Overview and methodology for cashflow forecasting, improving working capital, debt sources & risk

1. Cashflow, Trade
Working Capital, Debt
& Risk
OVERVIEW AND METHODOLOGY

2. Overview
• Short term cash forecast (8-12 weeks) -> Cash
• Focus on AR/AP payment terms – physical cash movements
• Pipeline of sales & purchase orders to be delivered
• Medium term cash forecast (12-24 months) ->TWC
• Months 1-3 agree to short term
• Driven by sales forecast and inventory management / procurement
• Improving Cashflow &TradeWorking Capital
• Systems, Policies & Procedures
• Longer term cash forecast (over 12 months) -> linked to strategic
development of cash & funding
• Strategic forecast over the 3-5 year time frame (annual cashflow forecast)
• Active Balance Sheet management – debt ratios, interest rate & maturity
• Risk Management
Anthony Mason FCCA, ARM FD Solutions Limited
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3. Short term cashflow forecast
• To be completed weekly on a rolling basis and submitted to HQ to allow for
consolidation / aggregation to identify when excess funds can be deposited
or drawn down against deficits – linked to cash pooling arrangements via
core banks, and available funding
• Majority of information can be extracted from system (AR/AP) for
immediate information on inflows and outflows:
• Pipeline of orders for both sales and purchases would also provide input for later
weeks on the report
• Identify where purchases can be pushed into start of a month to extend payment date
• Payroll paid out at end of each month, but payments to HMRC made mid month after
• Impact of bonus / commission payments at quarter ends
• Identify CAPEX expenditure (or significant other one off items)
• Suppliers requiring pro-forma or payments in advance
• VAT andTax payments (or refunds)
• Comparison should also be made against the prior weeks submission to allow for
identification and explanation on significant variances
Anthony Mason FCCA, ARM FD Solutions Limited
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4. Medium term cashflow forecast
• To be submitted monthly / Quarterly on a rolling 12 month basis (up to 24
months)
• Months 1-3 must reconcile to latest short term forecast (12 weeks)
• Medium term cashflow derived from latest sales forecast, and expected
movements in inventory etc., linked to trade working capital management
• Consider current performance for DSO – identify improvements in debtor and cash
collection – or any negative impact from significant delays / new contract terms
• Identify inventory movements – and impact upon both delivery and payment terms
with suppliers ->business cycle when inventories will increase / sales fluctuate
• Impact of supplier payment deferment at quarter ends
• Identify value of suppliers that must be paid v those that can be paid in the next quarter
• Compare forecast (DSO/DIO/DPO) against actual performance in past 12
months – any significant variance requires explanation / action improvement
• Impact of Non trade working capital items (e.g. significant rebate accruals,
provisions etc that will be paid out or received in next 12 months)
Anthony Mason FCCA, ARM FD Solutions Limited
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5. Improving cashflow & Trade working capital
• When operating across a group of companies or territories, it is
essential to have a common approach and calculation for KPI
measurement:
• DSO – Day sales outstanding
• (Current Month Net Receivables / 3 MonthsTotal Sales )* 90 days
• DIO – Days inventory outstanding
• (Current Month Net Inventory / 3 MonthsTotal Cost of Sales )* 90 days
• DPO – Days Payable outstanding
• (Current MonthTrade Payables / 3 MonthsTotal Cost of Sales )* 90 days
• Cash ConversionCycle (sum of DSO+DIO-DPO) indicates the time taken for sales
to be converted into Cash.
• Consider impact ofVAT upon the calculation as sales/ COGS figure will excludeVAT
whereas Debtor & Creditor value will include this (e.g. UKVAT 20% v IEVAT 23%) and
the impact of EU trade at 0% - increase in proportion of EU trade “improves” DSO
• For longer term CCC use the average values rather than current month
Anthony Mason FCCA, ARM FD Solutions Limited
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6. Improving Trade Working capital
Reporting format - activities with an estimated financial impact (Report all values in MEUR)
Updated: Division / Implementation Ongoing effect Realised
Business Line / Country / Contact person / Released costs on oper. inc today Financed Start of Deadline
Activity no:BA / BU Description of activity Segment Area Function Responsible Capital item? Capital (if material) (if material) (MEUR) by Status Activity for activity
1 Receivables 0.0 Green Not Specified Not Specified
2 Inventory 0.0 Yellow Not Specified Not Specified
3
Trade
Payables
11.4 Red Not Specified Not Specified
4 PPE 1.1 Green Not Specified Not Specified
5 Not specified 0.0 Yellow Not Specified Not Specified
• Once KPI’s have been agreed – areas of improvement and new
targets can be agreed upon:
• Activities can be a identified and allocated to individuals responsible for delivery
• Target values, start date and deadline for the activity
• Monthly feedback can be included with the latest cashflow forecast
• Identifying improvements that will impact future cash forecast
• Any cost impact on the P&L arising from capital being released
Anthony Mason FCCA, ARM FD Solutions Limited
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7. Improvements in Trade working capital
• Initiate benchmarking – identify areas where improvement should be
possible – dependant upon local norms (e.g. Italy v German credit terms)
• Best practice in one area / region should be transferrable
• ImplementCredit management policy & guidelines
• Credit management approval (credit terms) and risk management (credit limit)
• Develop consistent approach and appropriate escalation procedures
• Terms and limits to be agreed by local SMT ->escalation above agreed limits
• Identify mitigation – credit insurance
• Identify issues around procurement and inventory management
• Provision based upon common policy – exceptions to be discussed and agreed
• Aging of inventory and expected utilisation period to provide % provision
• Return of goods to supplier (discount) or transfer to another gr0up entity
• Disposal of inventory at 100% provision for upside to income v release of provision
• Supplier terms and conditions to be centralised and common across entities
• Implement common terms of payment across suppliers (e.g all suppliers at 30 days EOM)
• Rebates / volume agreements
• Negotiate Active Discounting for early payment – better return than cash in bank
• Property, Plant & Equipment – disposal or acquisition having a cash impact
Anthony Mason FCCA, ARM FD Solutions Limited
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8. Systems for cash flow reporting
• Reporting can be performed via excel templates - however, for group
purposes the submission should take place within a live reporting
system:
• Rexel utilised ‘magnitude’ linked to SAP business objects, for each entity to
submit to HQ in Paris
• There was also a weekly forecast for payments linked to treasury to provide funding in
advance of the payment requirements
• As deputy CFO for the UK & Ireland ,The UK submitted one value for all UK entities
(aggregated via excel)
• ABVolvo utilised a web forecast system linked to Hyperion Essbase – uploaded
via an excel add-in
• This enabled efficient extraction and development of consistent reporting, when
comparing separate markets across the European Region.
• Actual & forecast submissions were in the same system enabling comparison and
targeting of queries as part of the monthly commentary process
• As Director of Finance for the European Region I was responsible for working with the
country CFO’s and driving improvements in the cashflow and trade working capital
delivered to HQ in Brussels
Anthony Mason FCCA, ARM FD Solutions Limited
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9. Longer term cash forecast
• As part of the annual budget planning & 3-5 year strategic forecast their will be a
submission for the cashflow
• Sales growth / margin / EBITDA
• Improvements inTWC
• Capex requirements for investment /Acquisition
• With targets set within each entity to deliver positive:
• free cashflow
• cash conversion
• Net Debt development
• Ensure solid Free Cash Flow generation converted from EBITDA
• Set target for all entities -> and improvement over time
• Example: 75% of EBITDA converted into Free Cash Flow
Anthony Mason FCCA, ARM FD Solutions Limited
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10. Active Balance Sheet management
• Identify time frame for debt reaching maturity and additional funding
requirements based upon expected cashflow being delivered in the
long term forecast
• In support of business development, acquisitions and capital investment as
outlined in the 3-5 year strategic plan.
• Forecast and plan for net debt v equity mix
• SetTarget for net debt v equity
• e.g net debt should not exceed 15% of shareholders funds
• Set target for net debt to EBITDA ratio
• E.g. net debt to EBITDA to be below 3x (eg. EBITDA £1bn = Net Debt < 3bn)
• Set target for average maturity of debt & to increase to maintain
funding stability
Anthony Mason FCCA, ARM FD Solutions Limited
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11. Debt Management
• Develop sound financial structure, mixture of types of debt and maturity
timeframes
• Ensure natural hedging with USD,EUR,GBP debt funding operations in those
currencies (as much as possible)
• Senior unsecured notes (USD/EUR) range of maturity dates (7-10 years)
• Senior credit agreement (drawn / undrawn)
• Securitization through core banks (debtor funding)
• Commercial Paper
• Other debt & cash (short term instruments / loans)
• Ensure strong financial flexibility with available cash and undrawn facilities
• Identify cost of funding and set target for reduction in average effective
interest rate
• Actively manage facilities and identify when debt maturities (or options)
can be redeemed and replaced by new facilities with positive cash impact /
return on investment (net present value)
Anthony Mason FCCA, ARM FD Solutions Limited
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12. Risk Management
• Risk is not bad – we are in business to take risk. Shareholders expect risk and
associated return.
• Investors who do not have this appetite invest in non-equity alternatives
• Risk management is balancing the expected return to the shareholders against the
expected risk(s) of any given action
• Risk management is a part of everyday management.
• For major risks which are inherent in business, it is beneficial to have a central
coordination of competence.
Anthony Mason FCCA, ARM FD Solutions Limited
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13. Risk examples to be managed in a coordinated way
• Brand/image management
• Standards with respect to safety and quality
• Optimisation of currency flows
• Credit exposure & Sales financing instruments
• Residual value management
• Protection of property and continuity of business
Practical & operational – not theoretical and isolated
We are not a risk « prevention » department
Anthony Mason FCCA, ARM FD Solutions Limited
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14. Risks – that businesses “want” or “like”
• Manageable risks with quantifiable, non-material downside supporting good business upside
potential (example – customer credit)
• Risks which can be monitored and affected to minimize downside (eg currency risk, credit
risk,…)
• Risks which can be diversified, shared or insured
• In all above cases, risks which are
Clearly identified
Quantified
Minimized without sacrificing business objectives
Diversified in a cost effective way
Communicated to relevant parties for purposes of monitoring
Anthony Mason FCCA, ARM FD Solutions Limited
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15. Risks – that businesses do not like
• Ones that nobody knows we’re taking
• Non-quantifiable risks with potential for material effect
• Risks taken to support activities of questionable business value (ie
unneeded risk)
• Risks to core values and ethics which can not be managed or
controlled (ie selling an outside product which has not been
thoroughly reviewed, tested etc)
• Risks to support non-strategic activities (I.e. speculative activities)
Anthony Mason FCCA, ARM FD Solutions Limited
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16. Implications of risk management
• Risk Management is not a business prevention department – that’s easy!
• What’s needed are the skills to coach/educate the line and operational functions concerning:
 How to identify risks
 How to quantify risks
 How to evaluate risks
 Support in diversifying and selling off risk
 Monitoring services to help follow up on risks in a structured way and balance the total
exposure for the Company
• You can’t do this all from behind your desk – need to get out into the business, communicate and
evaluate business opportunities and mitigation.
Anthony Mason FCCA, ARM FD Solutions Limited
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