Dr. Hendrik Vater, CFO DHL Supply Chain Southern Europe
Working Capital Management –
The ICV’ s Guideline to Optimize Inventories, Receivables and
Payables
2nd International Controller Conference in Croatia (2nd ICCC)
Zagreb, Sheraton Zagreb Hotel
The ICV’ s “Working Capital Management” Task Force
• Founded in 2009 in Bonn (Germany) – the first ever
institutional connection between theory and practice via the
participation of representatives from academia and
practitioners
• Development of a basic understanding of working capital
management and its value drivers
• What role does the controller play in working capital
management?
• Discussion and exchange of information on examples of best
practices in working capital management
Working Capital Management Scope
Best practice in WCM reporting? Effects of globalization on WCM? Divisional-/ company-wide win-win situations? WCM objectives of companies? Sector-specific differences? Roll of controlling/ controller in WCM? Positive/ negativemeasures? Best practices
In payables, inventories, service levels, receivables Undiscovered potential in WCM (delivery times, scrapping, etc.)? Effects (liquidity/ profitability) on financial performance? Drivers? Framework for successful WCM? Main problems in practice? Effects of the financial and economic crisis on WCM and the role of the controller? Is top management aware of the importance of WCM? Leverage effects? Role of IT in WCM? Definition of working capital? Key metrics? Organizational foundation of WCM -> successful for the
long run? Possibilities to
control the life cycle by company/ sectors/ business cycle? Limits of WCM? WCM status quo in practice: organization, methods, tools
Substantive
questions about
WCM
Inventories
Payables
Receivables
Working Capital
Management
(WCM)
Different WCM at different strategic positioning? Role of supply chain management in WCM? Which aspects of WCM are impacted by trade-offs between income statement and balance sheet?Members of the WCM Task Force from 2010 – 2013
If you are interested in participating, please feel free to contact me at
[email protected]
Liabilities and Equity
Assets
…
Inventories
Prepayments
to suppliers
Trade
receivables
Other
receivables
Net Working
Capital
Customer
prepayments
Trade
payables
Other-payables
1
2
3
5
4
…
Reduction
Increase
…
…
Fundamentally, working capital management (WCM)
focuses on five items in the balance sheet
There are several ways to optimize a company’s
financial performance
Focus
Measures (examples)
• Stabilize or increase revenue
• Lower cost of materials
• Reduce staff expense
• Decrease other operating expense
• …
• Optimize inventories
• Optimize receivables management
• Optimize payment terms
• …
• Lower debt
• Reduce cost of capital
• Optimize equity contributions
• …
• Optimize investments (expand capacity,
implement technological innovations)
• Conduct disinvestments
Optimizing
financial
performance
Liquidity
Profit
Working
Capital
Capital
structure
Balance
sheet
structure
Effects of Working Capital Management
Lower non-capital carrying costs
(inventory write-downs, insurance, etc.)
More free cash flow, lower WACC
Reduced cost of capital
through lower use of capital
Higher capital productivity
through use of less capital
More cash flow through shorter tie-up of capital,
lower financing need
Easier access to capital and better
conditions thanks to improved credit rating
Higher
enterprise value
Better
credit
ratings
Lower operating
working-capital costs
Lower
use of capital
Lower
cost of capital
Released liquidity
(internal financing)
Source: Losbichler (2010)
The C2C-cycle shows the tie-up of capital in days
Production ends
DIH – days inventory held
DSO – days sales outstanding
Cash-to-Cash-Cycle – length of capital tie-up C2C = DIH + DSO - DPO
DPO – days
payables outstanding
Delivery +
invoicing
Expected
receipt of payment
Customer
pays invoice
Purchase
raw
materials
Delivery of raw materials
and invoice
Payment of raw-materials
invoice
Customer places
order
Production starts
Actual
receipt of payment
Storage period
raw materials
Production
throughput
Storage period
finished goods
DIH = Inventories* 365
Cost of sales
DSO =
Receivables*365
Sales
DPO =
Payables*365
Cost of sales
C2C = DIH+DSO-DPO
Definition of WCM based on the ICV
• Working capital comprises in detail:
– The current assets tied up in operating activities
– Whose positions do not earn interest and which
– Therefore must be financed with interest-bearing capital
• This narrow, operating definition of working capital
management can be expanded for each individual company
• But when doing so, care must be taken to ensure that the
additional positions to be included:
– Are material and related to operations
– Are controllable by management
– Are not interest-bearing
– Release liquidity and
Ranges within the definition of working capital
Most comprehensive definition
Most narrow definition
WC = current assets - current liabilities
WC = inventories + trade receivables - trade payables
Assets
Liabilities and equity
Assets
Liabilities and equity
Non-current assets
Equity
Non-current assets
Equity
Current assets
Non-current liabilities
Current assets
Non-current liabilities
Inventories
Current liabilities
Inventories
Current liabilities
Trade receivables
Trade payables
Trade receivables
Trade payables
Other receivables and
assets
Tax and other provisions
Other receivables and
assets
Tax and other provisions
Securities and equity
interests
Current liabilities to banks
Securities and equity
interests
Current liabilities to banks
Cash and cash
equivalents
Other liabilities
Cash and cash
equivalents
Other liabilities
Components of WCM – the definition of working capital can
individually be extended…
Item
Component of working capital
Yes
No
Potentially
Inventories, operating supplies
• Raw materials and operating supplies X • Work in progress, incomplete services X
• Finished goods X
• Prepayments made X
+
Receivables and other assets
• Trade receivables X
• Receivables from affiliated companies If operational, non-interest-bearing and controllable • Receivables from companies in which a participating interest is held If operational, non-interest-bearing and controllable • Other assets If operational, non-interest-bearing and controllable • Investments in affiliated companies X
• Other securities X
• Cash on hand, bank balances and checks X
• Deferred items X
• Unbilled, but rendered services X -
Current liabilities
• Provisions If operational, non-interest-bearing and controllable
• Tax provisions X
• Other provisions X
• Liabilities X
• Current portion of bonds payable X
• Current liabilities to banks X
• Prepayments received for orders X
• Trade payables X
• Liabilities from honoring bills of exchange & preparing own bills of exchange For purchases of goods
• Liabilities to affiliated companies If operational, non-interest-bearing and controllable • Liabilities to companies in which a participating interest is held If operational, non-interest-bearing and controllable • Other liabilities, including tax payables X
• Deferred items X
Forecast to Fulfill
(inventories/raw
materials) - DIH
Purchase to Pay
(payables) - DPO
Order to Cash
(receivables) - DSO
Delivery /
Invoice
Goods
Receipt
Maturity
Date
Payment
Delivery /
Invoice
Maturity
Date
Payment
+
–
–
Target
Time
Value
Workflow design & technology
Guidelines & process
documentation Goal setting & reporting
Internal & external
communication Cash culture Master data Contract administration &
archiving Target conditions
Proactive customer contacts
(before due date) Payment forms
Risk assessment Profitability Credit terms Dunning procedures &
timelines Cash application
Credit approval & credit limits
Billing triggers and invoice
issuance Term extensions & approval
Escalation & repayment
agreements Offset, reciprocal agreements
Credit risk monitoring &
portfolio management Service level parameters Hidden credit days Legal steps Unjustified discounts
Quote process Invoice accuracy & approval Financing, Securities & INCO
terms Dispute resolution
Order entry
Processing specific invoices, e.g. compensation
deposits
Premiums & rebates
Strategic positioning & sales channels
Sales, credit & order processing
Contract management &
invoicing Terms of trade
Dispute management
& collection Payment application
Potentials for Working Capital optimization can be identified
throughout the entire process flow – Accounts Receivable
Dispute root cause eradication
Unbilled goods & services Customer segmentation & service levels
Credit note process & management
Workflow design & technology
Guidelines & process
documentation Goal setting & reporting
Internal & external
communication Cash culture Sourcing, procurement
strategy & channels Billing triggers & events Payment terms Dispute management Payment timeliness
Spend forecasting & budget
setting Invoice processing Payment key date Early payments Payment frequency & method
Supplier selection & spend
consolidation Invoice receipt Payment discounts Partial payments Offset, reciprocal agreements
Contract management Invoice matching and
discrepancy management CapEx milestones Credit notes & discounts
Authorization & cash management
Requisition & approval process Accruals Management of supplier groups
or segments Duplicate payment recovery Cash flow forecasting
Arrival of orders & service System vs. contract terms Standard contracts & tenders
Master data
Purchase order & fulfilment
Invoice receipt &
processing Terms of trade Payment timeliness Cash paid
Potentials for Working Capital optimization can be identified
throughout the entire process flow – Accounts Payable
Product data maintenance
Access to customer demand forecast
Delivery conditions, Frequency & Order
quantities Replenishment method Capacity planning & management Inventory record accuracy Warehouse structure & location
Inventory classification
Forecasting process & tools
Customer service level definition &
achievement
Supplier contract terms & Order
parameters
Production planning & scheduling Inventory mix management & Safety/Target stock Warehouse management
Product & inventory
categorization Forecast accuracy
Lead-time Management Supplier performance monitoring Manufacturing process efficiency Inventory vs. Service trade-off management, MTS vs. MTO
Dispatch mode & Delivery routing
Product & inventory
category maintenance Scheduled orders Order processing
Purchasing timing, JIT
& Postponement Batch size
SLOB &
Clearance process Logistics
Product life cycle management
Supplier access to forecast & True
demand info
Order fulfillment MRP standing data quality
Capacity & bottleneck management
Management of spares & repairs
Returns management
Supplier assessment & rating Product range management Forecasting & Demand Planning Sales order processing & Customer service Materials planning, Purchasing & Replenishment Manufacturing Scheduling, Execution Inventory Management Logistics, Returns & Finished goods warehousing
Potentials for Working Capital optimization can be identified
throughout the entire process flow – Inventory
Workflow design & technology
Guidelines & process
documentation Goal setting & reporting
Internal & external
communication Cash culture
