Cash & Working Capital Optimisation .

1. Unlocking cash from within Companies’ balance sheets: • What should directors be doing? Cash & Working Capital Optimisation. Richard Hawes Deloitte Regional Head of Reorganisation Services

2. Cash and Working Capital OptimisationWhy is this so relevant to lenders / stakeholders? • They don’t want the money they have lent to a company to be mismanaged or lost and therefore they expect the company to be good at managing it: • Evidence suggests that an assessment of this helps to spot the winners from the losers: • 3 of the top 5 internal causes for corporate decline per recent studies are; • Poor management (consistently the number one cause) • Inadequate financial control and information, especially around cashflow • Poor working capital management and cost control • Restructuring a business is expensive – lenders should not have to fund it all / take all the risk:

3. Enterprise Cost Reduction (ECR) Mapped to the Enterprise Value Map Is there an alternative to borrowing more?Optimising working capital (and therefore cashflow) is one of the core drivers of shareholder value…… S H A R E H O L D E R V A L U E Revenue Growth Operating Margin Asset Efficiency Expectations Volume Price Realization Selling, General & Admin (SG&A) Cost of Goods Sold (COGS) Property, Plant & Equipment (PP&E) Inventory Receivables & Payables Company Strengths External Factors Income Taxes ………….its about making the best use of assets and ultimately about saving money.

4. Debtors Inventory Working Capital in use Creditors Potential benefit? Why focus on Cash & Working Capital? Companies have untapped sources of funding sitting on their balance sheets. However their first port of call when they need money is often the bank…… “European companies have over €500 billion locked up in excess working capital” Deloitte analysis • Cash is the lifeblood of business • Working capital is one of the few remaining areas which can deliver significant cash to the business in a relatively short period of time, without the pain and time required to achieve a large change or restructuring programme • Research shows there is a vast quantity of untapped capital currently lying idle, just waiting to be realised

5. Enterprise Cost Reduction (ECR) Mapped to the Enterprise Value Map How to spot when cashflow is not being managed tightlyAsk yourself is there……….. • A high level of working capital tied up for the size or type of business • A suddenfuture funding requirement which is not to meet a strategic goal or long term investment • Breach or potential breach of cash related covenants • A lack of cash flow visibility i.e. need for more robust cash flow forecasting tools and controls over cash (profit verses cash) • Inconsistent cash flow management between different subsidiaries or divisions of a group (leading to 'cash calls' back to head office) • High or deteriorating debtor days • Pressure from suppliers for more timely payment • A proliferation of stock keeping units or stock levels across multiple sites • Large unexplained fluctuations or volatility in cashflow putting pressure on facilities • A potential future breach of bank facilities or a lack of headroom in current facilities

6. Enterprise Cost Reduction (ECR) Mapped to the Enterprise Value Map What should companies be aiming to do?They should be looking to move away from this … £10-£15m can be released without restricting normal operations

7. Enterprise Cost Reduction (ECR) Mapped to the Enterprise Value Map What should companies be aiming to do?To this………. More availability for other uses More headroom Lower financing costs So why is this so difficult?!!!

8. How should companies approach it? The devil is in the detail. Firstly robust and accurate visibility over cashflow needs to be established, then every category in the balance sheet needs to be reviewed and challenged….. Planning: Establish greater visibility and control over cash via accurate forecasting and planning. This helps to identify areas for further investigation and instils a ‘cash culture’. Liquidity: Look for other one-off cash generation opportunities outside of stock / debtors / creditors (for example VAT accruals, sale of surplus assets, extracting value from property etc) Efficiency: Assess the ‘true’ cash requirement of the business. Generate liquidity via best practice working capital management and smoothing of cash flows.

9. OBJECTIVES Prepare a robust rolling short term cashflow forecast which: Identifies timing of surplus cash generation and / or cash shortfall positions Raises the profile of cash management across the business and instils a cash culture Identifies key areas for cash generation, working capital initiatives and discretionary expenditure by business unit Reviews, monitors and challenges cash performance Embeds cash management within each organisation with regular cash calls at its centre to ensure accountability Provides foundation for fact based allocation of funds Instils visibility and accountability over non-essential areas of spend. Planning Planning:Robust forecasting of cash is core to enable fact based decision making and to drive working capital improvements…….. Management Reporting Framework

10. Efficiency Debtors Inventory Working Capital in use Creditors Potential benefit? Efficiency:Assess the ‘true’ cash requirement of the business. Generate liquidity via best practice working capital management and smoothing of cash flows. Working capital cycle / Seasonality Multiple divisions or locations

11. Efficiency Typical issues: Inventory / Stock “We turn our stock fast and obsolescence is not an issue………” Disconnect between forecasting process and Sales and Marketing drives need for additional stock holdings Unstable forecast requirements & unresponsive suppliers lead to increased stock holdings requirements Long lead-times result in the need for additional stock holdings to meet variations in customer demand Multiple inventory locations leading to higher inventory levels or ‘double holding’ of some stock lines External pressure to revise forecasts upward leads to inaccuracies Understand individual product profitability Range Planning Inventory Holding Demand Planning Sales & Operations Planning Inventory Planning Fulfilment Manufacturing Demand Planning department adds safety stocks “just in case” or too much weight is given to bulk discounts Limited analysis of supply chain performance and capabilities results in increased safety stock holding ‘Fill the warehouse’ Blanket production or stocking policies drive increases in items with differing demand and profitability characteristics Too many lines / SKUs leading to excess inventory levels Limited manufacturing changeover flexibility resulting in need for additional stock buffers Old or slow moving stock not addressed or actively managed Cost of capital employed for each product

12. Typical issues: Debtors / Accounts Receivable Efficiency “Its so simple, its all about chasing payment when due……………” Claims for VAT on purchases made near the end of accounting period delayed until next period. Not fully leveraging VAT relief opportunities Pricing is conducted using a non-integrated database. The same customer is offered different terms by different parts of the organisation Customer set-up not properly controlled (or driven by sales dept. rather than finance). Credit checks not performed No process owner resulting in a lack of collections focus. Inefficient dispute resolution process and focus Order entry process not integrated with inventory or production leading to increased safety stock holdings Manual or redundant processing steps delay process Customers are given payment discounts even when not paying within terms Receive Order or Request for Quote Credit Authorisation Order Entry Ship & Raise Invoice Payment Receipt& Cash Application Receivables Management & Collection Incomplete order information causing errors later in the process Credit limits are inappropriately overridden. Customer payment history not visible leading to excessive credit limits Entry errors cause disputes and drive additional cost and re-work in shipping, handling and returns processing Shipping and invoicing systems are separate. Invoices are manually re-keyed delaying process Collection representatives wait until payments are 30 days past due date to begin contacting customers Unclear split of responsibilities between sales managers and credit control (finance) Limited visibility / reporting to identify and focus on problem receivables

13. Typical issues: Creditors / Accounts Payable Efficiency “We have standard supplier terms and pay suppliers in accordance with this. We don’t want to risk supply by stretching payment………” Each division or buyer purchase in silo rather than having a strategic view of what will maximise cashflow for the business as a whole No well-defined authorisation process exists to ensure conformance to agreed contracts and terms Decentralised purchasing means that purchasing power is not leveraged to improve terms and conditions Opportunities for delayed VAT or duty payments not identified or realised Payment policies are not followed and / or payments are made early Different terms with the same supplier across the organisation Manage Contracts & Suppliers Procure Goods & Services Receive Goods & Services Process Accounts Payable Disburse Supplier Payment Receiving processes are not robust and as a consequence goods & services are paid for that may not have been received ‘End of month’ payment culture is instilled rather than looking at the commercial reality of when each supplier could be paid Payment discounts are not taken when due No control over non-essential ‘maverick’ spend Off-contract spend leads to unfavourable terms of business Buyers focus on price and supplier proximity at the expense of payment terms (P&L vs Cashflow)

14. Liquidity Enterprise Cost Reduction (ECR) Mapped to the Enterprise Value Map Liquidity: Think out of the box to unlock one-off cash wins from many areas of the business………some examples • Treasury and facilities: • Funding: Ensuring that the business has the correct facilities to match the cashflow profile of the business. • Treasury: Cash pooling and smoothing to maximise headroom. • Financial Risk Management: Minimise the risk of cashflow volatility via the use of suitable financial instruments. • Tax cashflows: • VAT: Programs to accelerate input tax / decelerate output tax. • Capital allowances: Generating cash from retrospective reviews of capital allowances claims. • Tax efficient financing Reduce the borrowing cost via structuring facilities in a tax efficient manner (such as tax efficient hedging to achieve a low interest rate). • Working Capital vs P&L: • Accounts Receivable (Sales): Ensure credit control and customer take on best practice - not just chasing sales. • Inventory (COS): Minimise SKU’s, range management, understand product profitability and demand forecasting. • Supply chain / Accounts payable (Overheads): Consolidation of supplier base to maximise purchasing and payment efficiency. • Underutilised assets: • Accelerated M&A: Divestment of non-core areas of the business via an accelerated transaction process to quickly realise cash. • Property and Real Estate: Cashflow maximisation from property portfolios via negotiation of better terms or releasing cash via transactions. • Cash generation: Sale of surplus assets. • Data Integrity / Management Information: • Financial modelling: A forecast model can provide management with better visibility over cash and highlight non-essential spend. • Data Quality: ‘Garbage in garbage out’ – Data and systems need to provide the information necessary to make management decisions.

15. Conclusion: Companies need to be proactive in this area“The wisdom of hindsight, so useful to analysts and some shareholders, is sadly denied to practicing businessmen” • Given current market conditions it is fundamental for any management team and the Companies stakeholders that cashflow is being optimised.. • Companies need to be proactively driving cash benefits not just looking at profitability performance. • It seems to be on every Board Agenda at the moment but do Finance Directors understand the complexity of it and have the time / resource to pursue all areas? • Companies need to look ‘within’ before looking to extend external borrowings.

16. Tax CashSavings. • Ben Powell • 11 February 2008

17. Tax Savings – Case Studies 1. VAT deferral Commercial Vehicle Dealer - Deferral of £500k on sales for 3 months Engineering firm - Cash injection of £1.2m by estimating increased input VAT recovery Retailer - imminent VAT liability of £3m deferred over 12 months using “Time to Pay” Agreement negotiated with HMRC 2. VAT Refunds/Savings Consumer Product manufacturer - Errors worth £800k identified back to 1973 – deadline of 31 March 2009 to submit.

18. Tax Savings – Case Studies 3. Employment Taxes UK group with 4,000 employees - Cash flow issues: “SMART” Pensions – company savings of £500k pa + employee savings £350k Approved Performance Share Plans - savings of £200k pa Some redundancies - making tax efficient enhanced redundancy policy

19. Member of Deloitte Touche Tohmatsu