Beyond Working Capital Management – Cash Conversion Cycle Optimization

Webinar: Beyond Working Capital Management – Cash Conversion Cycle Optimization


Jeff Diorio

Treasury Strategies

Paul LaRock

Treasury Strategies


[0:00] Host Speaker:

Thank you for joining today’s session on how to design a data-driven collection and disbursement strategy that will enhance working capital metrics which also lowers processing cost. We have here with us, Paul LaRock and Jeff Diorio. Paul LaRock is a director with treasury strategies, a division of Novartis and co-manages the corporate advisory practice. He also has specific expertise in the international treasury, transaction processing, and working capital management. Jeff Diorio is a director at Treasury strategies works with corporate treasury departments, treasury technology vendors. Jeff has more than 30 years of experience in both financial technology as well as global treasury operations that allow him to bring a strategic focus to this leadership role. So without further ado, Paul and Jeff, the stage is all yours. Thank you. Round of applause everyone for them.

[0:57] Paul LaRock:

Well, welcome, everybody. Thank you for coming to our presentation. By way of background, Noventa security strategies were consulting firms Novartis is the name we use to consult the banks and treasury strategies is when we use we consult to accounts payable, accounts receivable and treasury departments. So we’re corporate facing. Jeff and I have that corporate practice. There’s another team that our bank consultants utilizing that 360-degree view of the market, we understand the technology providers, financial institutions, and then, of course, the corporates that use those services. That’s kind of what our firm does.

[1:36] Jeff Diorio:

Yep. And I’ve scrolled around at some of your clients. I may not know your client, but we’ve been doing this for a really long time. And I was approached by Tracy who’s leading up to kind of part of the Treasury initiative here, and she said that I did a speech yesterday which is pretty cool. And so we’re really excited. I told a few people, we’re going to try and go through the slides pretty quickly. And the reason for that is that we can take questions because you know, you’re here very early after the big party. And so we want to make sure this is valuable to you. So think about your questions. It might be better saying things you may go like “Oh, I want to know more about that.” And then of course, afterward, we’re happy to talk.

[2:31] Paul LaRock:

So we’re going to talk about the cash conversion cycle, it’s a big topic will be 40 minutes. So a lot of this is going to be a high-level overview with selective deep dives with things that we think might be especially valuable to you as you’re taking it away. Go back to your respective offices. So this is our session description, which you probably already read.

[2:56] Paul LaRock:

And so why working capital it’s about cash conversion. Simple basics. We’ve talked about working capital management and treasury transaction optimization and how to leverage forecasting. Once you manage working capital better in a role for that is better cash forecasting. It’s nice to free up cash. It’s even better to understand when that cash is coming in and what to do with it. Every year we do state of the treasury, we do a big survey. Last year, we added working capital as a question to it. What are your top priorities for this coming year? And that was last year. And you can see we didn’t do an 18 or 17. But guess that it was number one last year and I’m pretty sure it’s gonna be number one this year. And it in forecasting are very, very related, which we’ll talk about.

[3:52] Jeff Diorio:

I did a build on this slide. I’m really sorry, Paul. So, you know, we did these interviews and we said, What? So in addition to doing the survey, I interviewed 35 treasurer’s big companies. And I said, what are you focused on this year? What are you making people think about? And this was last year’s. This year’s will come out. And it’s going to be a little different than this and not terribly. And so they talked about a bunch of stuff. But on the left here, you can see working capital was a really, really big initiative for the last year. And we also think that the related initiatives that we heard about were related to it, so liquidity optimization. Why look at working capital? Because you’re focused on optimizing liquidity. And then new technologies and automation optimizing existing technology and people getting people to focus on the right things. And one of the challenges I think Paul’s going to talk about so let me not say too much. The fact that working capital typically crosses multiple groups. I didn’t talk to the lady here who’s got AP and treasury in one group, but typically treasury is separate from AP.

[5:03] Paul LaRock:
Yeah, I’ve been doing this for 30 plus years. I kind of want to hand the number of times I’ve seen companies have one person, end to end oversight. Over Working Capital Management is almost without exception done by teams of people who specialize in different things. And the few times I’ve seen companies that were in financial crisis, I mean, either in bankruptcy or bordering on it, we’re like, the treasurer was put in charge of the whole thing has almost czar like powers to make decisions about credits and because the company is running out of money and they know it. That is very, very rare. Almost always it’s done through multidisciplinary teams, sales, procurement, AR, AP Treasury, usually CFO kind of oversees and sponsors those committees, right.

[5:56] Jeff Diorio:

So our takeaway from this is four of the seven areas they talked about last year we’re really working capital. And then, in September, I tortured all the treasures again by calling them up and saying, so what are you making your people work on next year? And so the big initiatives we see are bank services and card optimization. Why because it’s money that’s been spent that doesn’t need to be spent. So we look at is working capital optimization.

[6:23] Paul LaRock:

And then you can see working capital optimization is right there under liquidity management. And through our presentation, we’re gonna make it to the action between traditional working capital management and the focus on the three primary metrics of working capital management. And all the transactions that underlie them. Incoming transactions, or collections and outgoing transactions, there’s money at two levels. One might look at the working capital metrics of DSO, DPO, and DIO and its balance sheet issues and all the transactional cost of issuing invoices receiving invoices, collecting payments, making payments is kind of the income statement side of that whole concept. So the cash conversion cycle is just, I mean, the mathematical formula is there. What we do with cash conversion cycle optimization is we don’t do pure working capital management.

But we look at all of the work, the resources you use, to invoice your customers, we start the billing part, going all the way through the value-added steps internally in your organization. To the very back end, we’re doing receivables application and reconcile bank accounts. On the outbound side, we start looking at the cash conversion cycle and if you’re doing this yourself, you start talking about procurement and how procurement extends credit that’s obviously a working capital thing but will tell you, I will suggest you they go one step further. If you develop a payment hierarchy and you should decide how do we want to get paid? And how do we want to pay others? What’s best for us?

You can have our first choice, second choice and third choice for your vendors that should be built into your procurement contracts. For example, if you like many companies are getting sick of sending checks and all the costs associated with that. You want to use a p card you want to use an ACH that should be in billing terms. It should say we will accept payments using a fire or we will accept payments when they ACH to a specific bank account. Alternately, if you don’t want to get paid with a card, and many people don’t, you simply tell them you will pay us with an ACH. And if a year into our multi-year contract, somebody from that company calls and says yeah, we’re going to pay you with our feet are like, Oh no, that would be a formal contract amendment.

[8:53] Paul LaRock :

Those of you who are in shipping lines of business and very low-profit margins taking a 2% or more load card website, 30 to 40% of your net margin on jobs. If you think everything about that very early in the process procurement part. And if you want to optimize your collection cycle, and you guys are mostly ordered to cash people, you know this, it starts at the invoicing and the onboarding, right? Otherwise, you’re gonna get downstream infections and you pay dearly for that. And then you end up having to hire consultants to figure it out.

[9:22] Paul LaRock :

So do it right. First, I am Paul just

[9:24] Jeff Diorio :

I really returned three-letter acronyms up there. You know, we do see a lot of examples of this last year. Treasurer I know, had file system Treasurer put together a dashboard and the dashboard showed because everybody said no, there’s no problem here. There’s no problem. We don’t have a working capital problem or nine other income. He put together dashboards and what it showed was, even though the terms for payments were 4560 days, things were getting paid in 30 days. They were 15 days early. And they said, Well, you know, it improves the relationship with the client and yadda but treasury and finance have the fiduciary responsibility to make sure that things are being done the way they should be done in 15 days is huge. Even though interest rates are low, it’s your liquidity you have to worry about these things. So this is a high-level view of various components of the cash conversion cycle. And on the left, we have the procure to pay piece on the right, the order to cash piece which overwhelmingly is yours.

[11:00] Paul LaRock:

So, the incoming goods on the left are going orders on the right. You can see that this is where mathematics comes in to calculate DPO. For example, use when you get to the supplier invoice versus when you pay that invoice in the same days’ inventory outstanding, day of sale outstanding. We think about credit, we have credit that we extend. Credit that we received. So on the supplier side, you want to get the longest terms you can. On the seller side, you want to extend the shortest terms you can. If you think about yourself as a bank, you’re not a bank, but you are, in a way all little banks. When you take your AP and AR process and put them together to the extent that your supplier credit terms are longer than your receivable terms and you actually collect within those, your cash positive, you’re being financed right? So you’re in the black. If you just look at those two, if you flip it and you have to pay your bills fast and you collect, you’re borrowing money from somewhere to draw on lines of credit, or you have cash in a bank account that you have to draw into the working capital accounts.

And so you could almost, and that’s an interesting metric is and we do that is to measure the days on both sides. You take the days, you calculate the dollars per day on both sides, slap an interest rate, your cost of capital, you’ve got a feeling for what this part is, costing you right? A third thing would be the figure in that day’s inventory, how much inventory is sitting out? Most of our clients are very interested in the relationship between these two things. What’s the average credit that we’re being provided? And what are we given to the customers? And then the formal cash conversion cycle you know, starts with when the shipment is received. In our work, when we look at this we make an observation. And I can do that on both sides. Order to cash people, how many are in here? Okay, how many computer people are in here? Oh, anyway, let’s do something else. Okay, I will adjust both sides. On the procure to pay side. underneath all of this is paper and electronic invoices going back and forth, right? So when you’re trying to optimize DPO, DIO by definition, you’re looking at all the steps, right?

You’re talking to people in procurement, you’re talking to people with inventory management, people in the accounts payable side, all of those people know something about the transaction itself. So when you’re talking to the procurement department, to figure out about credit terms and all that, you simply ask them what about the payment terms? How are you asking for us to be paid? If you want to painlessly migrate your payment cycle on a disbursement side, from paper to electronics, procurement is your go-to department. You have to have that conversation. As you move down and you get, you know how the supplier invoices are delivered? And you’re trying to understand that in order to manage DPO those people also have the metrics and the data, how much does this cost? What if all the suppliers sent it to us electronically? What if they went through rebar rather than went through a post office box? So we can do both in parallel, you can optimize working capital and optimize the transactions underlying it. At the same time, it’s like 30 seconds more conversation, 10 minutes more conversation with each department. So there’s a real economy of scale in your time to do this together.

[14:40] Jeff Diorio:

Paul, but there are some gotchas in there. Right. It’s you’re, you’re posing a beautiful thing, but a lot of people who have to fight the fight, so there’s some.

[14:52] Paul LaRock:

Okay, fine. ruin the narrative. I’m the Disney guy. He’s the Stephen King guy. It’s always horrible with him. But let me be candid with you. So here are some things. We think about DPO. We want longer DPOs, right? So we did a project for a big media company in New York, and 30 feet was actually better than the metrics for their competitive industry, but as we go through the data while about details, you have to be we see hundreds of their vendors being paid not in their 45-day terms, which is what they told us in terms are, they are being paid in two days, three days, four days. I’m talking to CFOs out there with that as the media company uses tons and tons of creative freelancers. And he shows you these are individuals living in Brooklyn and apartments trying to make rent. Because here’s how this works. on a Monday we decide that we want some advertising copy for a media company for one of our clients. We call it a Monday afternoon. We tell them the client wants at lunchtime on Tuesday. Save all night. And then they send us electronically production-ready graphic cards, right? We’ve worked through these bill older people, they’ve worked with this company for years. He was an electronic invoice because then they collapse into bed. He goes the next day that gets rushed on AP, and we send them a three or $4,000. And you make less. That’s how this world works.

[16:21] Paul LaRock:

He’s got the graphic designers and animators, all kinds of creative types. And he said, that gives us a competitive advantage over other media companies who don’t feel that way we can spin, work around 24 hours and get it back to our clients. Like I get it. So think about what they’re doing. I mean, why should we lower DSO? Why should we raise DPO? Because ultimately we’re trying to affect the net income of the company right? So don’t execute anything within the context of managing working capital. That is logical in theory by the metrics of working capital but stupid for your business. Got another one. Let’s go around the payable side. Distribution companies with distribution client, they want 45 days payables or less. But we see them actually pause for a second on the receivable side, sorry, got confused. They’re extending terms up to 160 days. And they think that’s good for their business. And they’re right. Why? Because this distributor is a distributor of agricultural products in the northern United States. And they refer to it as farm terms or egg terms.

Farmers buy materials, seeds, in the spring, grow them and harvest in the fall, get paid in the fall, so that the cash kind of goes out the spring comes back in the fall. If you want to be really competitive in this business, you have to have egg terms. You can’t insist the farmers pay in 30 days. Many of them won’t have the money. But here’s the other thing deep in the data, they have like negative DSO. How is this possible? Because lots of farmers have money, what they do is in the northern latitudes in November. The pre-order, and they order half a million dollars for the seed fertilizer, all this stuff for the whole next year. Our client gives them a discount, and our client is able to smooth out revenue up and down that’s inherent in agriculture. By taking these prepayments and farmer wins because they get a discount and our client wins because they get all this money upfront. They haven’t ordered payment to order the supplies yet for the farmer. So they are really cash positive. All right.

Both of those things make sense, extending extreme terms and prepays for their business. So that’s why it’s so important to have multidisciplinary teams. For each product line for each industry. There’s an appropriate way to do this. You should look at industry metrics, you’d see what your competitors are doing. But then you have to think about a team of other people in your company. What really makes sense here. How do we have some sort of standardization that has appropriate exceptions to the rule made? So there are the three primary accounting components, working capital management in the middle. These are the drivers to the left. Payment channels, its people, processes and to the right one of the concepts you can maximize your cash or increase it. If you have satisfied customers if you do it right. So a lot of advantages to doing this. So the working capital management of objectives, the traditional ones are to reduce DSO, raise DPO, reduce the DIO. You can improve efficiencies when you think about cash conversion cycle optimization by automating manual processes, eliminating paper. As a consultant to give you some free advice. If you walk around your buildings or facilities and you see lots of paper, you’re seeing the cost, follow the paper and you’ll reduce the crop loss. All right, just get the paper out.

The other thing is you’ll save the environment. That’s a nice thing to do. You can manage risk by reducing payment fraud when you’re choosing payment vehicle so I’m more prone to fraud than others. When you’re looking at processes to think about that you’re taking credit cards. How risky can that be? Well, if you’re storing card data, you’ve got PCI issues, got to protect the cardholder data. If you’re permitting people to do refunds, you could be subject to refund fraud, which means your own employees do refunds their own personal cards. And you have to think through all the details of all that all the details. And you achieve strategic benefits by strengthening customer loyalty if you let the customer pay in a way they want. They appreciate that.

[21:33] Paul LaRock :

Okay. He wants to know about discount terms and in today’s interest rate environment if things like 110 that 30 are worth doing. And so I’m a consultant. I’m going to give you two answers. My first answer is we look at it purely from the finance point of view. And as long as the discounts offered and the discounts taken, exceed your working capital cost, your cost of capital and a pure profit financial perspective, you’re doing the right thing. And you are right to note that in today’s low-interest-rate environment, those discounts are generally less valuable to most customers, right? Except for the few customers who have that are in financial straits that love those discounts. So that’s the exception. But let’s talk about something else.

[22:21] Paul LaRock :

This is the second answer. So we had a client, I would so clients have gone through this, where they have sales teams that want to offer extended terms, not 30-day terms, they want to offer 90-day terms. And finance teams are rolling their eyes like it’s not free money, withdrawn lines of credit. Are we drawn on our investments to finance this, but the sales team came up with a very compelling response and I sided with the sales team that I worked for the finance team. He said, love the product has a 40% margin on it. If we leave the money in your bank account, what are you going to do? Invest in that one and a half percent? Of getting 40% margins. Let’s give the customers the money as long as we beat the competitors and get those sales at a 40% margin. And then 90 days with the money, right? You get a competitive advantage. So two answers, one giving you a classical answer. The second is aligning classical theory with the competitive reality of your business. It’s a balancing act.

[23:28] Paul LaRock:

Okay. So, in your deck that you’ll get is a list of best in class working capital practices. The most important is at the top, you have to align the overall operational process with the business right? Know all the standard classical ways to maximize working capital. Take a deep breath and look at them individually. Does this make sense for our firm? Then does this make sense for all the suppliers? All of the customers? And start making exceptions. You’re doing a balancing act, everybody can have their own terms, right?

[24:05] Paul LaRock:

So you have to do a balancing act between the benefits of standardization stated policy, and a way to make exceptions to that an organized way to make exceptions. Here’s what you don’t do. Every sales guy doesn’t get to offer whatever terms he wants, that’s prohibited, but every sales guy on say, a sale of more than $1 million, or customer worth more than $1 million a year has a mechanism by which you can appeal that. And make a case and then a finance person goes through that experience I just described for 40% margin yet, we’re going to offer that customer better terms that you can do the same thing on the tableside.

[24:43] Paul LaRock:

I think multidisciplinary teams are critical and doing this. I don’t think anyone person has enough knowledge about any decent-sized business to do this well. And so getting salespeople for when people are representative from each team. Do that make sense? If you’re a big multidivisional company the way this is almost always done is a division-level finance executive sits on that committee for their company, right? And so it’s the controller, whatever, each division.

[25:12] Paul LaRock:

This is our redacted slide from an actual project we did. We were demonstrating to the client. What one day worth of DSL improvement does with two of their divisions and these are millions on all right. To start off the conversation. One division, we get $8 million more cash. The other we get about five, if they ran it up to 10 days there, my god $80 million from 140 million from though they never got close to 10 days. I think we’re able to execute something in the three or four-day range.

[26:01] Paul LaRock:

So before you start working on a working capital initiative, you have to ask yourself, is it worth it? You should do that with every project you do. This is like one of the first steps if you don’t see numbers that impress you and your boss, do something else, right? There are 100 different things, opportunities for improvement in the organization. If you see numbers like this, it’s probably worth doing. But if you don’t then find something else.

[26:32] Paul LaRock:

The key levers for improving AR performance. We’ve broken it into inherent structural, systematic and realized. I’m going to go down to the bottom. This is at the front end. This is about invoicing, accurate invoicing. Inaccurate invoicing is one of the single largest problems that we see in our projects with DSO being too high. And it’s worse than DSO being too high. In all of those projects, angry customers, branch managers will tell us exactly schedule fire over this issue. Love the product, love the service. I’m so sick of talking to the billing department who can’t get an invoice, right? I don’t want to leave you alone with a competitor.

[27:09] Paul LaRock:

That’s the real world. That really happened. So if there’s one thing you can do on the receivable side, it is to get invoices out in a timely manner, which is beneficial to you, and do all kinds of front end diagnostics to make them accurate, which in some of your businesses is much easier said than done. Those of you who are subject to change orders, we have construction industry clients who do track housing that is horrible to get an invoice accurate, because on the job site where they’re building 50 homes at once they’re making decisions real fine. You assume that the project manager is for that for our client is writing up the change order accurately getting it quickly into order entry, and that’s coming back and updating the invoice before it goes up. That frequently doesn’t happen.

You’ve got fuel finance in the building, holding back money, tons of money and reconciliation. So anything you can Do we get those invoices right. That’s time well-spent. This is the same graph on the AP side. This is sizing up the AP improvements for two different divisions. And these, similarly, the use of the AP improvement lever. So we’re talking about stretching payments if you want to hold back money, and just as I told you, you could extend terms you could pay fast if you get if a vendor is giving you a discount, then you have to think in financial terms and say, is it worth taking the discount thing early?

[28:36] Jeff Diorio:

Maybe we get asked that question a lot. Should we take this now?

[28:40] Paul LaRock:

Yeah, we have clients with huge Pico programs. You can program a hundred million-plus spent and they have accelerator clauses in those programs that permit them to earn extra rebates if they pay after them 25 days and there’s actually a matrix– 24 days, 23 days, 22 days. And with each day, faster payment, they get a look into.

[29:06] Paul LaRock:

This is a result that if the client aligned with peer group averages, which is the third row, or if they did a five-day improvement, they get up to 200. And some million dollars if they aligned with the very top of the portal of their industry and all their working capital, they free up 247 million. So this is the order to cash for $100 on a transaction that we did. So this is the real special part we think about cash conversion. This is a heavy, summarized slide. What we do over here is we think about the order channel and we’ve got a paper invoice with a check payment, a paper invoice with a card payment, moving down electronic invoices, a check payment, electronic invoices with online card payments, these are all their channels. So we start off with a picture to understand.

We actually diagram and you can do the same thing. You diagram a process. We get a picture invoicing and then next to it, they’re gonna mail it to our lockbox and then we have to mail to a lockbox for the receivable application. Just block it up. Run it horizontally then you’ve got a picture look at and say what does this box cost me? What does that box cost me? Start adding the numbers up. And so we add the numbers and we break them down by the transaction, our client found something very very important to them.

[30:31] Paul LaRock:

What’s the most expensive way for these people to get paid? The answer is at $4 and 38 cents payment. Yes, send a paper invoice out then that person takes their pen out, writes down their 13 digit card number, sends it back to your lockbox with keys and it costs $4 and 38 cents and it aligns with the general idea. The most expensive way to get paid is with a credit card. This overturns that idea. Look at $2 and 16 cents. We have an electronic invoice but still accepting card paid. It’s $2 is less than a lockbox. It is more than the others, the best way for them to get paid isn’t the ACH, that is no surprise that it’s always gonna be the cheapest way to get paid. But there are benefits to car payments and not on this slide. One is accepting card creates a greater chance of recurring customer renewal. In the 1960s the credit card or the fitness industry figured this out. Sign up for a health club, give a card, a charge every month. You could not go to that club for a year and it will not affect their revenue.

[31:35] Paul LaRock:

The lawn care companies have figured this out. You have automatic renewal for true green for Scott service, they come back. We’ve done work for those companies. One of the controllers and one of those companies said every time we send an invoice we’re asked a customer if you still want to do business with us? You still want to do business. Let them sign up with just the trucks. We’ll just keep going out and keeping your grass green and your money will make their bank account green. So 2% is a lot of money a lot more expensive than an ACH. But what if it boosts your revenue lights when the restaurants take it because you order dessert? It becomes more extreme.

[32:19] Jeff Diorio:

The question was if the average transaction is $1,000, does the answer change?

[32:23] Paul LaRock:

It does, and I’m dealing with that real-time right now, we have somebody who gets 10 and $25,000 payments and a lot of them on the credit card. So there is a separate program called the large ticket program, which converts from a 2% rate down to a $75 per transaction and like 10 basis points, Visa, MasterCard, pretty much one of all of our transactions and they adjust their pricing. You’ve seen the interchange tables, I think up to 188 different categories now to accommodate different types of transactions. And I actually had to fix that mess one time on a supply contract at a corporate office. They were getting paid $100,000 a month with a purchasing car. It was devastating that margin and we enrolled them in a large ticket program that dropped that down. So the details, man, I’m glad you asked that. So at this point, you’re right, we would change this to $1,000 to $50,000. And those numbers stop moving around. You put us in an Excel spreadsheet.

[33:32] Paul LaRock:

So you can almost see the order to cash cycle going across the top right? We got an invoice, lookout cheap electronic invoices are. Various payment types that they accept and the processing costs. That AR application varies depending on how the payment comes in. When I go on your website and pay a bill on your website. I call my customer number. I did the receivables application for you. That’s really two sets. But if I send you a check or read a card., over a voice line, that’s going to be up around 24 cents, right? Because you can get your customers to self-service and be receivables application for you. I find that they tend to do a pretty good job with that. So good. And then the reconciliation cost varies depending on the friction. Yes.

[34:24] Audience:

Do you have tax incentives for some of these fees? So you can deduct that as well as you know, coming up with a DSO reduction? As well as you don’t have to reserve or write off bad debt so little components that can drive the cost and then shifting your liquidity away from you as a supplier to a central organization like American Express.

[34:50] Paul LaRock:

Yeah, that centralization concept– we’re gonna flip the cash forecasting here. It’s great to free up all this cash, you need to centralize, if you leave it sitting in remote accounts around the world operational accounts, can pay down your debt, you probably can’t invest it very well. So you need to work with the treasury function or department. They’re part of the team to free up the cash on the operating units, bring it together in a single place, pay down debt, invest it or redeploy it towards needed a profitable manner somewhere else. So ultimately, this whole concept breaks down to liquidity management in various parts of the company, but we’re looking at a sub-components of that. Jeff, are there any barriers to accurate cash forecast?

[35:45] Jeff Diorio:

That’s why you’re all here. Right? Everybody loves forecasting. Why don’t we flip to the lifecycle one, I think that’s the easiest one to wrap up with here. You can download these. This one presentation and this really ties it all together. So forecasting is no fun. I spoke a text for last year and use them. And they started this speech by saying I absolutely hate forecasting, there’s nothing in my day to day job I hate more than forecasting. Although legal is getting up there. So, because of one company I had to revise the forecast every single week. And so here I was on the contributing side to it. One thing is to try and find a way to make it easier and everybody to get the data in forecasting but this is sort of our view of the whole thing. And you know, you’ve got data sources for. The better the data sources, the easier your life is going to be. And the forecast to me, it has to be done because it’s if you’re going to make any financial decisions, you have to know what’s going to happen. And if you’re going to deploy money or you need to port forward, you’re set if you need to pull money. Because you’re going to need it over the year. How are you going to know you’re going to need it over there if you don’t have a forecast?

[37:05] Paul LaRock:

And most companies do this in a very manual and inefficient, inaccurate manner, they don’t appropriately tie technology to that. So one way to overcome that is to use outside software products, as a company might have heard of the call Highradius. You might want to consider some of the beneficial products you built utilizing artificial intelligence and Highradius offers.

[37:28] Jeff Diorio:

Yeah, one of the interesting things we heard was since they’re so involved in AP and AR, they already have an awful lot of the information you need. But we also look at where you’re getting the info from we talk, we help some healthcare company and they were a healthcare insurance company, and they were going crazy. They just wanted to statistically model it. And we said, yeah, that’s certainly a way to do it if you can’t get better data. And so but the idea is you’ve got some tool to gather the data, you’ve got a model that generates the forecast, and you want to be able to throw salt on some of those numbers because some of the numbers are pretty accurate. And you know, some of the numbers are swag. They’re just swinging wild ass guesses. So you need to know that.

[38:08] Jeff Diorio:

And that’s what variance analysis does for you. So you should very much have variance analysis built-in as part of the process and as automated as possible, bringing what actually happened from the bank, tying it up against the forecast and seeing what those differences are. And then it’s rinsed and repeated. You take that forecasting is an art, right? There’s a joke about fishing as a friend told me, he said, “Jeff, if if you went out and caught a fish every time you went, they wouldn’t call it fishing. They call it catching, right?” And forecasting is because you don’t know what’s going to happen if you knew it was going to happen and be called knowing. Right? So the variance analysis helps you refine it. You know it’s going to be flawed. You have to have some measure of how flawed it’s going to be and accept a certain variant rate because you can’t be perfect. And then and then there’s the refinement process. The refining process is very important. So if you can automate one, two and three, the refinement process is you going back to people and saying, why are you so bad at this? And trying to find ways to get that better. And then, of course, that’s kind of our one minute spiel on forecasting.

[39:17] Paul LaRock:

And then we find that the variance analysis refinement process is critical. Even if your model is perfect. There’s this concept called data decay. And one of the strongest applications of artificial intelligence is to mitigate data decay and data decay is it works today, but you work in dynamic companies and even if your company is stagnant, meaning it’s heavily regulated doesn’t change– you have a dynamic economic environment. So by definition, everybody experiences data decay adjust for that variance analysis and tools associated with artificial intelligence. I think in the long run, I’m gonna prove the best way to deal with that.

[40:22] Audience Speaker:

You’re gonna understand why I advise my daughters not to date salespeople, right? That 40% they typically are the girls market. That’s right before distribution costs of 20%. Sales cost of 6%, DNA of 7% marketing if they’re doing great 8% which is a low single-digit right. So that might be why they sound to me like Kroger. When they got scared with Amazon buying Whole Foods and they became a bank more than a retail store, right? In our case, we’d really canceled sales to Kroger. More than trying to be a financing company we should let that to the backs. And not trying to take advantage of our vendors. Or the customers of our self to financing those things. So they were offering to us like, hey, 90 days, or I pay you 30 days with 5%. I said, “Guys, I can go to the bank of America and or you should go there.” Right? We definitely didn’t. I mean, because these guys are really great in chapter 11, or a lot of great companies, startup. What’s your perspective on this?

[41:42] Paul LaRock:

Well, I’ll tell you this since the 1990s there’s been about a 40 some day improvement in cash conversion cycle across all American industries. And the primary driver of that is increasing in DPOs. If you drill down into DPO numbers, you’ll find the largest corporations leaning like bullies on smaller corporations. Forcing longer terms, give me 15 more days or I’m going to drop you. And then if they’re a big supplier, it’s not so easy to say no to that. That’s where most of it has come. It has not come through making transactions more efficient improving their invoice and all this other stuff. It’s just pure brute raw power.

We live in an economy that has fewer and fewer big players, consolidation of industry and top of the list, commercial airliners, right? You don’t like a Boeing, which other American manufacturers you go to is enough? You see that in banking– 10 banks, issue 85% of all the credit cards in this country in five to about 60%. And so there’s enormous economic power amongst a few players that can be distributed against or deployed against smaller players, and so they can and that’s what they did. That’s why the DPO changed so much. That’s why the cash conversion cycle changed so much. And what you did is you had a certain professional skepticism about what you were hearing when you looked into the details, consider distribution costs, advertising costs, and realized that something is presented to you as a 40% margin is really what 6% margin and therefore you’re not going to give away the house and you did the right thing.

[43:15] Paul LaRock:

Our email addresses are on the slide deck, I have a stack of cards they don’t want to go back to New Jersey with so if you want to talk to us further about this stuff, we’re happy to talk. We’re always happy to educate. Thank you.

[0:00] Host Speaker: Thank you for joining today’s session on how to design a data-driven collection and disbursement strategy that will enhance working capital metrics which also lowers processing cost. We have here with us, Paul LaRock and Jeff Diorio. Paul LaRock is a director with treasury strategies, a division of Novartis and co-manages the corporate advisory practice. He also has specific expertise in the international treasury, transaction processing, and working capital management. Jeff Diorio is a director at Treasury strategies works with corporate treasury departments, treasury technology vendors. Jeff has more than 30 years of experience in both financial technology as well as global treasury operations that allow him to bring a strategic focus to this leadership role. So without further ado, Paul and Jeff, the stage is all yours. Thank you. Round of applause everyone for them. [0:57] Paul LaRock: Well, welcome, everybody. Thank you for coming to our presentation. By way of background, Noventa security strategies were consulting firms Novartis is the name we use to consult the banks and treasury strategies is when we use we consult to accounts payable, accounts receivable and treasury departments. So we’re corporate facing. Jeff and I have that corporate practice.…

What you'll learn

“While the traditional working capital focus on DSO, DPO and DIO benefits the balance sheet, a cash conversion cycle optimization approach incorporates reduction of all costs associated with the processing of transactions inherent in working capital management. This session will describe how to design a data-driven collections and disbursements strategy that will enhance working capital metrics while also lowering processing costs”

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HighRadius Integrated Receivables Software Platform is the world's only end-to-end accounts receivable software platform to lower DSO and bad-debt, automate cash posting, speed-up collections, and dispute resolution, and improve team productivity. It leverages RivanaTM Artificial Intelligence for Accounts Receivable to convert receivables faster and more effectively by using machine learning for accurate decision making across both credit and receivable processes and also enables suppliers to digitally connect with buyers via the radiusOneTM network, closing the loop from the supplier accounts receivable process to the buyer accounts payable process. Integrated Receivables have been divided into 6 distinct applications: Credit Software, EIPP Software, Cash Application Software, Deductions Software, Collections Software, and ERP Payment Gateway - covering the entire gamut of credit-to-cash.