Most Inventive Process Change I Made: Creating a New Cash Flow Plan Process
Situation:
Ecolab generates $2.5B of cash flow from operations with a 10% annual growth target. But as COVID-19 started to spread globally in 2020, delivering the expected cash flow and maintaining enough liquidity became a risk. As the Corporate FP&A estimated $4B – $5B of sales reduction (30% – 35% of sales decrease) as the worst-case scenario, the senior executives asked me to diagnose the cash flow risks before presenting the 2020 financial plan to the Board of Directors.
Problem Statement:
However, the existing bottom-up cash flow plan process was resource-intensive and took over a week to consolidate the inputs. Furthermore, as there were still uncertainties around quantifying the COVID-19 impact on our business, I questioned the accuracy of the bottom-up inputs, concerning that teams may quantify the impact differently.
Actions:
Therefore, I decided to build a new top-down model for practicality and speedy decision-making. Additionally, I closely collaborated with key stakeholders early in the problem-solving phase to identify risks and opportunities. Lastly, I implemented a new review process to expedite the decision-making process and improve accuracy.
First, to accurately model the P&L impact, I met with Corporate Accounting, Tax Department, and Corporate FP&A to review the initial plan assumptions and understand how each cash flow line relates to P&L. Then, I analyzed the last four years of cash flow and P&L actual data to estimate correlations between sales and commercial cash flow activities. After modeling the cash flow impact based on the learnings, I met with the stakeholders to further refine the model. As a result, I quantified COVID-19 impact on cash flow, ranging from $0.4B to $1B reductions (16% and 40% reduction) based on the P&L scenarios.
Then, I focused my attention on working capital which is the most volatile line in cash flow. Since reaching out to region teams will delay the process, with the 80:20 rule in mind, I focused on the US and Europe markets, accommodating over 75% of total working capital. Further, rather than reviewing over 3 million customer sites, I looked at three different customer types based on COVID-19 risk exposures to model the accounts receivable plan. By categorizing the customers by risk exposure, I simplified the model and made it easier to review the assumptions around the sales risk. Based on how I framed the model, both the Corporate FP&A and business units started to look at their P&L risks the same way. As a result, my model standardized how Ecolab reviewed business and customer risks around COVID-19 in corporate and business.
Rather than settling with identifying risks, I reviewed cash flow opportunities to assist the senior leadership make timely decisions around pulling cash flow levers. Upon review, I decided to focus on accounts payable, tax payments, and capital expenditure investments, which have the most considerable opportunities. Then, I reached out to Corporate FP&A, Tax Department, and Global Business Service team to quantify cash flow opportunities from delaying capital expenditure investment, postponing the US and international tax payments, and extending payment terms with our vendors. As a result, I quantified $750M of cash flow opportunities which translates to 30% of cash flow in a typical year. It was not enough to recover the full $1B risk, but proposing both risk and opportunity helped the senior leadership quickly focus on cash flow management and make decisions around pulling the levers promptly.
Finally, I built a thorough review process. Historically, the cash flow plan process was a consolidation of inputs with reviews focused on understanding the submissions. But as the new environment took my responsibilities to the next level, I led the review process that included the head of Corporate FP&A, the head of Global Business Service, and an Assistant Treasurer. And by newly involving the senior leadership, I expedited the decision-making process, refined cash flow assumptions, and brought in diverse perspectives.
Business Impact:
Within two weeks, I built the model and went through multiple reviews. Then, during the final cash flow plan review with the CFO and the Corporate Treasurer, I walked them through the detailed assumptions and the logic behind cash flow changes. They were especially delighted to see the cash flow opportunities with clear action plans. It was a rewarding experience to assist the senior leadership in managing the corporate cash flow during one of the most challenging times.
After finalizing the plan, I adopted the model to the monthly forecast process. By doing so, I improved the corporate cash flow forecast accuracy from below 60% to above 95%, which translates to over $50M to less than $7M forecast miss a month.
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