• Posted on: March 10, 2014 by: mardle0312

    Releasing trapped working capital is simply reviewing inefficient processes, whereas Working Capital Strategy is more about delivering an effective financial supply chain.  This means being proactive in areas from strategic alliances to delivering efficiencies in the cash conversion cycle.

    Working Capital Strategy checklist

    Ten tips when reviewing a strategy to achieve working capital optimisation:

    1.   Working Capital Optimisation programmes must extend beyond the finance function and engage the company’s entire managerial team.  Do not think that all working capital management problems can be addressed by treasury alone. Appoint local working capital strategy leaders/champions across the organisation.


    2.   Do not artificially adjust working capital levels through delaying payments to suppliers or indiscriminately stepping up collection activities in order to boost quarter- or year-end performance metrics.  In business, as in physics, every action is met with an opposite reaction.  Delaying payments to vendors may reduce working capital over the short term, but that improvement is likely to disappear over time as vendors adjust their pricing accordingly. Dynamic Discounting is now prevalent.


    3.   Incentivise people to achieve their WCO targets by compensating staff accordingly, particularly at managerial level. User driven key performance and risk indicators should be measure the underlying causes of DSO, DPO and DIO and steps take to monitor and manage findings.


    4.   Make a consistent effort to optimise working capital.  It may be tempting to take the focus away from working capital when the company is growing as there may be less immediate need for it.  Equally, in times of crisis, attention can be diverted elsewhere.  Ignoring working capital could significantly inhibit a company’s ability to grow and meet demand once business rebounds.


    5.   Ensure all hopes are not pinned on ERP implementation.  Although ERP systems can provide significant benefits in the working capital arena, in the near-term they can cause deterioration in working capital performance as key managers and employees are distracted from their daily routines and forced to fine-tune the new ERP system. Mobile applications are proving robust and agile.


    6.   Ensuring suppliers and customers are collaborating effectively is now very much to the fore in demand chain management.  Connect suppliers and customers across the enterprise to achieve maximum benefits.


    7.                  Provide added value for your suppliers.  Major organisations are now using web portals and the like to   deliver seamless accounting transparency for all their suppliers and their financial transactions too, wherever they might be in the world. Supply Chain Finance is now a major part of suppliers funding arrangements.


    8.   Do not allow debt to become overdue before identifying and resolving disputes.  Contact customers before payments are due to resolve any potential disputes and for delinquent payments, assign collection responsibilities to individuals and escalate the responsibility to more senior employees as invoices become further overdue. Have credit management as part of your strategy at Board Level.


    9.   Develop forecasting techniques that incorporate intelligence from all relevant business segments, including not just sales but manufacturing, distribution and marketing.  Evidence from these forecasts will assist in the production of company financial statements to investors re Companies Act 2006 as amended October 2013 re Strategy and Directors Report


    10. Look holistically at the whole financial supply chain.  For example, is there a direct correlation between inventory management methods and the level of customer service that a company can provide?  Do not allow one area to suffer as a result of focusing attention on another.

    An independent cash report (ICR) can be produced to identify whether the organisation is clearly and concisely reporting its cash flow objectives under the mandatory requirement of Companies Act 2006 (as amended Oct 2013) for a Strategic Report and Directors Report.

    The ICR is produced through robust and detailed analysis undertaken by reference to not just the annual report but also all other communications whether they be to investors /shareholders/financial institutions  via interim management statements, employees via pension fund reports, newsletters or indeed to customers and suppliers.

    Narrative, commentary or even recognisable graphs of trend data need consistency and robust reviews to deliver the strategic objective of the organisation in cash terms.

    If one is informing employees/pension fund members of the strategic objective then recognisable graphs of trend data may provide clear communication throughout the organisation of what is required.

    However communication of the same objective to investors/shareholders/financial institutions could require review of the financial impact of certain strategic objectives on the organisations credit worthiness.

    Customers and suppliers, attempting to understand the self-same strategic objective, maybe interested in the impact on contractual terms.

    Why Working Capital Metrics are calculated differently by credit rating agencies and organisations alike.

    Q1 of any new year sees a huge volume of organisations publish their annual reports. The narrative normally eludes to various cash metrics and in particular to working capital.

    However when one reads through these reports to establish a common but significant KPI like DSO, DPO or even DIO, they are not often found and instead other forms of cash metric are used but rarely explained as to why an alternative measure is being used, its relevance to the business its impact – maybe on bonus, maybe on remuneration or maybe on investment decisions.

    The likes of Marston Plc. suggest CROCCE, ITV profit to cash and Nestlé FCCF and yet none are ‘recognised’ by the usual credit agencies.

    Furthermore the agencies then compute DSO, DPO and DIO that does not conform to the usual accounting scenarios and rarely give a reason as to why?

    So when attempting to understand the cash conversion cycle or any working capital metrics one has to be very careful. As providers of such information we establish with the management team how to measure the real changes in working capital through the use of Performance Indicators (PIs) that are a subset of financial KPIs and are owned, measured, monitored and managed by operations.


    The Strategic Report required under the 2006 Companies Act as amended in October 2013 specifically states in Paragraph 12 that in the case of a quoted company ‘where appropriate, include references to, and additional explanations of, amounts included in the company’s accounts’

    Narrative within the Management accounts could contain views from ‘senior managers’ – defined in the aforesaid Act as being a person who-

    a)     Has responsibility for planning, directing or controlling the activities of the company, or a strategically significant part of the company, and

    b)     Is an employee of the company.

    By reviewing management comments, directors should be able to identify KPI’s/KRI’s that they then can provide as evidence to support the Strategic Report , but, with their own narrative, so that per section 14 of the Act ‘disclosure would, in the opinion of the directors, be seriously prejudicial to the interests of the company.’

    The critical piece in our view is the ability to measure the performance of the organisation, based on Paragraph 5 of the Act, ‘effectively’ which means reviewing trends and strategies to improve performance and delivering action plans that address the cash impact on the organisation.


    Monthly or at least quarterly management accounts are more current that interim management statements (IMS) and statutory accounts which should provide management accountants with an ‘edge’ over their peers.

    Frequency of reporting has increased exposure and therefore pressure on CFO’s and the whole executive team to the point that narrative is somewhat lacking in depth and breadth as it seems many IMS are attempting to ‘hide any surprises.’

    We see on a regular basis reports via social media, analyst opinions, newspapers, disclosures under the Freedom of Information Act and various other media ‘interventions’, that organisations have been ‘found wanting’ when it comes identifying trends in their levels of performance.

    This can immediately be reflected in share prices falling or rising, enquiries being announced, Parliamentary panels being established, various commissions established or indeed the decision for certain key personnel like CEO/CFO to be suspended or ‘let go.’

    The purpose of management accounts, in part, is to reflect KPI’s/KRI’s and various other metrics that support action plans in accordance with how strategy is being implemented.

    The greatest threat to the strategy is normally reflected in cash terms in that once a ‘surprise’- good or bad- is highlighted one should already have reviewed an action plan that puts some cash measures on the impact which could include appreciating what the future impact might be on ‘external’ measures like the market effect on share price or maybe on how the public might reflect on a particular service, a particular political approach etc.

    The Strategic Report required under the 2006 CompaniesAct as amended in October 2013 specifically states in Paragraph 12 that in the case of a quoted company ‘where appropriate, include references to, and additional explanations of, amounts included in the company’s accounts.

    This blog will be developed further to appreciate the affect this will have on Management Accounts.

    Posted on: July 25, 2013 by: mardle0312

    One could be forgiven for thinking that ones’ accounting training had made it obvious that trade debtors, stock and work in progress are assets and that trade creditors are liabilities.

    However a quick review of recently announced consultative documentation from:

    a)      The International Accounting Standards Board (IASB)

    b)      The Association of Corporate Treasurers (ACT) wiki

    c)       The introduction of FRS102 in 2015

    d)      The recently announced Standard and Poor’s rating review consultation by September 2013

    e)      and last month’s High Court Ruling concerning Balance sheet Solvency Tests

    And one could be in for a ‘surprise’ as the definitions vary but let me be controversial and suggest:

    1)      Trade debtors are liability until they are fully paid

    2)      Stock not only has an overhead, freight, disposal and sometimes land fill tax cost but deteriorates in respect to its original condition and/or original premise of being an asset to be sold so could be a cash liability.

    3)      Work in Progress could be very subjective, particularly if percentage of completion is involved, could consist of unbillable costs or contain ‘hidden’ accounts so could cause revenues and profits to be detrimentally impacted

    Trade creditors though in accounting terms are recorded as a liability could be an asset. Why?

    Suppliers have invested their own cash in supporting you and they have driven costs down so that you have improved margins and in these tough debt driven times they may still be willing to adopt supply chain finance schemes like dynamic discounting.

    Maybe it is about time we all looked at Trade Working Capital in a different light?

    Return on Capital Employed (ROCE) has at its heart, working capital, as is part of the equation PBIT divided by  total assets less current liabilities. Therefore when credit organisations use ROCE they are in effect measuring the efficiency of working capital to generate cash to pay for such investments as equipment, land, factories and fund the operational areas of debtors and creditors.

    It is critical for all organisations to demonstrate a consistent and robust measure of ROCE over say a 3 year period to provide evidence that their management of cash is such that investors are confident that the return OF their cash is not in doubt, and that the return ON their investment absorbs the ‘risk’ of moving cash from no or low risk areas/accounts.

    Posted on: May 1, 2013 by: mardle0312

    Deutsche Bank upgraded Tata Motors from Sell to Hold.

    Analyst Srinivas Rao said, “Our prior rating was underlined by an expectation of flat-to-falling margins from rising competition and lower ROCE due to higher capex. In our view, the stock performance (-7% YTD) reflects the negative margin surprise and higher capex guidance. JLR’s medium-term prospects are positive but the cost of emission compliance are likely to constrain EPS growth and ROCE.”

    From an investors standpoint the FTSE has increased in value by almost 15% from January 2013 to May 1st 2013  and yet most corporate ROCE are lower at nearer 10%. However is the risk factor  fairly reflected in these two percentages over time spans involved?

    From a company point of view ROCE should always be higher than the rate at which the company borrows otherwise any increase in borrowing will reduce shareholders’ earnings, and vice versa; a good ROCE is one that is greater than the rate at which the company borrows.


    Posted on: April 24, 2013 by: mardle0312

    Defined as Profit or Earnings before interest and tax PLUS Depreciation and Amortisation (as they are NON cash charges to the P & L account) less changes in working capital (Current assets less current liabilities) less Capital Expenditure in prior periods.

    Because free cash flow is a non-Generally accepted accounting principle (GAAP) or IFRS financial measure, companies that use this metric are required to disclose how it is calculated.

    Free Cash Flow vs. Net Income

    Free cash flow is used by some instead of (or in conjunction with) the net income as a measure of a company’s overall profit. As its name implies, free cash flow is calculated on a purely cash basis whereas net income is calculated on an accrual/prepayment basis in accordance with GAAP.

    Arguments for and against

    Proponents of free cash flow argue that free cash flow is harder to manipulate than net income since it isn’t subject to accounting shenanigans. However, free cash flow can also be manipulated by delaying items such as capital expenditures.

    Posted on: April 23, 2013 by: mardle0312

    Reporting of Return on Capital Employed (ROCE)

    Defined as Profit or Earnings before interest and tax divided by shareholders funds plus creditors more than one year (this being the equivalent of Total assets less current liabilities)

    The challenge is to understand the impacts on profit and by whom. Once this can be determined then one can turn attention to the other interdependent parts of the formulae. Strategy could deliver shareholders’ funds and creditors more than one year. However the major thrust for most local accountants, management teams will be in the purchasing with an emphasis on return on investment and valuation of a) Fixed assets and the valuation (including reserves) of B) current assets like debtors, stock and work in progress. Current liabilities, particularly creditors (suppliers) will require certification (self-approval via web portal and categorisation (criticality to the business) and then classification (metrics re Service level agreements, KPI’s and payment profiles)

    One could sweat capital items like fixed assets (equipment, buildings and land) and consume ones current assets like stock, wip, and debts especially when appreciating the full utilisation of assets within the ratio ROCE (return on capital EMPLOYED). People/employees could be regarded as Human Capital and in service industries one can obtain a return on human capital employed by attributing asset likes Pcs to individuals and charging them the costs so that they generate revenue to offset these costs on a person by person basis. ROI by person is then a measure that could be used to gauge the productivity of people.