Cashflow and the CREDIT CRUNCH: How to keep it flowing

www.sungard.com

Presented by

Colin Campbell

Senior product director, Asia Pacific

Who we are

“I have never watched rapids where boats go in and come out the same way. You should never waste a good crisis and in crisis there is always

opportunity”

Source: Deloitte CEO Giam Sweigers Financial Review May 2009

Agenda

What is Risk?

What is financial Risk?

How risk impacts organizations aspirations?

Why manage Risk?

How should risk be managed?

Requirements for “”effective” risk management.

This better be good because I know… CASH FLOWS!

What is Risk?

To take risk is the essence of economic activity….the main goal must be to enable companies to take the right risk…by providing knowledge and understanding of the alternatives. Peter Drucker 1974

Risk is anything that gets in the way of an organisation

achieving it’s strategic objectives

The impact to poorly managed cash

Cash has a holding cost The income earned by investing it, OR The interest cost of borrowing it

Cash is subject to shrinkage Decreased margin on sales due to late payment Interest rates Exchange Rates through Multi Currency Trading

Inaccuracies in Forecasting and Monitoring Short Term lending at higher Interest rates Lack of Actual income to supplement Financial management Dispute resolution Insolvency

“After 15 years of good times there has got to be an element of poor quality. In fifteen years badly run businesses can make money. Right now they can’t and we are beginning to see that normalisation happen.” Source: ANZ Chief Executive Mike Smith

Financial Plumbing

Sales Bookings

Cash Collected

On Average 1 in every 4 Invoices has an issue or

dispute that requires attention.

Quote OrderManagement

Manufacturing Logistic/Delivery

Invoicing Collections Returns CashApplication

Where is this Risk?

Delays/inefficiencies in the Order to Cash Domain (Intra Domain efficiencies)

Billing

• Sales trend analysis

• Revenue forecasts

• Cash Management

• Period Reporting / Ad Hoc analysis

Order Management/

Distribution

Accounts

Receivables

Credit &

Collections

Customer

Management

Reporting &

Analysis

• Master data maintenance

• Account Reconciliation

• Query Management

• Customer Credit Line updates

• Credit Control • Payment follow

up • Dunning Letters • Disputes and

Deductions Management

• Banking channels

• Bad debt provisioning and write – offs

• Fraud Monitoring

• Cash Application

• Revenue accounting and accruals

• Debt / credit notes

• Returns and chargebacks

• Deductions and Warranties

• Discounts and allowances management

• Invoice generation and dispatch

• Freight and Tax management

• Invoice adjustments

• Sales Management

• Order Entry • Order

Tracking • Shipment • Service

Management • Database

Management • Terms of Sale

Order to Invoice (O2I)

Invoice to Cash (I2C)

• Data is available in ERP systems but is often fragmented

• View on cash positions and liquidity forecasts to be poor across industries – This also creates the cash trap

• Cash gets trapped due to variety of upstream root cause issues emanating in the order to cash cycle • Domains, by nature of the activity, often reside in the various areas of the firm. This makes the O2C cycle a challenge to manage • Effective methods to determine and fix root causes – do not often exist in house

Big cash traps

Caught by Surprise…ANZ chief executive Mike Smith says companies are becoming “basket cases” overnight. Source: ANZ Chief Executive Mike Smith

Financial Risk.

90 Days

180 Days

360 Days

Current 1-10% margin Reduction

18-22% margin Reduction

45-55% margin Reduction

75-85% margin Reduction

90-99% margin Reduction

Poor Visibility You can’t manage what you can’t see.

High Costs – Primarily Headcount

Is technology, culture or apathy the crossroad you face in your organisation?

High DSO (Compare to Industry)

Disputes are Ignored

Lack Protocol / Standards

How can I make my department better?

Is this due to design, neglect or ability?

How can you control your environment better?

How Cash Flows Through the Organisation

Credit assessmentCredit Limits

Risk managementCollections Strategies FactoringInsurance

Banking Arrangements

Cash Transmissions

Working Capital Control

Investing Surplus Funds

Obtaining Funds Interest Rate

ExposureExport Finance Project Finance

Buying Currency Selling Currency

Currency Exposure

Management

Treasury Managemen

t

Credit Management

Cash Management

Funding Management

Currency Management

“Businesses continue to wear the pain of higher borrowing costs as the big banks raise loan rates and tighten credit criteria for corporate clients.” Source: NAB Executive Director of Finance Mark Joiner

How many boxes do you Tick?

Dated Technology

Disparate Systems – Operating on Multiple ERP Systems

Manual Process Management

Automate the Reminders, Automate the Workflow, Establish Call Queues Based on Strategy

Document Storage and Retrieval

Tracking Invoice Paths, Address Past due A/R Right Away, Getting Copies of Invoices to Customers Quickly

Control MechanismsEstablish escalation Paths, Provide more Transparency, Modify Internal Behaviour to Manage Disputes

Management Backed PracticesMaking Prudent Lending Decisions & Have a Documented Plan in Place to Manage A/R

Moving from Theory to Practice

The “theory” of driving Cash-Flow improvement through Working Capital is well

known…

Many functions are involved

Process hand over's between functions are often the weakest link

International/multi-language environments with different “cash” cultures

Gaining buy-in, raising understanding and getting people working together

Driving simultaneous activity from top-down and bottom up

But in practice it is a great deal more complex

Failure to adequately record goods receipts – can result in additional emergency orders being raised for the same part

Failure to send the customer invoice on time, or incorrect details (price/quantity, purchase order reference number) extends the time to receiving payment

Failure to apply the negotiated terms, can mean supplier payments are made earlier than necessary

Equally “process conformance” (or non-conformance) has a major impact

What Drives Working Capital?

How quickly you convert supplies into a product available for sale (production lead-time/storage and shipping time

Customer payment terms & how long it really takes you to collect the cash Payment terms with suppliers (and the point you take ownership)

“Simple” business elements do actually drive the level of working capital required by

an organisation…

Who Drives Working Capital?

Working Capital Management: Involves many functions

Directly impacts P&L

Needs to be considered in day-to-day decisions

Improves customer service in many ways

Delivers a fantastic return, creates significant value and supports strategic goals

Reality

Working Capital Management: Is a Finance issue

Is purely a balance sheet item

It is only in focus at year-end

Will be detrimental to Customer Service

Has limited ROI potential and doesn't align with business strategy

Perception

Key Elements to World Class Performance

APPLY A SYSTEMATIC APPROACH TO RISK Optimize Process and an enabling Technology

Automation vs. Manual Processing Increase Productivity

Consolidation of Disparate Systems

Reduce Redundancy & Error Improve Visibility

Collaboration

Leverage Data & Resources Improve Communication

Three Things you can do Today…

APPLY A SYSTEMATIC APPROACH TO RISK

Comprehensive Review of Credit Risk on an Enterprise Level with Embedded Controls to Initiate Action if Required

AUTOMATE THE 02C WORKFLOW

Strong Collection & Deduction Practices based on a Strategic Approach to Mitigate Risk

DRIVE ENTERPRISE WIDE VISIBILITY

Dashboard Visibility to Highlight Potential Areas of Concern and to Ensure Timely Resolution

Best Practices – Portfolio Management

APPLY A SYSTEMATIC APPROACH TO RISK

Comprehensive Review of Credit Risk on an Enterprise Level with Embedded Controls to Initiate Action if Required

Best Practices• Automate the corporate credit policy• Use of automated credit scoring• Segment all customers by risk• Daily credit review work queues for credit analysts based on configurable parameters

(Customer approaching credit limit, customer ADTP increases 10% over 3m)• Periodic reviews of all customers• Automatic adjustment of collection strategies based on changes in risk grade• News alerts

Best Practice – Collections Management

AUTOMATE THE 02C WORKFLOW

Strong Collection & Deduction Practices based on a Strategic Approach to Mitigate Risk

• Best Practices• Drive workflow to the collector work queue• Stay in contact with your customer• Use Risk Based Collections• Immediately address disputes• Use automated matching for cash application• Dispute Resolution Analysis

•Build the Framework for Enterprise Wide Visibility

• Consolidate Data from Multiple Sources to Single Solution

• Embed Policy to Automate Processes & Drive Workflow

• Leverage Data Across the Entire Order-to-Cash Cycle

• Facilitate Internal & External Collaboration

• Track Performance, Adherence to Policy & Effectiveness

Elements that build a path to effective management of your cashflow….

Drive Enterprise Wide Visibility…..

• Best Practices

Key Elements to ensure cash flows you can effectively manage

Automate Credit Risk Management

Drive Collections/ Disputes

Management

Close the loop with Sales & Service

Apply Cash Quickly with Intelligent

Matching Elements

Build the Framework for Enterprise Wide Visibility

Provide On Line Payment Channels

Integrate Commercial/

Consumer Reporting Channels

Visibility: How do you Monitor Collection Activity?

Real Time View of Activity

Take Corrective Action as Needed, in real time

Empower Business units to become PARTNERS not ADVERSARIES

Visibility: Cash Application, How can you gain Visibility?

CASH RECEIPETS – CASH ALLOCATED

Typical Improvements Realised in Working Capital Projects

Source: REL Consultancy

Key success factors for releasing Cash through Working Capital

It’s not just process!

• Set-up a Working Capital measurement system

• Focus action by creating a Working Capital Council with Board level leadership

• Clearly define responsibilities and improvement targets

• Get people to think outside their function to improve the ‘end-2-end” process

• Document ‘best practices” – develop and train the organisation in how to implement them; policies, processes. IT tools, organizational alignment and metrics

• Change the focus of rewards – not just sales and profit, but cash generation too!

Collaboration is Vital to Achieve Success

Efficiencies across the financial supply chain will be a key focus with CEO’s and CFO’s for Liquidity and cashflow. The absolute need to operate a lot more smartly and adhere to the rule that “Cash is King”

Thank You

AvantGard – Collaborative Financial Management