Jeff Diorio:
So I’m, I’m Jeff is if you can’t tell I’m the bald one. And this is Dave Robertson.
Dave Robertson:
and the other bald one.
Jeff Diorio:
And we’re going to talk to you about working capital. So why do you care? Right? and earn was Ernie and then Bruce spoke about how Treasury can add value. And so if you look at working capital, you’ve got the invoice to pay flow, but then you’ve got this, this cross-part here where trade Treasury really come into it. And if if it’s managed correctly, you’re focusing on things like managing free cash flow that we talked about earlier. And, and so it is very important, it’s critical to things like your profit and your liquidity. And it may be underappreciated because I can tell you, I talked to a lot of treasurers about it. And I think this came up in one of the earlier sessions where they said, if you’re, if you’re a net debtor, and you have a lot of debt, they care about certain things differently than if you’re Apple, and you have mountains of cash, and they don’t care how much cash is sitting in the bank. Dave, any thoughts on this slide before we move on.
Dave Robertson:
I think working capital is one area, right? Where you can annoy the customer, mess up liquidity, take on credit risk. And right now we’re working with a logistics company and just an example of how the Treasury has to stay close to the business model. They’re basically organizing shipping for other companies and taking a fee on top of it. And with the supply disruptions in the container shortage, they actually had to pre-purchase capacity. So all of a sudden Treasury is seeing their working capital explode, and they’ve got to go out and get liquidity. And so it’s a surprise to the treasurer, that there’s this financing need because the business model for the supply chain has changed. So really strategically coordinating the procure to pay and the invoice to cash. value chains are very critical for Treasury.
Jeff Diorio:
And since it’s a small group, we want you to think of questions because we can be very interactive. The wrong button, that was the laser. Okay. And I don’t know from back there, I was sitting back there, can you see that? Okay, I guess this one’s not that bad.
Dave Robertson:
I don’t want to get too caught up in this. So we can share with you some estimates of what every 100 million dollars of revenue, what’s the typical value companies can generate. But obviously, one of the big things with working capital is liberating cash. So making the account receivable DSO faster, extending DPO, those are fairly obvious. But even just getting better visibility can lead to a cash forecast that has more confidence, more ability to extract cash in the organization, a lot of efficiency, we’re seeing solutions like hire radius become very accessible. So automation is no longer a two-year project, it can be a matter of months, and drive efficiencies, improving the experience. So what happens when you don’t collect cash? Well, you don’t bill Well, you don’t provide statements. Well, we’ve seen companies with unapplied cash where the customers don’t believe the statements. So they start short-paying. And then lastly, governance. So really having visibility into what’s going on with A/P and A/R prevents surprises on the liquidity and, and then obviously getting better control. So the amount of fraud that’s now being directed toward the AR and AP value chains is intense. I just saw there was this political group that has lost all this money because they had a wire, they’re getting ready to pay to a law firm, and someone had access to their system. They intercepted it, they spoof an email saying our payment instructions have changed. They updated it, and they sent the wire to the fraudster. And good luck catching that money, find its way to Hungary or Cyprus, where you can’t get at it.
Jeff Diorio:
And this is an area that people have been focused on for quite a while and you know, we’re here at a HighRadius conference very clearly. On the AP and AR AR side. Her radius has been an advocate for a while. Alex’s former partner in crime was telling me that they put a dashboard in place and they identified that within their organization, people were paying invoices early. Right and she you’re talking about DPO DSO optimization, and you got people that are actually paying invoices early, big ones, and at first, everybody was in denial about it. So having a good system To show you that that’s going on with dashboards and that kind of technology are very helpful. And they moved, I think they moved things four or five days, and, and moving that amount of money four or five days is a huge impact to the company. So there were a lot of different examples of how you can provide value by managing this process, the working capital, keep pushing the wrong button, I’m sorry.
Dave Robertson:
And these are just some examples, what we’ve seen for every 100 million of revenue, there can be as much as $4 million, that can be extracted out of working capital, and the cost saved can be as much as 100,000. So that’s, that’s the US, if you were to take this in Europe, or Asia, typically, the cash extraction is even higher. And the efficiency savings might be a little bit lower because there’s more electronic adoption.
Jeff Diorio:
Because So what are some of the challenges?
Dave Robertson:
So maybe I’ll, I’ll see this one up, you know, if you think about these, in order, and I think others have said this, getting the data is critical. And as a treasurer, you’re relying on visibility and those working capital streams, you also may be in coordination with working capital around terms for AP and AR. And yet, if you go and you ask somebody, give me all the data on AP, all the vendor data, the payments, sometimes the data doesn’t come together with the whole. And so that’s got to be fixed. What’s the authentic source of the data, how’s it being reconciled? One of the things that PMC sees often with middle-market companies, in particular, is the PO ledger is on Excel, and then it’s being input into the ERP. And then the payments are coming into the banking portal. But it’s all conflicting data. So there needs to be a normative data model that has integrity. The other thing is just the fragmented responsibilities. So who’s doing what many times companies have rolled up through acquisitions, and they’ve not put it all together into a common model. So people are not orchestrating and basically, all these units are just a lot of manual activity. And I think the last thing is, is reactive management. So if your staff is just purely doing operational activities, and you’ve not automated, then they’re not doing the higher-order activities, optimizing the terms, thinking strategically about the customer payment experience, monitoring the environment for things like a supply chain shock, yeah, earning.
Audience:
these areas as often as low as and thorough company data, silos, or is it I guess they all drive the reactive management for what you see as the lowest hanging fruit for most things?
Dave Robertson:
Yeah, it’s a great question. So it’s going to depend, we often see companies that just have not digitized, right. And so getting that right, could be the lowest hanging fruit for them. Others, if they’re just purely operational, you don’t have to get the data perfect to optimize your terms. So if you’re a highly leveraged company, and you’re borrowing and it’s at, you know, a higher rate, getting the AP and AR terms could be the lowest hanging fruit. And then lastly, if you have gone through all these acquisitions, it might be moving to a common model and getting the data, right. So it really is going to vary by the nature of the company.
Jeff Diorio:
And another point to be made here is silos. So who’s responsible for this? In all kinds of falls under the CFO? But is it the Treasury? Or is it the controller’s group? You know, who’s driving this? And it does seem that in going back to one of the earlier presentations about strategic Treasury, it does seem like the treasurer’s group is driving this because it’s, it’s important to the bottom line. So that last point, when we go back to it, champion, somebody’s got to be the champion for this. And we see Treasury as the premier driver for that. So how do you achieve this? You know, how do we get you to that target state of and by the way, somebody showed me You can download this presentation off of the app. So if you find these valuable, is there one more, I think there’s one more. Yeah, cuz I’m going to push it one more time is going to go away. So how do you get there so and depending on what your organizational maturity level and capabilities are different of these are going to make more sense for you? So digital, I’m a big person on automation and have done it for many, many years. And so I’m all about finding ways to get digital data, and things like the API integration and the automation going so that you can reach in to multiple systems to get at the data, and we’re seeing a lot more projects, because we are consultants and we see a lot more projects these days where people are saying, look, I, I have these fantastic systems, I have a wonderfully ERP and may have a TMS, I’ve got these banking systems I’ve got, you know, all these systems, but I can’t get this big picture. And so what you’re seeing is a lot of people putting in place an infrastructure that allows them to create a data lake that allows them to create some business intelligence that shows them this information. And so if you go back and they say, how would we measure this? How do we know whether we’re achieving this? It might be a project to put something like that in place. Dave, do you have any thoughts about which ones are your favorites?
Dave Robertson:
Well, I think they’re all important, but I like the last two because I think it’s important to look at where your company is headed. So oftentimes, we see companies that are getting ready to really globalize, where they’re looking to do acquisitions. And so it’s not just a question of getting the current state, right. But really building a model that’s going to scale, or can be extensible and flexible. So all these other components are correct. But if you build the model in a way that doesn’t encompass your plans for the future, you’re just gonna have another problem later on.
Jeff Diorio:
Yeah, and I was speaking with somebody, I think it was last week. And they said a week we did a factoring, we don’t need to focus on working to have we did a factoring, we pulled 175 million out because we did a factoring of our receivables. So we don’t need to worry about working capital anymore. And I said, Yeah, you really should, because why would you leave all this other money on the table because you didn’t optimize your receivables or any of the other aspects of working capital. And so that’s something to think about. And the other point about the last two about scalability and extensibility is your most Treasury and finance organizations just simply don’t have enough people working in them? And organizations these days are growing, there’s the concept of growth. And so if they say, why do we need to do this? And part of the reason is, well, of course, it affects the bottom line. But it also allows us to do more more efficiently with the same amount of people. And that’s where the scalability comes in. How are we doing on time? Five minutes perfect, because, you know, we’re hoping it’s a small, intimate group, we can take questions. Okay, so what does success require, and we think it’s across several streams. And so if if you think about it, you may feel that one or two of these are more prevalent to you and more pertinent to you. But on the data side, you want to think about digitization. And, and in this age, that’s really what it’s all about finding ways to get to the data sources and automate things. And you know, we’re at a HighRadius conference and here this is all about digitizing. One of the concepts there under data is the fact that data from different sources do need to be captured,, they could be different formats, different structures, they may need to be enriched, so that you can use them. So you have this concept of normalizing them, consolidating them, and enriching them. And so that’s, that’s kind of, you know, the thoughts you should have around the data. Dave, do you want to talk about the process?
Dave Robertson:
Sure, I think the process, people jump right to technology, which, which you can, but really making sure that it’s streamlined, it’s simplified. There’s clarity, we’re working with a client right now. And they’re in their Treasury function, where they’re getting things from working capital units, they don’t understand where it’s coming from, they’ve not connected the dots. And if you were to ask five different people involved in that process, what the processes are, you would get all these different answers. And you can see the impact in terms of a lack of a clear process and how it’s orchestrated across the roles.
Jeff Diorio:
Very good. And around governance, because I, honestly, Dave, I don’t think too much in working capital around governance. What are your thoughts there?
Dave Robertson:
Well, this one is huge because really, governance is trying to understand what are the controls that are in place? And what are the escalation conditions? And so oftentimes, we’ll see companies put in place policies, which are great, but how are those policies enforced? How do you know they’re being followed? Is there an audit trail to show that this is occurring is there is too give a sense of where we are versus limits? So oftentimes, when people think about automation, they think about automating the process, but I think there’s even more value in automating the controls the escalation, and all the governance activities.
Jeff Diorio:
And so the example I gave earlier of Alex’s pal, who, when he initially said I kind of got the feeling that a lot of invoices are being paid early. Everybody on the AP side said absolutely not No way in god’s green earth is this stuff being paid early and only once they put a system in with escalation to prove that it was happening, and then to say to people, I guess you’re wrong, what are you going to do about it, but you have to measure it, you have to be able to measure it, and have an escalation procedure for it. And finally, there’s people and I talked a little earlier about the silos, but you do have to build a culture that’s going to work proactively on it, it’s folks from different groups, and some of those groups are going to be resistant because they like doing things the way they always did them. Some of them might feel like, it’s a little bit of a job risk that this, you know, that that’s my job, I can’t, I can’t let other people get involved with it. So there’s that kind of ingrained. It’s not that they’re on purpose fighting, what you’re trying to do, but you have to build a culture that embraces the change. Dave, any more thoughts on people before we move on.
Dave Robertson:
I have a kinder view, which is I think people know what they know. And so if they’re in a paper process, and you’re going to migrate them to a digital process, and all this stuff can be automated, you got to bring them on that journey, explain how it’s going to be different. They’ve got to see how they’re going to exist in it. What I find challenging is the companies will deploy automation, then they want the staff to do these higher-order functions. But the people that were doing the operational activities aren’t often the people that are going to really do that. Well. And so a perfect world. Treasury is working with working capital, asking questions. So working capital, automate, get better data, get people that can think strategically about the supply chain, the customer base, the pricing strategies, how that’s going to affect liquidity. But the people that they have there can’t answer that type of question. So oftentimes, once somebody has digitized, automated gotten the process, right, then there’s this HR issue of the people we have are not the right people for the future. So that’s something Treasury can help with because Treasury has already made that migration to knowledge base workers.
Jeff Diorio:
I guess you can figure out which one of us is from New Jersey. So Dave, do we have How much time do we have left for this one? So we still have about 10 minutes for q&a. So if you want to discuss, Dave is going to give this one the one-minute fly by and then we’ll take questions.
Dave Robertson:
So I think Ernie asked like, Where’s the money? Or where’s the low-hanging fruit? And so I mean, if you think about financial engineering, one of the easier things is terms and financing optimization. Because even if you have crappy data, if it’s good enough to at least understand who our customers are, you can think about where can I push discounts to accelerate money? Where do I have some opportunities to maybe extend the payables? The better the data, the easier to get to that idea? So one of the things we work with a lot of private equity companies, what does private equity do when they buy a company, they loaded up with debt. And now this thing’s leveraged to the hilt. And so they need cash. And they can pay pretty good discounts to accelerate receivables and get funds. What if you knew which of your customers were cash-rich. So now if I go to a cash-rich customer is getting, you know, 20 basis point, ECR on their, on their cash, and it’s actually zero because the deposit administration fee wipes out the car, if I give them a half percent discount, that’s a great return for them. And I can pull in more cash. So that one is a huge opportunity. I like to put digitization and process automation orchestration together, because if I don’t digitize, it’s hard to automate, it’s hard to orchestrate. But those two together, I’m finding less than less, the company wants a perfect business case that says I’m going to get rid of staff or I’m going to reduce bank fees to purchase the solution. They might like a business case where they spend a little bit of extra money. But with that foundation, now they’re getting more insights to drive the controls and governance and you know, as treasures, you have to be risk-averse. How do you know that working capital functions are not at risk of fraud, risk of losing money? And I had one Treasurer Tell me Look, I know if working capital does something that AR AP does something to cause this type of fraud loss. It’s going to be on me as the treasurer and my responsibility. So I need to work with them and make sure they’ve got the controls in place that the vendor master database has integrity, all those things. So as a treasurer, you can’t ignore that. The expectation is that you are because it’s a bank product that’s being used to send out that payment. It’s on you to ensure the controls are appropriate. And doing that with an automated digitalized environment. Much easier, much more effective. So it was a little longer than a minute. Questions. Alex.
Alex(Audience Member):
where do you see working capital in terms of companies maturity level, if you think about that, I guess you can start with a typical startup, your first priority for a startup will not be working capital that will be, how do we make payments, then next level of maturity will come to a couple of years, is that when we speak of VC companies thinking about when it comes further down the line.
Dave Robertson:
I think they think about it all the time. I mean, if your startup has a burn rate, maybe you don’t think about it, but right off the bat, your billing touches your customer, your supplier relationship might be critical. And unless you’ve got unlimited cash, you need that visibility into the liquidity, I tend to think of the maturity spectrum more on the resources, they have to apply to it. So you may find middle market companies that are not large enough to really have somebody providing leadership there. And but once you do, and they have that leadership, then you start putting a model in place, you start taking advantage of automation, and you begin using your bank partners and your technology vendors more intelligently to drive value. So I typically see somewhere in that 100 and 50 million revenue, that typically there’s some financial executive now, who can think strategically about this and really drive it to the next level. And then once you get up into the $2 billion level, you’re looking at companies with incredible functional specialization, more challenges, putting it all together, but no lack of knowledge of things like that can sometimes explain banking better than the banks can. So I think from a maturity perspective, it’s Can I think about this structure and get a good model in place? And then as I grow, can I put the expertise in there in the right places? I don’t necessarily need to be the world’s best, you know, accounts receivable group if I’m using effective solutions. But maybe I do need somebody that can strategically, think about what the business needs to grow, how to manage the terms, how to how to orchestrate a good billing experience, and then have partners help me execute on that. journey. Anything that that Jeff.
Jeff Diorio:
I think you’re at a high level, what Dave’s talking about is there’s no, early enough time to start it, you should start as soon as possible. But you’re working capital process can evolve as it goes forward. So you should always keep an eye on this. And I remember a couple of years ago, somebody was saying to me, yeah, we, we decided, one of the things we’re going to do to improve working capital is we’re going to take all our payment terms, and we’re going to move them from 35 days to 90. And I said, well, how’s that working for you? Right? And that one’s right, you’re going to have a bunch of different plays to get this working capital thing working better? And he said, Well, we got them up to an average of about 55. And so everybody said, No, we’re not going to 90, but they were able to move them up from 35 to 55. That’s 20 days. That’s huge. And then if you could do a couple of other things, right? So you’re not going to be able to say I’m gonna boil the ocean, right? You’re not gonna be able to do all the initiatives to improve working capital to the nth degree immediately, it’s going to be stepwise. And so there’s no early enough time to start on it.
Dave Robertson:
Yeah, and I think one of the things I’d add Alex is that if you think about today, the technology solutions are more accessible than ever. And so some of the things that accompany might have had to be larger scale, to get access to certain sophistication, that sophistication is now available and much easier to implement, adopt and use solutions. Yeah, please do.
Alex(Audience Member):
So, you know, every bank is happy to come in and pitch their product on their working capital, and they would love to take your spend data and come back, show you what you’re doing. How do you currently view bank banks as partners in this process? I’m sure they add value, but maybe not as much as they claim to be?
Dave Robertson:
It’s an interesting question, because the same solution that technology providers are offering, sometimes they’re partnering with banks to deliver them. And yet sometimes you go to a bank, and you’ll say to the customer might say, Hey, I’m interested in this solution. And the banker will say we don’t have that because they’re not are aware that they actually have it. So there’s the people quality. And what I will say is that a technology vendor that specializes in AR is gonna have a sales force that probably is a lot more focused and understands the reality of an AR solution. Whereas the banker might be more of a generalist. So I, you know, I don’t think there’s a right or wrong answer. Banks are expanding their solutions. There are some areas whereas a corporate, you may not want to be tied to a bank. So for example, you know, if it’s accounts receivable, and you have a bank-based solution, and now you want to do something different, that might be a little hard-coded, and now you’ve got to change things with your customers. Whereas if you’ve gone outside the bank, your bank agnostic, you’ve got more flexibility. But certainly, the banks are motivated to help you. They want your cash flow because it’s the repayment solution. But I think it comes down to do they know how to solve the solution, configure it to your needs, and be successful. For things like wires, cards, they’re typically very good, the deeper you get into the AP and air value chain, you can get a good experience, but oftentimes I find that they struggle. That’s not bank bashing, is that I love banks. I used to be a banker.
Jeff Diorio:
Dave, Dave not only advised banks in a prior job, and he, I think he offered them solutions and the one that was right before this one. Any other questions?
Audience Member 2:
Are we going I’ll throw one out here real quick. So you mentioned you know, the highly leveraged companies, you know, the borrowing rate being a big driver of these types of projects. And you also mentioned the example of, you know, very cash positive companies apple at the extreme, other ends of the spectrum, but you find that companies that are generally cash-rich, do still have working capital projects, and what are the drivers for those just looking to have more cash? Or what, what could you expect to find for a project and a company that’s generally cash flow positive, it’s interesting.
Dave Robertson:
These projects can come from anywhere. So in a prior life, I worked with a very large cash-rich company. And they had to completely redo their accounts, receivable model. And it was mainly because they were just taking their customers off so badly, sending out erroneous statements. And they just did not have command over the process. But I think even if you look at Apple, right, Apple wants to have visibility into its supply chain. To the point even, you know, our do our suppliers have enough liquidity to deliver against us. And they want to have visibility into their billing and their statements and the statement experience. So there’s going to be strategic drivers that are always going to be present, just because it affects access to supplies, and the customer experience, there’s going to be efficiency plays, so I don’t care how much cash you have on your balance sheet. If you’re running an inefficient process and working capital, you’re not only throwing away money, but the data is not there. And then finally, even if you’re cash-rich, you’re still trying to get a yield on that cash to understand it to have visibility. And that requires visibility into both sides of the working capital to so it’s a different intensity, they can have a little more error in their cash forecast. But they’re still interested in it.
Jeff Diorio:
The other argument I have for why they should do it is investment rates are awful right now. So if you’re cash-rich, your options for investing are kind of ridiculous. I’m on the board of Caymanian, I remember, somebody asked us a question, well, what could you possibly do you have to start going into crazy credit? Where am I really looking at investing in cyber currencies, because somebody in the board asked us to do that? And if you shouldn’t, you shouldn’t be wasteful, right? Treasury has a fiduciary responsibility to the organization. First off to make sure that you can pay all your bills, but also that you’re not sitting on mountains of cash that are doing nothing. And so you have to be able to put that money to work. And so being as efficient as possible in your working capital helps you in that in that venue in that way.
Dave Robertson:
And yeah, surely cash-rich, you could do Supply Chain Finance. And so you obviously need command over the accounts payable to do that.
Audience Member 2:
Yeah, that makes sense. We were talking to a company recently about our cash forecasting AI solution. And the gentleman on the phone said that while we were just cash-rich, so we don’t forecast. So that was kind of the genesis of the question. Clearly, we were too low down the food chain. We weren’t talking to the CFO, because somebody cares. So those are great examples. Thank you, guys.
Jeff Diorio:
Thank you. Thank you. Great job.
