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The Strategic Role of Treasury Optimizing Treasury’s Value Within the Organization
Robin Veariel, CTP SVP, Working Capital Advisor September 2015
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Transforming Treasury
Transactional “Transaction Processor” • Payment Execution • Interco Cash Movements • FX Purchases/Sales • Bank Acct Management
Advisory “Data Analytics Provider”
• Spend Analysis • Investment Options Analysis • Risk Management Advice • Policy Management
Strategic “Forward Looking Strategist”
• Cap Structure Planning • Interest Optimization • Acquisitions/Divestitures • Supply Chain Finance
Transform the Treasury Organization from Transactional to Strategic
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AFP Strategic Role of Treasury Survey Results
45%
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• What are KPI’s?
• The importance of KPI’s
• Characteristics of KPI’s
• Working Capital, A/R, A/P & Treasury KPI’s
• Solutions to improve Treasury’s value proposition
• Elevating the role of treasury in your organization
Promoting Treasury
AGENDA
What’s a KPI?
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Definition
A Key Performance Indicator (KPI) is a measurable value that demonstrates how effectively a company is achieving key business objectives. Organizations use KPIs to evaluate their success at reaching targets.
Why Measure Anything?
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Why are KPI’s fundamentally important?
How will you ever know if you’re missing the mark!
KPI Characteristics
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Characteristics of KPI’s
Practical
They integrate well with present company
processes
Actionable
They can be put into practice to effect desired change
Directional
They help to determine if improvements are
occurring
Quantitative
They can be presented in the form of numbers
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The fundamentals of KPI’s
▪Quantify performance & behaviors
▪Automate measurements
▪Make sure that measurement is non-disruptive and cost effective
▪Determine key or critical performance metrics
MEASURE
▪Track measurements over time
▪Perform regular review of results
▪Analyze trend data
▪Re-calibrate performance when necessary
▪Look to available systems to provide tracking and reporting
▪Collaborative initiatives create buy-in
▪Consistently recognize accomplishments and celebrate wins
▪Make certain to acknowledge group success
▪Create rewards in order to incentivize behaviors
MONITOR REWARD
Measure, Monitor and Reward!
What gets measured….gets managed!
Those traditional Working Capital KPI’s…
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Working capital metrics
Working Capital...
Organizations optimize working capital by…
OPTIMIZING PAYABLES
▪ Optimizing days payable outstanding (DPO)
▪ Lowered borrowing costs
▪ Reduced transaction and FX risk
▪ Streamlined processing
OPTIMIZING RECEIVABLES
▪ Optimizing days sales outstanding (DSO)
▪ Lowered financing costs
▪ Reduced transaction and FX risk
▪ Streamlined processing
BETTER MANAGING LIQUIDITY
▪ Enhanced cash flow management
▪ Optimizing visibility and control
▪ Minimized idle cash balances
▪ Reduced operating risk
Cash Conversion Cycle
= Inventory days (DIO) + Receivables (DSO) – Payables (DPO)
[Expressed as # of days measuring how efficiently short-term assets &
liabilities are being used to generate cash]
(Adjusted) Working Capital
= Accounts Receivable + Inventory – Accounts Payable
[Expressed as an absolute $ amount measuring liquidity & managerial efficiency]
Examples of KPI’s for A/R, A/P and Treasury
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Order-to-Cash
Customer Service
Collections & Cash Application
Over/Short Payment
Resolutions
Payments Received &
Applied
Fulfillment & Invoicing
Customer Set-up &
Credit
Credit, Collection, Receivables
# of new/existing credit apps processed
# credit apps amended
cycle time for new customer set-up
cycle time for new customer credit reviews
Reserves/ Reporting
EDI %
unit cost per invoice processed
% ACH
% Card
% Paper
auto hit rate %
unit cost: payment posting
cash app transactions/FTE
$ unapplied cash
average days late (ADD)
average days deductions outstanding (DDO)
days sales outstanding (DSO)
collection effectiveness index (CEI)*
unit cost: collections $
straight through processing (STP) %
days sales outstanding (DSO)
accounts receivable turnover rate (ART)
bad debt to sales %
time to close the books
cost to service $
# customer service calls
time to resolve
CEI = (Beg AR + (Credit sales/N) – Ending AR)/(Beg AR + (Credit sales/N) – Current AR) x 100
KPI’s specific to A/R
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Procure-to-Pay
Customer Service
Accruals and Reporting
Payment Execution
Invoice Processing
PO’s & Receipt Vendor Master
Data
Procurement and Payables
# active vendors
# of vendor scorecards (strategic vendors only)
% vendor reviews
% payment method: ACH, Card, Check, wire
% electronic PO delivery
% of eligible P-card spend
# and $ Pcard transactions
# and $ PO transactions
% electronic invoices
% straight through processing vs. manual
Invoice cycle time
Invoices per FTE
Per invoice cost
% electronic payments
% payments on time
% of available cash discounts taken
$ cash discounts taken
days payables outstanding (DPO)
#/% exceptions
forecast accuracy
straight through processing (STP) %
time to close the books
# of inquires and problems
root cause analysis of inquires and problems
% vendors using portal
KPI’s specific to A/P
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Treasury KPI’s KPI’s specific to Treasury
Trapped Cash Forecasting Hedging Investing
Surplus Cash Cash Position
& Liquidity
Treasury/Cash Management
Payment Execution
# of accounts managed
#/% of accounts with visibility
time spent setting position daily
# of late pmt requests
meeting liquidity targets
Integration of acquisitions
actuals vs forecast
hitting liquidity/funding target/buffer
error rate by business unit
measure vs policy thresholds
counterparty risk ratings vs policy
tracking investment vehicles
tracking investment earnings
volume of pmts – both $ and #
error rate
timeliness
% payment method: ACH, card, check, wire
costs associated with different payment methods
# and $ Pcard transactions
•hedge ratios •hedge ratio retrospective •hedge effectiveness •effective fx spot trading
domestic vs intl
monitoring bals
collaborative effort with tax/acctg/legal – time spent vs $ brought up
$ brought home or up to parent
Solutions that can improve treasury’s value
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Global Liquidity Management Techniques Centralization of Cash
Sweeping is an automated process that will physically concentrate funds of the same currency into a single account in a designated location – within the same country or across different countries, within the same bank or across different banks
A solution that improves interest earnings at account level based on balances maintained with the same bank across different countries and currencies, including trapped cash
A short term working capital tool where debit balances are notionally offset against the credit balances of the same or different currencies held within the same country for interest offset purposes, no cash actually moves in this structure
Flexible options
3 Interest Optimization
+ + + +
2 Notional Pooling
1 Physical Cash Concentration
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Global Liquidity Management Techniques Centralization of FX Management
A netting structure provides….
• Centralized and controlled hedging strategy • Improved visibility to total exposure • Reduced hedging costs and exposure • Reduced costs associated with payment processing
Flows without Netting Flows with Netting
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Global Liquidity Management Techniques Centralization of Transaction Processing: In-House Bank & Payment Factory
IHB Local EUR bank account
IHB Local USD bank account
Sub 1 Local bank account
Bank 1 EUR
Bank 2 USD
Bank 3 Currency x
Cu
sto
me
rs
Sup
plie
rs, Tax, Oth
er
IHB & Payment Factory
Sub 1 Internal account
Sub 2 Internal account
Sub 3 Internal account
Concentration
Account (in name of IHB)
Customer Billing
Supplier Billing
“Pobo” “Robo”
Clearing & reconciliation
of internal payments
Internal Funding &
Internal Loans
Cash-Less Settlements
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Global Working Capital Management Technique
Supply chain financing (SCF)
Shifting from traditional optimization of working capital to a more strategic level (e.g., finding new trade partners)
59% perceive SCF as a strategy that helps
to create business opportunities
Components to manage for maximizing financial value and opportunity…
GLO
BA
L SU
PP
LY C
HA
IN
Physical Activities
Logistics & Carriage
Challenges faced when managing the “financial activities” component…
Financing How do you evaluate options to improve cash flow efficiency?
Compliance How can you best comply with government regulations for global trade and record keeping?
Risk What options are available for mitigating risk of trade countries and counterparties?
Expansion What best practices exist to manage larger trade networks, inventories, markets and exposures?
Improvements companies can make to effectively meet those challenges…
Payables ▪ Extend days payables outstanding (DPO) ▪ Lower cost of goods sold (COGS) ▪ Control financing costs
Receivables ▪ Improve “quality” of A/R and tighter
management of earnings ▪ Lower financing costs ▪ Shorten days sales outstanding (DSO) ▪ Expand sales markets (revenue growth) ▪ Reduce payment and FX risk
Processing ▪ Save time/eliminate document
discrepancies through automation ▪ Address issues through in-country support ▪ Expand supplier base and strengthen
supplier relationships
Financial Activities
Treasury Management & Financing
Information
Technology & Knowledge Management
Source: 2014 Aite Group Survey , “Supply Chain Finance: The Corporate Perspective” (July 2014)
Supply Chain Finance
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Global receivable management trends
Regulatory and tax issues
Difficulty obtaining remittance detail
Varied clearing standards
Various payment methods
Decentralized or fragmented receivables management
Current management challenges:
Regulatory reform
Invoice matching tools
Virtual account management
Creation of shared service centers
Cost savings
Greater efficiencies
Collections/reconciliation automation (STR)
Enhanced customer service
Enhanced relationships
Improved payer behavior
Enhanced Days Sales Outstanding
Cash forecasting
Stronger commercial and operational risk management
Anticipated Benefits
Proven best-in-class environment yields significant benefits
Best-in-class transformed receivables environment:
35% one in three companies have made significant investments
in automation1
1. PayStream’s Invoice and Workflow Automation Benchmark Report 2013; www.paystreamadvisors.com
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Paying by Card: Advantages over check
60% of companies view corporate or purchasing cards as providing a clear advantages over paper checks
The Card advantage
Increased DPO (up to 55 days!)
Faster processing time (70% faster)
Easier to use
Less costly to process (77% decrease)
Requires less manual intervention
Provides greater security
Less prone to error
Source: Accounts Payable at a Crossroads, CFO Research, December 2013.
Goals
Increase convenience of purchasing for employees
Reduce the transaction processing workload
Reduce time needed to obtain goods and services
Reduce labor and administrative costs associated with procurement and payables
Obtaining better data to increase control over spending
Increasing supplier acceptance of cards
Obtaining better data to enhance leverage with vendors
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Global industry trends – what’s on your radar?
SOURCES
PWC: Manufacturing Barometer (1/2015)
IndustryWeek: 5 Manufacturing Trends that will Shape the Market in 2015 (11/2014)
Strategy&: Industry Perspectives, 2015 Industrials Trends (01/2015)
KPMG: Global Manufacturing Outlook (5/2014)
Manufacturing Global: Top 10: Manufacturing trends 2015 (2/2015)
Opportunities ▪ Consider automated pooling that may offer later cut-off times ▪ Consider an in-house banking model to drive efficiency/account rationalization
▪ Improve global cash visibility, controls and reporting
▪ Identify and mitigate the market, operating and regulatory risks of countries, institutions, counterparties and currency exchange rates
▪ Update technology for managing compliance, exceptions and market alerts ▪ Monitor impact locales, as regulations can change between operating regions ▪ Collaborate with suppliers to help share compliance/sustainability costs
▪ Utilize letters of credit/local currencies to facilitate cross-border purchasing ▪ Improve the procure-to-pay process; consider receivables/supply chain financing
▪ Automate collections/reconciliation; use invoice matching tools to reduce DSO ▪ Examine customer payment methods for potential collection redesign
▪ Move to P2E where possible; standardize channels, processes and formats ▪ Improve authorization/release control to help improve DPO
▪ Consider equipment financing approaches, both tax- and non-tax driven solutions ▪ Consolidate accounts, reduce duplicate operations, remove silos and drive better
synergy worldwide
Liquidity management
Risk management & mitigation
Receivables management
Supply chain costs/risks
Payment transformation
Increasing capital expenditures
In conclusion…
what are we trying to accomplish?
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Making connections for success
RECEIVABLES INVENTORY
PAYABLES
CASH
IMPROVEMENTS Ways to accelerate
receivables
SOLUTIONS For improving receivables
Expedite check processing and posting
of receipts
Image lockbox/remote deposit/image cash letter
Reduce/eliminate mail float
ACH, image lockbox
Improve visibility Receivables networks
Process receipts in multiple currencies
Foreign exchange
Accept multiple payment types
Merchant Services
Transform paper to electronic processes
Comprehensive receivables solutions
IMPROVEMENTS Ways to extend
payables
SOLUTIONS For improving payables
Make ‘just in time’ electronic payments
ACH / SWIFT
Reduce expense reimbursement
processing costs Card solutions
Pay in multiple currencies Foreign exchange
Extend DPO/reduce borrowing costs
Supply chain finance, card solutions
Make secure payments online
Electronic Bank Solutions
Transform paper to electronic processes
Comprehensive payables solutions
Integrate multiple payment formats
H2H electronic solutions
Remove risk and guarantee timely
payment Trade services
IMPROVEMENTS Ways to better manage liquidity
SOLUTIONS For improving liquidity
Concentration of funds Zero balance accounts (ZBAs), pooling , netting
Short-term investment options Investment solutions
Enhance portfolio safety / transparency
Custody & escrow accounts
Improve visibility Bank web portals
Reduce short / long-term risks Foreign exchange
Improve forecasting Electronic forecasting solutions
Connecting Working Capital Improvements to Solutions
LIQUIDITY
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Critical Characteristics
Communicative Collaborative
Strategic Thinking
Adaptable Consultative
Elevating the strategic role of Treasury
Clear Vision
Use the full potential of Treasury’s skills and talent to optimize financial performance
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Strengthening your value proposition
Data security
Integrations & divestitures
Global expansion
Operational efficiency
Risk management
• Treasuries need support for increasing transaction volumes, more diverse payment and receipt types – plus faster reconciliation
• Efficiency, automation, reconciliation
• Global expansion requires new payment types, cross border transactions, and FX contracts, plus global reporting
• One format, multiple payment types, increased visibility
• Fraud and cybercrime are increasing threats for 2015 • Protect from the outside – and the inside
• Risks include credit, fraud, systemic and operations risk – including risks from unauthorized access
• Automation – Push Technology
• Payment and receipt volumes are expected to become more complex and grow, but treasury department staffs will remain constant
• Increased electronification
Sources: Bank of America Merrill Lynch 2015 CFO Outlook (CFOs of companies with $25M to $2B Revenue), 2015 AFP Business Outlook Survey, PWC Global Economic Crime Survey 2014, Microsoft Digital Crimes Unit
Summary of clients’ major priorities from 2014 market analysis:
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Working Capital Management It’s all about the CASH!
Maximize Cashflow By improving DSO & DPO
Optimize Cash By deploying efficiently
Visibility & Access to Cash Through optimal liquidity structure
Protect Cash Preserve cash via risk management policies
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Summing it up Hitting the mark!
Build, deliver & leverage a comprehensive value
proposition for your organization
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Working Capital Advisory profile
ROBIN VEARIEL, CTP Central South Region, Houston
20+ years of treasury experience
713-247-6046 ● 281-770-7324 robin.veariel@baml.com
Skills
▪ Global cash management
▪ Budgeting/forecasting
▪ Debt management
▪ Intercompany/cross-border transaction management
▪ Policy development/compliance
▪ Sarbanes-Oxley (SOX) compliance
▪ Rationalizing global bank accounts
▪ Maintaining efficient and effective technology
▪ Facilitation and training related to best practices
▪ Business continuity planning
Affiliations
▪ Member of the Association of Financial Professionals (AFP)
▪ Former member of the Houston Treasury Mgmt .Association (HTMA)
▪ Past member of the American Payroll Association
▪ Treasurer roles held with various academic/athletic-related organizations
Industry Experience
▪ Energy industry, domestic as well as international, for Fortune 500 MNCs with billions in revenues; both public and private
▪ Includes work in oil & gas, petrochemicals and energy plays in emerging markets
Key Accomplishments
Improved global cash visibility facilitating enhanced cash forecasting; led extensive trapped cash initiatives repatriating billions to the parent company while reducing effective tax rates; investing billions efficiently and safely during times of challenging markets
Experience
▪ Treasury/payroll software implementations
▪ Engineering/implementation of a customized in-house TWS
▪ Debt negotiation and compliance
▪ Teamed with Tax/Accounting/Legal for M&A and global cash initiatives
▪ In-house bank management
▪ FX management/hedging
▪ Pooling structures
▪ Letters of credit
▪ Commercial card program implementations/management
▪ Foreign Bank and Financial Accounts Reporting (FBAR)
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