Global

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  • Date: 3/28/2014

Get Your House in Order 

get your house in order
Strong cash management is the basis of any successful business, but requires particular attention if an organisation is exploring new territories and markets.

Africa, like other new markets, is a challenging and potentially volatile market with elongated supply chains and varying domestic capabilities. Investment is high-risk with little prospect of a short-term return. In such a situation, managing cash outflow is critical, and for oil and gas companies that means instilling rigid cash discipline in the business. Weak cash and working capital management can result in hemorrhaging of profits, hardly the best foundation on which to build a new enterprise and often a sign of wider systematic failings.


Cash management tends to be strongest in sectors where cash is constrained, not often a problem associated with the cash-rich oil and gas sector. However, tightening cash and working capital management can release significant value; in our work with clients we typically see the release of upward of 10 to 15 percent of the value of working capital, not by aggressively managing cash flow cycles but rather by doing the basics well and instilling a ‘cash culture’ within organisations.


Good examples in the industry

We have seen many of the big players in the industry express a commitment to improving cash management, particularly to fund acquisitions in recent years. This has been echoed in our surveys of business leaders in the petrochemicals sector, who see improving cash and working capital management as critical to their pursuit of growth. This is an admirable aim and one that all oil and gas companies should emulate, particularly those thinking of entering into new markets.


Sustaining a cash culture

Good cash management is a relatively basic question of getting the simple things right. But while such measures can improve cashflow in the short term, sustaining them and establishing a strong cash culture within a business is a far greater challenge. Even in organisations with a centralised treasury function, control often weakens as processes filter towards the outer edges of the organisation. The trick to good cash and working capital management is not the immediate change – it is about making it stick.


That is why we have developed a framework for improving cash and working capital management, one that emphasises sustainability and addresses all aspects of the business that impact cash performance. A successful cash management programme does not happen by accident. It needs the organisation as a whole to think afresh and requires a real understanding of what drives cash and in particular the working capital constraints. No one is suggesting that a business can run without appropriate levels of working capital but the key is optimising what that level is and understanding the implications of too much or indeed too little working capital.It needs leadership and rigorous implementation, and a change in behaviour at almost every level.


Criteria for sustainability

We believe that sustainability of good cash management depends on four ingredients:


  1. Visibility
    Commitment from the top to good cash management, robust forecasting models and constant and consistent monitoring of KPIs
  2. Control
    Cash management culture reinforced through incentives and targets, policies and processes, controls and sign-off
  3. Organisation
    There are clear responsibilities and accountability, all functions are committed to better cash management, and communication is consistent and clear throughout the organisation
  4. Capability
    The right skills are in place, as well as the necessary training and career development to reinforce in the future.
    The most successful oil and gas companies invariably have both higher performance and the lowest operating costs in the sector. They have good operating management systems that spell out the procedures to be followed and provide all the information necessary to make good decisions at all levels of the organisation. This helps build a culture of competence that maximises business performance, and in a new and difficult market, that is just what is needed.

Key considerations

Strong cash management begins with asking basic questions of each operating cashflow cycle as well as any other areas of the business that tie-up cash:


Purchase to pay (P2P) Despite often long and complex supply chains, oil and gas companies are often presented with opportunities to improve the efficiency of the P2P cycle. At a summary level opportunities usually fall into four categories – 1) Terms extensions; 2) Compliance to existing terms; 3) Process efficiency and 4) Tactical measures.


  • How many organisations excel at negotiating an initial contract but then let their focus slip?
  • How are suppliers paid and could this be further improved? Think in particular about the number of payment runs, weekend due payments, payment triggers, etc. Consider as well whether there is a consistent and sensible global payment policy?
  • Consider whether terms are too skewed in favour of the suppliers and do they appropriately reflect the associated supply chain and inventory risk?
  • Is there appropriate segmentation of suppliers in order to understand relative opportunities?
  • And the lowest hanging fruit of all…are businesses actually complying to agreed terms or are they paying suppliers early or to the wrong terms?

Forecast to deliver (F2D)  A common challenge in emerging markets is establishing the right level of inventory that balances the supply chain risk. There is a tendency for oil and gas companies to base inventory levels on the possibility of a ‘force majeure’, which has the potential to stop production from upstream operations and major capital projects. Often the decision fails to take into account that others along the supply chain have made similar assumptions, which leads to a compound effect. In some cases we have seen a 50 percent excess in inventory over what we would consider sufficient levels.


  • Does the business understand the drivers of inventory levels?
  • Are supply chain risks documented and understood?
  • Are safety levels of inventory set with regard to all drivers – e.g. lead times, supply chain risk, MOQs, production capacity, demand forecasting, etc.
  • Is the stock level being driven by tank farm capacity rather than true inventory drivers?
  • Do structural opportunities exist to improve tank capacity and reduce heels?
  • What other inventory exists within the business that could be better controlled? E.g. spare parts and bi-products such as coke.

Order to cash (O2C) Entering a new territory also raises questions in relation to how companies engage with their customers. It is essential that the business understands the relative credit risk of its customer base and that the order to cash cycle is optimised to reflect that understanding.


  • Are terms aligned to the market you are operating in and do opportunities exist to further improve terms?
  • Is there a sophisticated segmentation of customers relative to their credit worthiness?
  • Is credit management and credit control robust and appropriate relative to your market?
  • Is the dispatch and invoicing process efficient or do opportunities exist to shorten this element of the cycle? As an example, the certification process on dispatch is often a bottleneck.
  • Is there a minimum order quantity in place in order to maximise efficiency of delivery?
  • How efficient is the shipping operation?

Other areas

Opportunities go beyond the three core operating cycles. Businesses should be considering all other aspects of the operations that ties up cash:


  • Are capital expenditure projects profiled efficiently with appropriate milestones that optimise cash payments relative to progress?
  • Are there excess assets that could be sold?
  • Are treasury practises optimising management of liquidity on a day to day basis?

Ben Tatham

Director, KPMG

+44 20 76943801

ben.tatham@kpmg.co.uk

 

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