Beyond Conversion Cycle Optimization

February 5-7, 2020 Dallas, Texas Paul LaRock Jeff Diorio Director Director Treasury Strategies Treasury Strategies AT&T Stadium Home of the Dallas Cowboys Session Description

• Working capital management was the number 1 priority for Treasury departments in 2019 and looks to be the same in 2020. In this session we will expand on traditional working capital management by incorporating an emphasis on making transaction processing more efficient. While the traditional working capital focus on DSO, DPO and DIO benefits the , a cash conversion cycle optimization approach incorporates reduction of all costs associated with the processing of transactions inherent in working capital management. • This session will describe how to design a data-driven collections and disbursements strategy that will enhance working capital metrics while also lowering processing costs. • This session will conclude with an interactive Q&A discussion of ideas for optimizing participants working capital. Agenda

• Cash Conversion Cycle Basics • Working Capital Management • Transaction Processing Optimization • Framing Forecasting • Influences • Challenges • Approach • Liquidity and Forecasting Best Practices Why Working Capital? 2019 Survey Results

Results of online survey of 400 Treasury users indicated Working Capital Optimization was #1 item they were focused on for 2019.

OPPORTUNITIES Rank 2019 Rank 2018 Rank 2017

Working capital management 1 - -

Cash forecasting 2 3 4

Financial , FX and IR 3 1 1

Bank relationship management 4 5 3

Treasury staffing levels and skill sets 5 8 8

Source: Treasury Strategies 2019 State of the Treasury Profession Survey Interviews: 2019 Opportunities

Results of interviews of 30 Treasurers put Working Capital optimization as the top item on their to-do list for 2019. Early results have it as #1 for 2020 as well.

Primary Driver

FROM STRATEGIC TO TACTICAL

Optimizing existing Liquidity Working New technologies and Corporate New payment tools technology and Risk management Optimization automation capabilities partner and opportunities capital people

Related Initiatives

Source: Treasury Strategies 2019 State of the Treasury Profession Survey 2020 Initiatives • Bank services and Card optimization • Technology Optimization: TMS, ERP, new technologies (Dashboard, RPA) • Optimizing a multi system environment • Technology roadmap • Liquidity management • Cash visibility • Forecasting • Working capital optimization • DPO/DSO optimization • Payment hubs and • Risk, Fraud and disaster mitigation • BRP/BCP • Payment workflow • BAM and entitlements • BEC and account validation

Source: Treasury Strategies 2019 State of the Treasury Profession Survey A Holistic Approach to Cash Conversion Cycle Optimization

• Cash Conversion Cycle = DSO + DIO - DPO • Improve Transaction Processing Efficiency Cash Conversion Cycle Optimization (CCCO)

Procure to Pay Order to Cash

Supplier Goods Supplier Supplier Customer Customer Shipment Goods Shipped Customer Pays Ordered Invoice Payment Orders Invoiced Received

DPO DSO DIO Supplier Credit Customer Credit

Formal Cash Conversion Cycle What is Working Capital? Drivers Working Capital Management Successful Outcomes

Information Management

Supply Chain Management

Credit Policy

Revenue Strategy Payables • Maximized cash • Improved costs & efficiencies • Managed risk Payment Channels • Achieved strategic benefits • Satisfied customers Receivables Risk Management

Technology Working Capital Management Objectives

Objective Benefits

Improve costs & Achieve strategic Optimize W/C Manage risk efficiencies benefits

• Reduce Days Sales • Automate manual • Reduce payment fraud • Focus staff on strategic processes Outstanding (DSO) • Manage credit risk activities • Reduce payment costs • Optimize cash • Improve payment data • Capital planning • Maximize forecasting concentration management & forecasts • Forecasting • Optimize balance levels • Improve staff • Financial analysis productivity • Increase internal controls and investments • Strengthen customer • Pay down debt around payments • Achieve optimal Days loyalty • Invest additional funds • Payables Outstanding or extend maturities Improve customer (DPO) satisfaction • Minimize collection • Improve relationships float with suppliers Best In Class Working Capital 1. Align overall operational processes with stated strategic intent. 2. Engage executive-level support for and involvement in working capital optimization as a prerequisite for reducing the amount of cash invested in their operations. 3. Centralize and standardize financial transaction processing to drive maximum efficiency and to draw meaningful insights out of underlying data. 4. Take a cross-functional approach to working capital accountability and continuous improvement of receivables and payables processes. 5. Use data from an ERP system to inform daily credit and collection activities. 6. Conduct real-time analysis of cash flow drivers to ensure reliable forecasts and optimize spare cash. 7. Analyze, measure, and advise operating units on how to increase the return on working capital invested in operations. 8. Design custom measures of working capital management that are relevant to their business models. 9. Apply quality and productivity tools to process improvement efforts in finance. 10.Leverage change management principles and practices in finance. 11.Identify and Resolve data discrepancies on the front end of the process. 12.Manage working capital risk. 13.Offer self-service to drive efficiency. 14.Conduct transactions electronically whenever possible, and work with vendors so they can do the same. A/R Improvement Potential

The One-Day Difference: Days Sales Improvement

90

80 Millions 70

60

50

40 CashReleased 30

20

10

0 1 2 3 4 5 6 7 8 9 10 Days

Sub One (Blue) and Sub Two (Purple) AR Improvement Levers

• Address inherent market / customer volatility by aligning business processes to Inherent Level serve specific streams. • Only use standard terms and conditions for new contracts. Standardize Terms Structural • Review existing terms and conditions to assure they cover your cost of capital and and Conditions influence channel inventory to reduce obsolescence. • Align incentives to accelerate payments, consistent with your cost of capital. Rationalize Systemic • Focus on stimulating early payments from large customers who make up the bulk of Incentives your receivables credit.

• Segment by size and credit risk to standardize processes and improve conversion Segment Receivables efficiency. • View receivables as an opportunity to improve your service operations throughput.

• Regularly process discipline to make sure orders are not changed unless Ensure Accurate Realized paperwork is available and matches and invoices match existing customer data prior Invoicing to sending. • Resolve disputes with customers to whom credit has been withdrawn, and small Settle Disputes “nuisance” disputes with healthy customers. AP Improvement Potential The One-Day Difference: Days Payable Outstanding 90

80 Millions

70

60

50

40 CashReleased

30

20

10

0 1 2 3 4 5 6 7 8 9 10 Days Sub One (Blue) and Sub Two (Purple) AP Improvement Levers

Reduce Supply • Address inherent supplier volatility by aligning business processes to serve specific Inherent Volatility production streams. • Only use standard terms and conditions for new contracts. • Review existing terms and conditions to: • Identify and obtain best payment terms across business units, suppliers and Standardize Terms Structural product types and Conditions • Assure they do not exceed your cost of capital • Influence raw material inventory to reduce obsolescence • Renegotiate to improve terms and conditions with high leverage accounts. Leverage Trade • Segment supplier credit terms and identify opportunities to leverage trade credit on Systemic Credit terms that are less than your cost of capital. • Pay invoices on due date and take advantage of grace periods. • Stop early payments. • Explore legitimate opportunities for delaying payments including invoicing errors Realized Stretch Payments and quality issues. • Ensure suppliers do not issue invoices prematurely. • Utilize P-Card programs Economic Impact

Improvement Levers

Current Position AR AP Inventory client ($M) $402 $223 $295 client (Days) 50 29 38 Industry Peer Group Average 50 46 81

5 Day Improvement ($M) $31.5 $70.4 $117.0 Total Cash Released ($M) $218.9

Improvement to Top Industry Quartile $56.2 $191.7 In top quartile Total Cash Released ($M) $247.9

Company data for the most recently reported 4 quarters and the client Industry data for the most recently reported 4 quarters. All data compiled from publicly reported information. Order-to-Cash Cost, $100 Average Transaction

Payment A/R Order Invoice Processing Reconciliation Total Type Application Paper Invoice Check 2.00 Check 0.50 0.20 0.04 2.74 Payment Paper Invoice Card 2.00 Card 2.10 0.24 0.04 4.38 Payment Mailed Paper Invoice ACH Online 2.00 ACH Credit 0.06 0.24 0.06 2.36 from Bank Electronic Invoice Check 0.02 Check 0.50 0.20 0.04 0.74 Payment Electronic Invoice Online 0.02 Card 2.10 0.02 0.02 2.16 Card Payment Electronic Invoice ACH 0.02 ACH Credit 0.06 0.24 0.06 0.38 Online from Bank Electronic Invoice ACH 0.02 ACH Debit 0.06 0.02 0.02 0.12 Debit from Vendor Site Leveraging forecasting to enhance working capital You can’t optimize a financial process you can’t measure – a frustrated CFO Forecasting Barriers

• A majority of indicate they are “less-than-satisfied” with their cash forecasting processes and forecast accuracy • Many organizations face the same kinds of forecasting challenges • Low interest environment led to benign neglect

Issues Treasury and Finance Users Note •Insufficient resources •Ineffective forecast methodology, tools •Poor information access/exchange •Poor internal knowledge of cash flows •GIGO (accurate data sources) •Low priority by senior management •Inconsistency between short-term cash •Organizational complexity forecast and Treasury can have multiple forecasts / time horizons

They should be linked, but all have different objectives and uses

LONG TERM

MEDIUM TERM

NEAR TERM

Objectives: Objectives: Objectives: Daily cash positioning Liquidity planning, borrowing Long-term capital management and Invest/borrow decisions decisions earnings protection Horizon: Horizon: Horizon: 1–4 weeks 13–18 weeks 12–18 months Detail: Detail: Detail: Most granular, account level Medium Summary level detail; focus on details balance sheet, business categories Frequency: Frequency: Weekly Frequency: Daily Monthly or Quarterly Update: Update: Update: Weekly Intraday, as needed Monthly Five Steps to Begin

1. Identify the Purpose of the Forecast Who will use the forecast and what do they want?

2. Design the Forecast What is the first row? What is the second row? What are the time increments? Weekly? Monthly? Time increments are the columns

3. Identify Data Sources for Each Row

4. Establish Variance Analysis Process

5. Write Policy and Procedure Find the Right Data Sources

Spreadsheet Bank Reporting Models

Business Units ERP Cash Or Departments Forecast

Investments and Historical Data Debt Documents

Derivative Positions External Market Data Internal Teams

Effective forecasting Choosing the right sources and models for the different forecasting line items Liquidity Forecasting Cycle 5. Refinement Forecast Refinement Process

Data Sources

Business 3. 2. Units 1. Variance Analysis Execution Data Gathering & Analytics Financial Units

Internal Systems Centralized Forecasting Variance Analysis Collection Tool Model Bank Data

4. Reporting Output Reports to Users Variance Analysis: What was Different?

1. Perform variance analysis Forecast to Actual Forecast to Forecast Multiple frequencies 2. Analyze forecast effectiveness By line item By time period 3. Report back to data sources or review model 4. Update the forecast with improved data 5. Rinse and repeat Cash Forecasting Final Thoughts

1. Comprehensive mapping of all cash flows and strong understanding of cash flow volatility drivers 2. Strong communication with providers of information 3. Tools that support data gathering, modeling and consolidation 4. Dynamic trending and variance analysis tools 5. Accurate assessment of aggressiveness/conservativeness level 6. Multiple scenario analysis to accommodate different interest rate scenarios Q&A About Treasury Strategies Treasury Strategies, a division of Novantas, Inc., is the leading treasury consulting firm. Armed with decades of experience, we’ve developed solutions and delivered insights on leading practices, treasury operations, technology, and risk management for hundreds of companies around the globe. We serve corporate Treasurers, their financial services providers and technology providers for the complete 360° view of treasury.

AREAS OF EXPERTISE • Global Liquidity Management • Bank Relationship Management Structures Support • Cash Forecasting • Bank Fee Account Analysis Solution - • Financial Risk Management and NDepth Product Controls • Technology Optimization, Selection • Treasury and Implementation • Payments Strategy • Merchant Card and Purchasing Card • Leading Practices Review and Program Benchmarking • Treasury Change Management and Resource Support • Policy and Procedure Review February 5-7, 2020 Thank You Dallas, Texas AT&T Stadium Home of the Dallas Cowboys

Jeff Diorio Paul LaRock Director Director Treasury Strategies Treasury Strategies [email protected] [email protected]