to address the circumstances of any © 2009 KPMG International. KPMG International is a particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no Swiss cooperative. Member companies of the KPMG guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the network of independent companies are affiliated with future. No one should act on such information without appropriate professional advice after a thorough examination KPMG International. KPMG International provides no of the particular situation. client services. No member company has any authority to obligate or bind KPMG International or any other The views and opinions expressed herein are those of the interviewees and survey respondents and do not member company vis-à-vis third parties, nor does necessarily represent the views and opinions of KPMG International, KPMG member firms or CFO Europe. KPMG International have any such authority to obligate or bind any member company. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative. Designed and produced by KPMG LLP (UK)’s Design Services Publication name: Cash Survey 2009 Publication number: RRD-163084 Publication date: October 2009