planning for 2017: what gets measured gets managed
TRANSCRIPT
Planning for 2017:
What Gets Measured Gets
Managed
By
Bruce C. Lynn, CTP, The FECG LLC
Gregory Person, CTP, Kyriba
October 11, 2016
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Agenda
Where are we today?
Outlook Next 12 months
What gets measured gets managed
Too much processing, not enough planning?
Building a business case for change in 2017
A metrics “starter set”
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Current Economic Trends
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Current Economic Trends (2)
Source: BEA, Factset, JP Morgan Asset Management
Slow is the new normal ?
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Current Economic Trends (3)
Source: BEA, Factset, JP Morgan Asset Management
best uses of cash?
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S & P Non Financial Companies (428 companies)Quarterly Trends as of 6/30/16
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
Q8 Q7 Q6 Q5 Q4 Q3 Q2 6/30/2016
$ in
Bill
ion
s
0
20
40
60
80
100
120
140
Fre
e C
ash
Flo
w (
$ in
Bill
ion
s)
Cash & S/T Equiv. Total Debt Free Cash Flow
How much cash is “enough”?
Cash trend flat; free cash flow trend
volatile. How much cash is enough?
Debt
Cash
Current Economic Trends (4)
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Snapshot - S& P 500 Non Financial Companies (428 co.)(Selected Results - 12 months ending 6/30/16)
41 61
1
64
153
71
222
142
592
34 15
193 211
4
284
437
331
502
1,050
506
134
532
11 19 0 241
-49
76101
144
13
-31-100
100
300
500
700
900
1,100
1,300
01 - B
asic M
ateria
ls
02 - C
apital G
oods
03 - C
onglom
erate
s
04 - C
onsumer C
yclical
05 - C
onsumer N
on-Cyclic
al
06 - E
nergy
08 - H
ealth C
are
09 - S
ervic
es
10 - T
echnolo
gy
11 - T
ransporta
tion
12 - U
tiliti
es
$ in
Mill
ions
Cash + S/T Inv Q1 Total Debt S/T + L/T Q1 Free Cash Flow 12Months
Current Economic Trends (5)How much risk (debt / free cash flow) is “too much”?
“enough” varies by Industry:
Tech = OK. Services? Utilities?
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Outlook – Next 12 Months
Top Concerns for U.S. Businesses – Jun 2016
1 Economic uncertainty (Investments)
2 Attracting and retaining qualified employees (Staffing)
3 Regulatory requirements (Compliance)
4 Cost of benefits (Costs)
5 Weak demand for product/services (Volume)
6 Government policy (Compliance)
7 Data security (Operations - Risk)
8 Employee productivity (Costs)
9 Access to capital (Financing)
10 Rising wages and salaries (Costs)
Source: Duke's Fuqua School of Business / CFO Magazine Business Outlook, Jun 2016; 626 firms
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Outlook – Next 12 Months
Duke Fuqua / CFO Magazine Survey June 2016
Expected Growth - Next 12 months
(626 companies)
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
Jun 2016Mar 2016Dec 2015Sept 2015Jun 2015
Dividends* Share Repurchases* Cash on balance sheet*
Duke Fuqua / CFO Magazine Survey June 2016
Expected Growth - Next 12 months
(626 companies)
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
Jun 2016Mar 2016Dec 2015Sept 2015Jun 2015
Dividends* Share Repurchases* Cash on balance sheet*
Cash Balances to decline
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A Framework for the Future
If You Do Not Know Where You are Going…
Any Road Will Take You There
Mr. Cheshire Cat
What Gets Measured Gets Managed…
Mr. Peter Drucker
Who To Trust?
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RiskMgt
(Mkt, Credit, Ops)
Cash Accounting(focus on creating, posting,
reconciling transactions)
DebtInvestment
Cash Management(focus on balances)
DebtInvestment
Cash Management(focus on balances)
Treasury Performance - Today• Current focus on internal processing
• Resources devoted to repetitive tasks
Cash
Tomorrow
Today
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Treasury Performance – Few Metrics
Measurement & Communication of Results to
Executive Management & Board:
Treasury Contribution to Company Performance
All
Revenues
< 1BN
Revenues
> 1Bn
No Measures / No Communication 51% 43%
Has Measures & Communicates 55% 49% 57%
Totals 100% 100% 100%
Source: AFP 2014 Strategic Role of Treasury Survey (243 responses)
45%
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Treasury Performance – Daily Work
Source: Kyriba / ACT June 2016 Survey (332 responses), Figure 3, Daily Responsibilities
2016 survey results
consistent with 2014
AFP results
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What Gets Measured Gets Managed
Measuring success• External – depends on industry and competition
• Internal - assumptions need, but how to capture?
• Must integrate multiple perspectives Profitability: Unit volume, prices, costs; fixed vs.
variable drivers (e.g. time vs. volume)
Liquidity: Investments (uses) & Financing (sources) -must match sources and uses over time (balance sheet & future cash flow)
Risk: exposure to factors with little ability to control them (FX rates, Interest rates, Counterparty risk). Example: Stronger USD / Weaker GBP means GPB sales are worth less
Rewarding success (Hint: it is not all about the P & L)
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What are we solving for?
Entity Act Plan F (U)
Acme CA 0.9 0.5 (0.40)
Acme UK 1.6 1.0 (0.60)
Acme JP 0.8 1.0 0.20
Acme DE 0.5 0.5 -
Acme AU 1.1 1.0 (0.10)
M ar 15 USD Equiv
Liquidity Scorecard
Set Objectives
Measure
Manage
Clear reporting expectations for global regions Senior management buy-in and incentives Set metrics and KPIs: e.g. target bank balances,
forecast accuracy, hedge ratios, benchmark rates
Transparent and proactive reporting Treasury scorecards, incentives, multibank
technology communication channels
Take action – working capital strategies (e.g. SCF) to improve cash flow
Proactive restructuring of liquidity and KPIs as business evolves
Adjust hedge layers Actively compete trades
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Complete position; current day actuals and forecast items
Zero-balance and target balance account cash consolidation
Transparency into variances
Reduce interest expense
Achieve and manage ‘goldilocks’ balance
Daily Target Balancing
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Monitor intercompany loans balances and credit ratings
Apply arm’s length interest treatment
Loan position hygiene
Credit worthiness?
Balances repaid?
Credit spreads applied?
Manage compliance (reg385) and tax regulations
Intercompany Management
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Exposure variance analysis
Budget rate vs. hedge rate
FX hedge coverage ratios
Hedge effectiveness
Reduce P&L volatility
Currency Management
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Ability to quickly solve for working capital needs
Benchmark to peers
Actively manage to compete trades / issuances
Real P&L benefit Reduce interest expense
Improve interest income
Benchmark Interest Income / Expense
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Real-time insight forecast upside / risk
Transparency into variances
Align FP&A cash flow targets with Treasury direct forecast
Execute capital allocation strategies with confidence
Manage cash flow expectations
Cash Flow Forecasting
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The Year Ahead – One Scenario
A near term scenario• Uncertain actions by competitors. Impact on growth? • Higher interest rates in 2017• Stronger USD: Exports more expensive; Fgn income
worth less; lower Fgn investment costs• Investors want cash payout “now”• Enough liquidity?
If more payouts = less cash remains for operations, debt repay, future investments
Banks remain reluctant lenders (Basel LCR? RAROC) Reg 385 – restrict intercompany cash movement
• Debt capacity maxed out?• Rely on organic growth or use cash for M&A?
Is treasury equipped for this scenario? If so, what is a “successful” outcome?
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The Business Case for Change Striking the “right” balance?
• Requires integrating P, L, R goals for the future• Need to measure actual results vs. tactical and strategic goals
Focus on liquidity & leverage metrics• 9AM: Where in the world is my cash?• 11AM: Do I invest or do I borrow?• End of day: forecasting the “right” decision for tomorrow?
Balance sources with uses• Internal: Cash on hand + Cash flows forecasted
If long cash: repay & borrow less / lower mkt exposure? If short: “Buy” in the market. Fixed or variable rate?
• External sources: Invest sooner to become more competitive? Investors dividends = better stock price?
Problem: need resources now (e.g. systems, staff, etc) to forecast future benefits
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The Business Case for Change (2) To start:
• Treasury should own the cash flow statement• Market prizes operational cash flows
Comply or die – Do NOT become MF Global
Pay for performance and use two perspectives:• Top down – link uses with sources by SBU• Bottom up – link sources and uses at transactional level
Think outside the silo - involve your “friends”: • Operating units – they control operating cash flow
• Financial units – FP&A, Tax, Audit helps fin. cash flows
• Even your banks ….
Forecast the future with measurable metrics• Interest Expense - less borrowing or lower cost?• Bank fees – services are not free• Staff costs - in & out of treasury?• Lower exposures – to FX losses, overdraft, fraud• Increases in debt capacity and / or decrease in utilization• Access to more 3rd parties for debt or equity
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1. Cash on hand (by curr., entity, bank, etc)
2. Free Cash Flow ($FCF) = op cash flow –CAPEX – Dvds (compared to uses?)
3. Cash Conversion Cycle (days) = DSO + DIO –AP Days to pay
4. Burn rate ($ / day) = Avg. current liabilities / cash on hand.
5. Debt headroom (% or $) = debt used vs credit limits
6. Leverage = debt / FCF; debt / equity
7. Ops cost = Treasury + bank + back office + FX losses
Which of these do you measure?
Treasury Metrics – “Starter Set”
Q & A
Bruce C. Lynn, CTP
• FECG LLC, Managing Partner
• 203-655-4806
Greg Person, CTP
• Kyriba, VP Presales
• 508-359-4968
10/11/16