Published: November 01, 2012
Leading engineering company Sweco has pursued a successful growth strategy in recent years. This has required a highly efficient approach to treasury management, and a focus on mitigating core business risks and optimising working capital management. In addressing these challenges, it was important that any solutions were specifically tailored to Sweco’s individual needs, as defined by its industry, strategy and organisational structure.
As a technical consulting company engaged in complex engineering and infrastructure projects, Sweco has few fixed assets and low levels of traditional inventory on the balance sheet. Bo Jansson, Sweco explains,
“Consequently, Sweco is not a capital-intensive company as such, but working capital, particularly accounts receivable, is a key consideration. Instead of physical inventory, our inventory takes the form of consultancy hours that have been invested in projects, but not yet invoiced. Around 80% of revenues are derived from work invoiced by the hour, and the remaining 20% from fixed price contracts that typically have milestone payments.”
This is a very different situation from that of, say, a truck manufacturer, which would have significant amounts of fixed assets and tangible product inventory on its balance sheet.
A key factor in optimising working capital was therefore to accelerate the speed with which consultants could invoice for hours worked. Around two years ago, a project was undertaken to assess performance in this area. The study showed that some of Sweco’s units managed to invoice customers within five days of completing the work, whereas in other units, it took as long as 15 days. Bo Jansson, Sweco continues,
“By aligning processes to internal best practice, we were able to release SEK 140m of working capital. The project clearly showed the benefits of a clear focus on working capital. As a result, we have updated our performance metrics to track working capital, and increased management accountability for monitoring and enhancing performance across the value chain.”
Efficient invoicing processes are important to all industries, but the process challenges are a little different when dealing with billable hours as opposed to physical product delivery.
As Bo Jansson, Sweco continues,
“By reviewing and enhancing performance criteria, we have also been able to review the utilisation levels of our consultants. Currently, around 75% of consultants’ time is chargeable, but for every percentage this ratio can be increased another SEK 100m will be added to the bottom line. This is clearly a compelling proposition, but increasing chargeable hours forces us to be more flexible in the way that resources are utilised. For example, resources need to be leveraged across borders and units in line with project demand, as opposed to being governed by the location of consultants. This requires an efficient approach to intercompany billing and means we need to be aware of tax and regulatory issues relating to transfer pricing, legal entity profitability and withholding tax issues. Therefore, the treasury and finance functions needs to be closely involved when finding ways to deploy the workforce in a flexible way.”
This is a good example of how treasury can add tangible value to the organisation by supporting the company’s pursuit of efficiency goals in its core business activities. To make another analogy with the manufacturing industry, Sweco is faced with managing its intellectual rather than physical resources in an efficient way.
Alongside initiatives to optimise working capital and profitability, it is important for Sweco to manage counterparty risk effectively. Bo Jansson illustrates,
“Many of Sweco’s export contracts have some support from international organisations or agencies, such as the World Bank, which helps to mitigate counterparty risk. However, we also have contracts with private sector buyers in emerging markets where there is inherently more risk, not least because it may be difficult to assess the credit quality of the customer. We are therefore endeavouring to introduce advance payments and invoicing at key project milestones instead of hourly billing to the extent possible. This gives greater assurance that we will not incur a loss on a project even if the customer terminates the contract over a dispute or is for some reason unable to pay.”
Since Sweco’s products are intellectual rather than physical, it is difficult to use traditional trade finance instruments as risk mitigants. There is therefore greater reliance on a combination of customer credit monitoring, a proactive collections process and advance or timely invoicing to manage our risk.[[[PAGE]]]
Sweco has a substantial guarantee portfolio of bid bonds, advance payment guarantees and performance guarantees linked to various projects. Ensuring complete visibility of this portfolio in order to monitor compliance and ensure that guarantees are standardised in line with Sweco policies is of great importance. As Bo Jansson describes,
“To this end, we have introduced a process whereby all guarantees need to be opened with SEB using the bank’s online tool. This makes it far easier to manage the process of initiating, monitoring and reporting guarantees, and enables Sweco to manage its risk as well as operational processes more effectively.”
Sweco’s growth strategy in recent years has been built on a combination of organic growth and rapid acquisition, with around 90 companies added to the group over the past 10 years. Bo Jansson, Sweco highlights,
“These acquisitions have been financed through operating cash flow as opposed to raising debt, a strategy which is beneficial in the long term, but which requires a high degree of financial flexibility. For example, we have focused not only on enhancing working capital, as described earlier, but also on the efficient concentration of liquidity at a treasury level, and sufficient backup lines to manage short-term liquidity shortages.”
An important consideration when making frequent acquisitions is not only how to finance transactions, but also how to integrate acquired companies into the group successfully. This is essential to achieve synergies, manage cash and liquidity, and mitigate risk. Bo Jansson, Sweco exemplifies,
“We try to rationalise banking relationships, accounts and liquidity structures as quickly as possible to provide access to operating cash flow and manage risk.“
Bo Jansson, Sweco concludes,
“Given the importance of cash and liquidity management for Sweco’s business, and our growth-led strategy, it is important for us to work with a bank that is flexible, able to make decisions quickly, and provide a high level of customer support. At the same time, we value a long-term view on the relationship and a bank that makes an effort to understand our strategic priorities. We rely on SEB to be proactive in providing ideas and solutions for managing working capital, mitigating risks and optimising liquidity. We also count on their flexibility and ability to help us integrate acquired companies quickly to achieve financial synergies.”
Historically, professional services firms have been focused predominantly on growing revenues. When work was plentiful, margins strong and bank finance easy to obtain, management of working capital tended to be given a fairly low priority. During the downturn, business has been harder to convert and professional fees put under unprecedented scrutiny. Suddenly, professional firms (including lawyers, accountants, architects, surveyors, engineers and consultants) saw cash flow becoming more critical. For example, in the UK around 25% of law firms required their partners to inject more capital during the last 12 months – just to keep them afloat. If these firms had implemented tighter working capital controls this would have largely been unnecessary.
The latest results from PwC’s annual UK Law Firm benchmarking survey confirms that ’lock-up’ (cash tied up in work in progress and receivables) performance has deteriorated during 2012 – with average lock-up days now representing the equivalent of 127 days’ sales. This was mainly driven by a nine-day increase in work in progress (WIP) (to 55 days) with DSO staying relatively flat at 72 days. Indeed if the top 100 UK law firms all achieved 1st quartile lock-up performance, they would collectively release over €1.7bn of additional cash flow.[[[PAGE]]]
In PwC’s experience, the typical working capital drivers we see in professional services firms are as follows:
NOTES
This document has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
© 2012 PricewaterhouseCoopers LLP. All rights reserved. In this document, ‘PwC’ refers to PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom) which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.
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