Date post: | 01-Jan-2016 |
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Cash Flow
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Imagine the result
Gross Revenue
Net Revenue
Effective Multiplier
Financial Billability
Operating Income (Income after Corporate Overhead)
Return on Net Revenue (Income percent of net revenue)
Bookings
Backlog
DRO (Days Revenue Outstanding)
Key Financial Metrics
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Why Does Cash Flow
Matter?
• 90% of AUS’s total tangible assets are cash & receivables making DRO the key balance sheet metric
• Allows us to fund investments, make acquisitions and invest in growth
• Key measurement of our financial health to clients, business partners, and shareholders.
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Cash Management Cycle
Client Go/No Go
Opportunity Go/No Go
Proposal
Contract
Project Execution
Invoicing
Collections
Closeout
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Credit Review• The credit review is a key element of the
client approval process.
• Typically requires a 24 hour turnaround
• Coordinated through credit and collections managers with their available resources
• D&Bs/D&B Alert Program (Existing Clients)
• Credit Applications• SEC search – Annual Reports, 10Ks, 10Qs• Public Records• Internet• Moody• Existing clients internal payment history
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The Go / No-Go Decision
For Non-Public Companies:
• Review payment history and financial condition with finance
• Detailed review of D&B report – PAYDEX Score
• Negotiate high multipliers, push for retainers, especially for new or Non-tier clients.
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The D&B ReportWhat’s in it?• History• Operations• Public Filings - UCC Filings – collateral agreements• Suits, Judgments , Liens – bankruptcy records• Paydex – 3/12 month score – how vendors are being paid• Company Financials – balance sheet, P&L, trend analysis,
financial ratios, statement of cash flow, etc.• Special Events – work force changes, natural disaster's,
earnings updates, ownership changes, stock/bond issuance/redemptions
• The Credit Rating – Tangible net worth combined with key credit factors (1-4)
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What’s an FSS? Financial Stress Score from D&B• Lowest risk 1 – highest risk 5• Score of 1 indicates a failure rate (bankruptcy) of 1.2% or
120 per 10,000 companies• Represents risk of severe financial stress over the next
12 months• Model uses statistics from D&B files to predict
deterioration including but not limited to;• Trade payments• Balance Sheet/P&L• Operational/ownership changes• Relationships to other firms’ in same industry and all firms in
database• Industry, size, years in business, etc.
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What’s an CCSC? Commercial Credit Score Class from D&B
• Lowest risk 1 – Highest risk 5
• Predicts likelihood of a firm paying in a severely delinquent manner (90+ days past terms) over the next 12 months
• Based upon a statistically valid model and the most recent payment information in D&Bs files
• Uses some of the same criteria as the FSS but more emphasis on payment statistics
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During Contract
Negotiations…
• Educate the client on our process, terms
• Ensure contract spells out all invoicing requirements
• Understand and document client’s schedule for invoicing
• Request Retainer – if possible• With private sector clients – know your
state’s lien right requirements• Develop a cash flow model to look at
timing of cash and cost on lump sum projects
• Negotiate favorable payment milestones
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During Contract
Negotiations Avoid
• Payment terms outside of 30 days
• Discounts for prompt payments
• Retainage if possible – may not be
• Unfavorable milestone billing requirements
• Volume Discounts
• Credit Card payments, whenever possible
• Subcontractor not on pay-when-paid terms
Imagine the resultImagine the result
Unbilled AR
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Unbilled Revenue
• Definition
• Unbilled Revenue = JTD Revenue – JTD Billings
• Goal: No Balance over 45 Days
• In a perfect world there should never be any Unbilled over 45 Days
• 0-30 Days is the current month (Labor posted in open account period)
• 31-60 Days is the prior month (Labor posted in prior account period) – should be billed by day 45
• Any Unbilled > 45 days at this point has a story OR is potentially at risk of not being billed.
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Unbilled Monitoring
ActivitiesWork with PM
• Weekly UB Reports available
• “Who charged my project this week” is a very useful tool in managing unbilled.
• If UB is not billable –write down the revenue as soon as possible
• Monitoring Unbilled can and should be part of all project reviews
Imagine the resultImagine the result
Accounts Receivable(Billed AR)
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Accounts Receivable
• Definition: All amounts billed to clients, but unpaid.
• Strive toward industry best in class of 45 days or less.
• Days outstanding is a critical element of project management – measure of quality and client satisfaction.
• We need to be proactive in our monitoring – don’t be afraid to ask!
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Accounts Receivable Monitoring
Activities
• 15 Day Call Criteria – All invoices greater than $10,000 posted to our accounting systems 15 days prior.
• Call is an opportunity to contact the client and verify that the invoice was received. This is NOT a Collection Call, it is a courtesy call. Used to identify potential invoice processing delays.
• There are a number of ways to verify receipt of invoice:• PM can delegate to Project Assistant to verify.• PM can request the Invoice Specialist
confirm receipt.• Credit and collections team can contact
Client to confirm• Email confirmation that the invoice was
delivered.
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Accounts Receivable Monitoring Activities –
Con’t.
• Revenue detailed exceptions report (i.e. balance 90+ days and greater than $10K)
• Incorporate discussion of accounts receivable into project reviews and/or monthly financial meetings
• Continue follow-up with clients, especially when greater than 60 days
Imagine the resultImagine the result
DRO and Interest Calculation
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Income Statement -
Expense Items
A/R Interest
• Finance charge based on project DRO; 10% in excess of 91 days; credit of 10% if lower than 75 days
• The business unit interest charge is the total of the projects in the business unit
Accounts Receivable +Unbilled Revenue
Average Revenue Past 91 daysDRO =
Imagine the result
Days Revenue Outstanding CalculationPrevious Period AR/UB:BILLED AR $ 20,767 UNBILLED AR $ 19,659TOTAL UB/AR $ 40,427
If DRO < 75 Days:
Interest Calculation
51 – 75 = (24) days
Interest rate (month)10%(APR)/(12 months) = 0.8333%
(24) days * $790 = ($18,983)Revenue Earned Under 65 days
Interest: Charge/(Credit)($ 18,983) * 0.833% = ($158)
Average Revenue per Day = Last 3 mo Gross Revenue/91 days$71,978/91=$790 Avg Rev/Day
DRO = TOTAL UB AND AR $ 40,427/Avg Rev per Day $790 = 51 DAYS
If DRO > 91 Days:
11 days * $790 = $8,700
Revenue Earned Over 91 days
Interest: Charge/(Credit)$ 8,700 * 0.833% = $72
102 – 91 = 11 days
Imagine the resultImagine the result
CREDIT IS A PRIVILEGE ANDNOT A RIGHT
Economic conditions and a firm’s credit policy are the primary drivers of the level/aging of
accounts receivable
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Imagine the result
Remember Positive Cash Flow is the #1 sign of a healthy business