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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