Breakfast Talk Series: Strategies to unlock working capital. Marvin Tan Executive Director

Transcription

1 Breakfast Talk Series: Strategies to unlock working capital Marvin Tan Executive Director

2 Self Introduction Executive Director of Nufin Data & JK Tech Group Previously, -Group CFO of JK Tech Group -Consultant and investor for Private Equity Fund -Auditor in PWC in Singapore, EY in America Education: - Tsinghua University Insead executive MBA programme - Honours Degree in Accountancy from NTU Nobel Laureate Series: Asian Chinese Leader Award by Asian College of Knowledge Management in Hong Kong -Elected as Fellowship of Asian College of Knowledge Management - Awarded Honorary Doctorate by Lincoln University

3 Agenda Introduction Working capital situation in Singapore Using Payables to free up working capital Leveraging on technology Early Payment Discounts/Dynamic Discounting Q&A

4 Working Capital Situation in Singapore

5 Working capital Net Working Capital (NWC)= Current Assets Current Liabilities What affects your NWC DSO - Days Sales Outstanding DIO - Days Inventory Outstanding DPO - Days Payable Outstanding

6 Singapore Working Capital Study 2017, PWC + Spring Singapore Percentage of NWC = Growth funding necessary for a business E.g. A company that carries 20% NWC will need S$200,000 cash to fund each S$1 million growth; while a business with 10% NWC will only require S$100,000 for each S$1 million growth.

7 Singapore Working Capital Study 2017, PWC + Spring Singapore m and m (turnover) have the worst Net Working Capital performance

8 SMEs financing gap in Singapore SMEs with financerelated issues % % 35% Main reason cited: 81% face late payments Source: SME Development Survey 2017 by DP Info Source: SME Development Survey 2017 by DP Info

9 How can you free up more working capital? One way is to extend your DPO.

10 Because... Higher DPO = Higher Cash Flow

11 Cash conversion cycle (CCC) The longer your DPO, the better your CCC CCC is a measure of working capital efficiency DIO + DSO DPO = CCC Example: = = 20 The lower your CCC, the better your cash flow

12 The link between Working Capital Management & Business Value A common way used to calculate the value of a business - Value = Free cash flow / (risk-growth) Consider a company that generates: - S$730m in annual sales - S$100m in free cash flow - S$110m in earnings before interest, tax and depreciation and amortisation (EBITDA) - WACC of 11% - Growth rate of 3% per annum Value = Free cash flow / (risk-growth) = S$100m / (11% - 3%) = S1,250m or 11.4 times EBITDA

13 The link between Working Capital Management & Business Value Assuming the EBITDA and other variables are held constant, while Cash Conversion Cycle was reduced by 10 days generating an additional S$20m cash flow Old Value = Free cash flow / (risk-growth) = S$100m / (11% - 3%) = S1,250m or 11.4 times EBITDA New Value = Free cash flow / (risk-growth) = S$120m / (11% - 3%) = S1,500m or 13.6 times EBITDA By reducing CCC by 10 days and freeing up S$20m in cash flow, the company improved its valuation by S$250m for shareholders

14 Using your payables to free up cash flow AP automation Supply Chain Finance / Reverse Factoring

15 1. AP automation Faster payables approval = more early payments Digitizing end-to-end AP processing workflows: - E-invoicing (from paper to paperless) - 2- or 3-way matching process (reduce manual work and mistakes) - Workflow approval (improve internal control and transparency)

16 2. Reverse Factoring / Supply Chain Finance Using the opportunity to extend Days Payables Outstanding Secure your supply chain help and helps your suppliers Doesn t add to debt Leverages on your credit worthiness

17 Supply Chain Finance / Reverse Factoring

18 Leveraging on Technology

19 Leveraging on technology to achieve both ü Automation improves day-to-day operational efficiency ü Maximizing early payment discount window ü ALL your suppliers, not just the short tail ü Easier and faster supplier onboarding ü Reduce liquidity risk with choice of funders

20 Payables Technology improves your payable processing to maximize early payment requests The opportunity 0 Days Invoice 10 Days Approve Faster approval = more early payments requests 30 Days Due Date Extending net terms = more need for cash 60 Days Due Date

21 Using your excess cash to get better returns Early Payment Discounts / Dynamic Discounting

22 Early payment discounts opportunity for better returns Early Payment Discounts Annual Spend $50m 10% of suppliers financed $5m Discount terms 2/10 net 60 Discount earned per cycle $100k Payment cycles per year 6x ROR 12% p.a. Annual Earnings: $600k Fixed Deposit Yield Deposit amount $5m Fixed Deposit Interest Rate 2% p.a. Annual Earnings: $100k Note: Figures used are for illustration purposes only. Assumptions of discount rate, payment terms and programme adoption rate have been made to facilitate calculation.

23 Free up cash flow from payables + Use cash to get better returns

24 Summary Use your payables to improve your working capital - Automation - Reverse Factoring Leverage on technology to achieve both Early payment discounts is a great way to earn returns

25 Thank you. Q&A Marvin Tan Executive Director