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Compliance Ecosystem Transformation • Compliance Technology & Data Analytics • Business Consulting • Internal Audit & SOX

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The Orchid Advisors Webinar Series Presents:

Cash Management & Working Capital Opportunities

September 18, 2014

2012-2014 © All rights reserved / www.orchidadvisors.com / 100 Pearl Street, 14th Floor, Hartford, CT / Telephone 855.ORCHID.0 This document is for your company’s internal use only and may not be distributed to any third party. Transforming The Compliance Ecosystem

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Hosting Today’s Webinar

Jon Rydberg, CEO and Five-time Author •  20 years global business consulting at Ernst & Young, Protiviti; Former CCO & VP Internal

Audit for multiple public companies including Smith & Wesson. •  Expertise: Supply Chain and Cost Optimization; Shared Services and Financial Close;

System Implementations; Internal Audit; Sarbanes-Oxley; Corporate Compliance.

Michelle Ingram, CFO and Client Data Analytics •  15 years at Bank of America, Latham & Watkins, Cigna Investment Services, Disney •  Expertise: Finance & Strategy; Secondary Markets and Securitization; Financial Analytics

and Data Mining; Credit and Receivables Optimization; International Finance

Jeff Grody, Principal •  9 years General Counsel at Colt Defense; 25 years private law practice; Partner at Day,

Berry & Howard; Columbia University School of Law; Princeton University •  Expertise: M&A, Corporate and Commercial Transactions, Corporate Restructurings,

Turnarounds, Intellectual Property, Supplier Contracts, Business Disputes


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About Orchid Advisors

!  Strategic management consultancy focused on operational excellence derived from strategy, internal control and data analytics.

!  Provide economies of a boutique with depth of Big Four and top-tier legal / corporate

environments.

!  Solve C-level challenges related to:

Business Performance Working Capital (Today’s Discussion)

Governance & Control

•  Strategic lifecycle services •  Aligning execution to

strategic plan •  C-Suite / Board Advisory •  Operational turnarounds •  Project management •  Learning Management

Systems (LMS)

•  Working capital planning* •  Rationalize / benchmark costs* •  Cash recovery and financial leakage* •  Receivables and credit* •  Optimize inventory * •  Navigating bankruptcy / liquidity

•  Corp compliance / ethics •  Regulatory compliance •  Internal audit •  Sarbanes-Oxley •  Control optimization •  Enterprise Risk Mgmnt •  Policy development

*Areas to be discussed today *Contingent fee pricing available.


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Agenda

! Define working capital

! Understand Drivers of Cash and Working Capital Management

!  Indicators of Working Capital Optimization Needs

! Macro Economics

!  Impact Analysis – A Closer Look at Key Areas

! Case Study - Vendor Management and Payables


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Webinar Objectives

!  Establish a uniform understanding of working capital management. •  What does it mean from an operational perspective? •  What does it mean from an accounting perspective?

!  Dissect the primary sources of working capital optimization.

!  Review methods and a case study for working capital optimization.


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Defining Working Capital

!  Measure of liquidity, efficiency and overall health - it is money available for day-to-day operations.

!  The formula for working capital is Current Assets less Current Liabilities.

!  It is generally impacted by the following constituents:

•  Cash and Marketable Securities

•  Accounts Receivable and Credit

•  Inventories

•  Accounts Payable


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Understand Drivers of Cash and Working Capital Management

Cash / working capital management require introspective view of key areas.

Inventory Management •  Is our inventory growing? •  If so, where in the cycle (Raw, WIP, FG)? •  How do our inventory turns stack up?

Accounts Payables •  Are we taking advantage of our discounts? •  Do we have standard terms? •  How many invoices do we process?

Credit Management •  Do we have a credit Policy? •  Does Sales promise orders despite over credit

limits? •  Will we be able to collect?

Cost Optimization •  Have we optimized our supply

base? •  Do we have control over our

purchasing function? •  Who is monitoring G&A

spending?


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Consider The Cash Conversion Cycle

Cash surplus and deficit is highly impacted by the conversion of materials to cash.

–  Sales and operations plan –  Product development –  SKU rationalization –  Contracts –  Pricing –  Demand management

-  Float and Collections –  Credit terms –  Payables –  Financing –  Cash Forecast

Sales

Operations

Finance

Inventory Conversion Period + Receivables Collection Period

- Payables Deferral Period

Cash Conversion Cycle

–  Sourcing –  Procurement –  Cost optimization –  Inventory management –  Receiving accuracy –  Shipping accuracy


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Working Capital Diagnostics

What will a one day improvement in any of these metrics mean to you? Do you know? •  DSO •  DIO •  DPO •  DWC


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Indicators of Working Capital Optimization Needs

!  Economic pressure and times of uncertainty •  Rapid drops in demand •  Growing inventories

!  Unstable or growing cost structure •  Price increase to cover margins •  Unabsorbed overhead costs •  Increase cost of supply

!  Operational weaknesses •  Limited demand visibility •  Weak internal controls esp. over inventory, logics and cash/credit processes •  Weak computing systems and weak transaction control •  Fragmented supply base and tactical purchasing •  SKU proliferation

!  Lack of recent leakage analysis or cost benchmarks


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Lets Look at the Economic Landscape

CEOs see economy short-term underperforming; long-term rebound possible.

!  Economy’s output recovered in Q2, advancing annual rate to 4%. Economists still lowered ‘14 forecasts per slow start. (USAToday, Aug ‘14).

!  CEO’s see economy underperforming in next 6 months. “.....results reflect an underperforming economy held by policy uncertainty and growing world conflicts.” (Marketwatch, Sep ‘14).

!  IMF maintains 3% growth outlook in ‘15, saying meaningful economic rebound is on its way. U.S. must cut spending and raise revenue to avoid public debt overwhelming country’s finances. (Source: WSJ)


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And...Macro Inventory and Sales Trends

Inventory is a leading indicator. Higher implies lower sales; Lower implies a business pick-up. Higher also indicate greater confidence in future sales. !  Trade sales / mfg shipments for July ‘14 up 0.8% from June ‘14 and up 5.3% from July ‘13.

!  Adjusted mfg’s and trade inventories up 0.4% from June to July ‘14 and up 5.9% from July ’13.

!  Inventory / sales ratio shows how long existing inventories will last if current rate of sales continues.

Census.gov, Sept ‘14


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And...Macro Credit Availability and Needs A Survey of Business Owners

NFIB Research Foundation; September 2014

!  4% reported credit needs not met, equal to record low.

!  28% reported credit needs met, and a record high.

!  2% reported financing was top business problem compared to 24% citing taxes; 19% citing regulations and red tape; 13% citing weak sales.

!  Most favorable reading about credit market since 2006. Occurring when Federal Reserve is terminating its aggressive QE3 policy.

!  Interest rates low, but prospects for putting borrowed money profitably to work are not great and so loan demand remains weak among business owners.

More business owners expect that it will be “harder” to arrange financing than easier.


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Impact Analysis

Key Elements Areas to Focus

Working Capital Management

!  Planning !  Diagnostics !  Key metric measurement

!  Optimal levels !  Controls to govern use !  Accuracy of reporting

Rationalize / Benchmark Costs

!  Strategic sourcing / procurement !  Indirect sourcing !  Labor costs analysis !  Organization structure !  In-source / Out-source (Make/buy)

!  Benchmark costs !  Restructure sources of supply and

contracts !  Leverage spend !  e-Catalogues and Procurement card use

Cash Recovery and Financial Leakage

!  Accounts Payable !  Tactical Purchasing

!  Duplicate payments !  Unused credit memos !  Vendor master file cleanup !  Large volume invoice / small payments !  Voided payments !  One-time vendors !  Invoice processing time !  Royalty audits

Where can we make adjustments to have the most impact on working capital?


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Impact Analysis (continued)

Key Element Areas to Focus

Receivables and Credit

!  Credit management !  Accounts Receivable !  Cash allocations

!  Standardize credit terms !  Customer Acceptance !  Aging and Review of Receivables !  Proactive Cash Collection Efforts !  Consider Outsource Collections

Optimize Inventory

!  Receiving

!  Shipping

!  Stores

!  Obsolescence

!  Alternative specifications

!  Timing and pull

Where can we make adjustments to have the most impact on working capital?


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Rationalize and Benchmark Costs Strategic Sourcing

Spend Management: Supplier Fragmentation (returns up to 15%) !  Standardize material specifications !  Aggregate demand into larger buys !  Rationalize the number of suppliers !  Utilize modern procurement tools !  Audit contracts for compliance


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Cash Recovery and Financial Leakage Accounts Payable (AP)

Accounts Payable: Reduce Leakage (returns up to 1% of spend) !  Spend Analytics Across: A/P, P-Cards, T&E, Claims, Contract Compliance and Fraud !  Standardize Favorable Payment Terms !  Duplicate Payments Recovery Analysis !  Master File Cleanup !  Processing times vs discount period !  Number and value of unused credit memos !  Quantity of invoices per payment

!  Impact of early supplier payments !  Impact of payment term variation !  Lost discount analysis

Credit 2008 Protiviti Webinar


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Receivables and Credit

Aggressive(

Moderate(

Conserva0ve(

Sales(

Current(Assets(

An important decision facing executives...how aggressive should our credit policy be? !  Aggressive: Requires higher current asset balances. Sales are generated through more

significant extensions of customer credit. !  Conservative: Current assets are limited and forced to produce more with less. !  Either working capital policy require important decisions about your business, customer

base, and your ability to finance these current assets with short term credit.

Facilitators to working capital improvements: !  Shortening processing time and sell

goods faster. !  Decease collection times to reduce

Accounts Receivable collection period.

!  Defer payments where appropriate.


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Optimize Inventory

How much is your inventory costing you? The cost of carrying or holding inventory is the sum of the following costs: !  Money tied in inventory, such as cost of capital or opportunity cost of money. !  Physical space occupied by inventory including rent, depreciation, utility costs, etc. !  Cost of handling the items. !  Cost of deterioration and obsolescence. The standard rule of thumb for inventory carrying cost is between 20% and 30%. Inventory carrying cost is different for every business.

Source:accountingcoach


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Accounting View of Inventory and the Cash Conversion Cycle

For example: !  $3,000 day in interest to buy, hold and sell inventory.

!  That results in $262,000 in interest to cover inventory borrowing needs.

!  An improvement of 9 days could yield a $31,000 interest savings per year.

0"" 20"" 40"" 60"" 80"" 100"" 120""

Days"in"A/R"

Days"in"Inventory"

Days"in"Payable"

Cash"Gap"

Days

"Cash"Needs"@"Most"Recent"Year"

0"" 20"" 40"" 60"" 80"" 100"" 120""

Days"in"A/R"

Days"in"Inventory"

Days"in"Payable"

Cash"Gap"

Days"

Cash"Needs"@"Post"Improvements"


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Case Study A Look at Vendors and Payables


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Lets Uncover Poor Use of Cash

Begin by characterizing the environment – what are they dealing with? •  2-3 times

normal invoice volume.

•  One vendor submits 5,000 invoices per year.

•  Significant number of low-dollar purchases.


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Uncover Poor AP Processing Capabilities

What is the capability of your AP function to manage cash?

Impact !  3 times as many employees as necessary. !  Weak transaction processing. !  Duplicate payments. !  Discounts not applied; Unused credit memos. !  etc.


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What is missing?

•  10-15 years behind in basic Accounts Payable technologies.

•  Accounts Payable is beaten down due to slow process and failures to take discounts.

Benchmark To Others


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What Should You Do After This Webinar?

!  Short term actions

•  Benchmark and optimize your cost structure – where do you really stand?

•  Consider Strategic Sourcing / Procurement optimization – why not increase profits?

•  Consider immediate payables analysis – it costs nothing!

!  Long term actions

•  Accelerate conversion of working capital to cash by optimizing the cash conversion cycle.

•  Get analytical with your scenario-based cash flow forecasting.

•  Implement zero-based budgets / Seriously review discretionary spending.

•  Analyze span of credit, contract, purchasing and payables control.

•  Assess out-sourcing and/or in-sourcing opportunities.

•  Develop exit strategies for unprofitable products and loss leaders.

This document is for your company’s internal use only and may not be distributed to any third party. www.orchidadvisors.com / 100 Pearl Street, 14th Floor, Hartford, CT / Telephone 855.ORCHID.0 / all rights reserved

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