fti-valuebriefingreport-ocfo

VALUE BRIEFINGWORKING CAPITAL MANAGEMENT: A Comprehensive Approach to Faster, Sustainable Results

OFFICE OF THE CFO SOLUTIONS

FTI Consulting Value Briefing Working Capital Management 1OFFICE OF THE CFO SOLUTIONS

THE CHALLENGE:

• Improvement initiatives often take too long with mediocre results

• Solutions have a limited “shelf life”

• Lack of holistic perspective

• Reliance on average-based metrics that distort true performance against key working capital metrics

• Misaligned incentives due to functional assignment of working capital responsibilities

OUR SOLUTION:

• Utilize a two-pronged approach in driving working capital efficiencies: data analytics and process diagnostics

• Leverage existing internal data to perform advanced analytics and create non-linear metrics to identify areas of rapid return

• Conduct a working capital diagnostic to identify the root causes of AP, AR and inventory management challenges and develop a holistic remediation plan that addresses people, processes and systems in its solution set

• Improve engagement of functional working capital owners, ensuring remediation plans have collective buy-in

KEY TAKEAWAYS:

• Conduct a rapid diagnostic to pinpoint otherwise hidden root causes to identify quick wins

• Engage in short and long-term remediation activities to establish processes for sustainable performance and growth

• Consider internal and external stakeholders in constructing holistic solution

• Gain greater visibility and with detailed analytics

The mandate for improving working capital management is clear–it is the most cost-effective way to free up cash, invest in the business and improve operating efficiencies. However, traditional methods often involve protracted measures and reliance on static data, resulting in missed opportunities and non-sustainable solutions.

Executive Summary

FTI Consulting Value Briefi ng Working Capital Management 2OFFICE OF THE CFO SOLUTIONS

The Challenge

ORGANIZATIONAL CONSIDERATIONS:

• No global process owner for working capital, as fi nancial and operationalresponsibilities are spread across various functions and functional leads

• Lackluster sales growth, shrinking profi t margins and highly-leveragedcapital structures elevate the importance of working capital management

• Faulty assumptions due to over-reliance on inconsistent data; “lacks asingle source of truth”

• Lack of a consistent approach to working capital management

TECHNICAL/TACTICAL SYMPTOMS:

• Frequent early or late payments to vendors

• Limited data on contract terms and vendor spend

•

• Poorly-defi ned, communicated and enforced AP and AR policies and procedures

• Excess inventory in low turnover or low profi tability products

• High propensity for obsolete and/or duplicate SKUs

• High process costs compared to benchmarks

The root causes of poor working capital management are often found in operational processes, with overwhelming consequences that can do serious damage to a company’s health.

F U N D S

Suppliers Customers

C O M PA N Y

Source-to-Settle Cycle

Source-to-Settle Cycle

Forecast-to FulfillCycle

PROCUREMENT FINANCE OPERATIONS SALES

G O O D S

Customer-to-CashCycle

Customer-to-CashCycle

FTI Consulting Value Briefi ng Working Capital Management 3OFFICE OF THE CFO SOLUTIONS

Where are you today? Where should you be? Better data analytics and process diagnostics allow organizations to migrate up the Working Capital Maturity Model more quickly.

Leading Practices

QUICK WINS

CONTROLS

TIME

WORKING CAPITAL MATURITY MODEL

STRUCTURAL

STRATEGIC

Lower Commerical

Risk

Shorter Term

Longer Term

Higher Commerical

Risk

Accelerateinvoice tocollection

timePayment controls Inventory

Corrections

Control purchasesOverdue

debtors collection

Capital Expenditure

Revise customer

terms

Revise terms of

trade

Margins improvement

Cash forecasting

Payroll taxes

Revise credit

controls

Redesign supply chain

Direct and indirect tax

Identify non-core assets for

saleStaff

incentives aligned with

cash KPIsIntroduce cash KPIs to monitor inventory cycles

Property portfolio and

redundant assets

Increased use of less capital

intensive production and

logistics channels

Target better working capital management in

supplier companies

Stakeholder management and communication including cash performance

Improve inventory

planning and forecasting

Negotiate creditor terms


Data-driven analysis coupled with a diagnostic assessment of an organization’s people, process and systems, is the best practice for identifying quick wins and creating sustainable performance improvements.

The Solution Framework

Provide hands-on implementation support to help ensure sustained benefits

Data AnalyticsQuick wins, cash in the bank

Diagnostic AssessmentLong-term improvements, sustainable management

People

Process

Technology

Policy

Develop definitive, prioritized recommendations for improving working capital performance

Review payment data for errors and anomalies; identify inconsistencies and reasonableness of payment terms/policies

Review receivables/collections data for collection opportunities, anomalies and possible recurring issues

Review inventory data for suboptimal inventory (based won turnover, stock-out metrics, customer service levels) and root causes for poor performance

Accounts Payable

Accounts Receivable

Inventory

Right people in the right job; organization aligned; roles and responsibilities defined

Controls in place; processes are e�cient and e�ective

Minimize manual processes; create a single source of truth; provide business intelligence and analytics

Governance structure and systems in place, aligned and applied


ACCOUNTS PAYABLE

• Extend payment terms; minimize early payments; optimize discounts

• Vendor rationalization and proactive sourcing (preferred vendors)

• Reduction of “rogue” spending and cost avoidance (PO use/compliance)

• Tracking and monitoring of AP KPIs/metrics (reporting and analytics)

ACCOUNTS RECEIVABLE

• Billing accuracy and efficiency

• Effective and efficient collections and dispute management processes

• Optimized customer payment, credit and contract terms

• Tracking and monitoring of AR KPIs/metrics (reporting and analytics)

INVENTORY

• Improved inventory visibility, data quality and source-to-fulfill mechanisms

• Better understanding of and focus on product profitability

• Achieve consensus forecast across sales, operations and procurement

• Implementation of vendor managed inventory, postponement and/or consignment strategies

The Benefits of Doing It Well

AR Dashboards (Illustrative)

AR Dashboards (Illustrative)

Improving working capital management provides for a more effective and efficient organization.


What’s Next? The company continues to use dashboards developed by FTI Consulting to monitor working capital, correct inefficiencies and identify additional improvement opportunities

SITUATION:

• A highly-leveraged, private equity-owned media and communications company recently re-financed a large portion of its debt

• The sponsor and management team were seeking to generate more than $75 million of working capital savings as a low-cost means of funding its interest payments

• FTI Consulting was engaged to assess and improve the company’s receivables and payables processes

SOLUTION:

• The FTI Consulting team used a multi-faceted approach to drive short-term wins and sustainable process improvements

- AP – Reviewed and analyzed invoice and payment data to identify ways to better take advantage of existing payment terms, or renegotiate vendor terms where appropriate

- AR – Identified which customers were driving increasing Days Sales Outstanding (DSO), segmenting them by customer type, business unit, and market

- Our team also developed short-term process changes and longer-term strategies by which the company could work more closely with customers to obtain earlier payment

OUTCOME:

• By minimizing early payments and correctly applying negotiated vendor terms, the company is on track to achieve its targeted $75+ million in working capital improvements

• Improved policies and procedures were implemented and communicated both internally and externally to vendors

• Increased controls led to more consistent and favorable A/P terms and reduced the frequency that terms were overridden or required expedited payments

• Improved strategies and processes led to better customer targeting and earlier collection of receivables

• Reporting and analytical tools through the use of Tableau enabled ongoing measurement of key working capital metrics

Analytics and improved visibility into performance data drove a first wave of working capital savings. Transformational changes to processes, policies, controls and systems were implemented to deliver lasting improvements.

Case Example: Global Multi-Billion Dollar Media and Communications Company

Disbursement Timing Analysis (Illustrative)

What’s Next? The company continues to use dashboards developed by FTI Consulting to monitor working capital, correct inefficiencies and identify additional improvement opportunities

About FTI ConsultingFTI Consulting is a global business advisory firm dedicated to helping organizations protect and enhance enterprise value in an increasingly complex legal, regulatory and economic environment. FTI Consulting professionals, who are located in all major business centres throughout the world, work closely with clients to anticipate, illuminate and overcome complex business challenges in areas such as investigations, litigation, mergers and acquisitions, regulatory issues, reputation management and restructuring.

www.fticonsulting.com ©2015 FTI Consulting, Inc. All rights reserved.001232

OFFICE OF THE CFO SOLUTIONS

ContactOffice of the CFO [email protected]/OfficeoftheCFO

The views expressed herein are those of the author(s) and not necessarily the views of FTI Consulting, Inc., its management, its subsidiaries, its affiliates or its other professionals.

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