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Focus on Working Capital

Focus on Working Capital. AFP Southern Nevada Chapter Wednesday, April 22, 2009 Jerry Hubbard, CTP Manager Working Capital & Cash Conversion NV Energy, Inc. Focus on Working Capital. AGENDA Introduction Today’s Working Capital Challenges Working Capital Strategies

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Focus on Working Capital

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  1. Focus on Working Capital AFP Southern Nevada Chapter Wednesday, April 22, 2009 Jerry Hubbard, CTP Manager Working Capital & Cash Conversion NV Energy, Inc.

  2. Focus on Working Capital AGENDA Introduction • Today’s Working Capital Challenges • Working Capital Strategies • NV Energy’s Working Capital Management • NV Energy Working Capital • NV Energy Cash Conversion • Important Internal Strategic Relationships • Components • Accounts Receivable • Inventory • Accounts Payable • Corporate Card Program • 2009 Initiatives

  3. Working Capital • Working Capital Defined • The sum of current assets (cash, A/R, inventory) less the sum of current liabilities (A/P, accruals). These are the accounts through which cash flows during the cash conversion cycle. • Textbook formula: WC = Current Assets – Current Liabilities • NV Energy focuses on three key components: • A/R • Inventory • A/P • These three primary categories are used because they can be individually managed and directly affect the amount of money available to fund operations and strategic initiatives on a daily basis.

  4. Today’s Working Capital Challenges • “Working Capital Pressures Heat Up” • Treasury & Risk, 02/09 • According to KPMG LLP survey • Over 80% of all financial executives surveyed cited working capital management as their highest or high priority. • Yet only 37% of these have a working capital improvement program. • 70% of respondents forecast flat or declining working capital levels. • Tightening cashflow is top concern among 67% of all US companies • Inadequate cash flow forecasting systems • According to KPMG, only 14% of financial executives reported achieving accurate projections over the past 12 months, even though 95% of these have forecasting systems in place. • Contributes greatly toward collections problems creating accounts receivable difficulties and a strain on working capital.

  5. Today’s Working Capital Challenges • “Working Capital Visibility: Time for a Visit to the Eye Doctor” • AFP Online: Topics-Working Capital, Ernie Humphrey, November 5, 2008 • Companies are examining all options to maximize working capital in order to minimize need for outside sources of working capital. • Improving working capital visibility • Identify and manage Accounts Receivable exposures • Automating all or part of the AR function • ARC, Check 21, electronic check conversion • Alternative payment methods • Payment and credit terms/bankruptcies • Short term investing exposures • Fund risks • Financial institution vulnerability • Portfolio management • Identify and manage Accounts Payable exposures • Implement ERP for automation, efficiency and control • Payment methods: check, ACH, wires, credit card • Payment terms • Payment timing

  6. Working Capital Strategies • “No Stone Unturned” • Strategies for Cash Management in Hard Times, CFO Research Services in collaboration with American Express, November 2008 • Senior finance executives – mid size US companies ($10M - $2B) • Core financing activities of funding the company and ensuring liquidity are now more imperative - even as they become more challenging. • Top two priorities • Improve internal business processes that affect working capital. • Better cash flow forecasting. • 80% of surveyed executives expect their teams to spend more time on cost cutting, and improving cash flow forecasting and cash management than ever before. • Focusing attention on better managing working capital and cash flow. • Traditional methods • Aggressively manage AR • Stretch-out payments/seek extended terms (45 days?) • Reduce inventories

  7. Working Capital Strategies • “Money Movement: Creating Working Capital and Cash Flow Efficiencies” • AFP Online: Topics-Working Capital, Bob Douglas, November 10, 2008 • Today’s economy requires strong cash management practices. • Continuously changing practices and supporting technologies are available to optimize working capital. • Accounts receivable • Outsource/Lockbox/Electronic check conversion • Remote deposit capture/back office conversion • Paperless & improved float (NV Energy: 75% of checks clear by day one) • ACH payments • Control the payments process • Controlled disbursement accounts allow same day funding to exact dollar amount and company can specify when funds will be presented. • Low cost ACH vendor payments improve cash forecasting • Pay some bills using Purchasing cards for cost reduction • Take measures to mitigate risk and protect working capital strategy. • Timely bank recon’s • Use online tools for fraud detection (Wells Fargo CEO) • Use Positive Pay • Use ACH blocks and filters

  8. NV Energy’s Working Capital Management Focus on Working Capital

  9. NV Energy’s Working Capital Management • Working Capital Defined • The sum of current assets (cash, A/R, inventory) less the sum of current liabilities (A/P, accruals). These are the accounts through which cash flows during the cash conversion cycle. • Textbook formula: WC = Current Assets – Current Liabilities • NV Energy formula: WC = A/R + Inventory – A/P • NV Energy’s Working Capital History • For the Period 2002 - 2006 • Total investment in working capital increased from $228M to $280M. • FY2007 Results • Total investment in working capital decreased by $55M (20%) to $225M. • FY 2008 Results • Total investment in working capital decreased by $56.6M (25.1%) to $169M.

  10. Working Capital Investment by Year

  11. NV Energy’s Working Capital Management • Cash Conversion Cycle Defined • Cash conversion cycle (CCC) calculates the time (days) required to convert cash outflows into cash inflows and is an indicator of how efficiently a company uses its current assets and current liabilities. • Standard formula: CCC= DR + DI – DP • Where • DR = Days Receivables • DI = Days Inventory • DP = Days Payable • The lower the number of CCC days the greater the cash conversion efficiency. • NV Energy’s Cash Conversion Cycle History • FY 2002 – 2006 averaged 26 cash conversion cycle days • FY2007 days shortened from 26 to 18 days • FY 2008 days shortened from 18 to 13 days • 13 CCC days translates to a cash turnover of 28 times per year

  12. Cash Conversion Cycle Days by Year

  13. NV Energy’s Working Capital Management Internal Strategic Relationships • Supply Chain Management and Customer Service are integral to our success in cash conversion. • Shared 2008 goals • Name change impacts • Supply Chain • Electronic vendor payments • Vendor discounts • PCard program, policy & contract review • Customer Service • Strategic planning sessions • Customer Channel Enhancement project • Electronic customer payment options • 2007 = 38.5% • 2008 = 43.2% • Remittance (Mailed payments) • 45.2% by volume, 61.3% by amount • Accounts receivable analysis • Cashier closures/Miscellaneous cash • Impacts of process changes, technology advances and strategic decisions on working capital and cash conversion.

  14. NV Energy’s Working Capital Management Working Capital Components

  15. Accounts Receivable by Year

  16. Receivable Days by Year

  17. Inventory by Year

  18. Inventory Days by Year

  19. Accounts Payable by Year

  20. Payable Days by Year

  21. NV Energy’s Corporate Card Program • Completed our first year with a new corporate card provider. • Exceeded 2008 spend goal of $20.0 MM • Achieved 2008 target rebate • Annual spend applies to all card types • 87% PCard • 13% T&E card • Initiatives • 2009 spend goal = $21.5 MM • Increase PCard usage company-wide for frequent low dollar invoices • Tighter controls and monitoring of past due T&E card balances • 2008 significant cost in forfeited rebate due to past due T&E card balances. • Cardholder Communications • Thorough statement review • Best practices and tips • Policy • Compromises/Data breaches • Currently under review in collaboration with Supply Chain

  22. NV Energy’s Working Capital Management 2009 Working Capital Initiatives • Maintain reduced working capital investment • Maintain low Cash Conversion Cycle days • Accounts Receivable • Continue to support efforts to migrate customers to paperless payments • Increase customer electronic payment options • Customer ACH payments • Desktop deposits: reduced float, bank fees and handling costs • Lower cost, web-based/IVR customer credit card payment provider • Accounts Payable/Inventory • Increased vendor discount program • Vendor ACH (electronic) payment rollout • Increase PCard usage and spend • Increase 2009 A/P average on-time payment metric • Lower A/P processing costs • Supply Chain inventory reduction review • Analyze and better understand the reasons for differences between the two utilities.

  23. Focus on Working Capital Discussion and Q&A

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