Redesigning your treasury function for future growth A case study - - PowerPoint PPT Presentation

Redesigning your treasury function for future growth A case study

Presented by Heath Shonhan Partner, Bentleys QLD hshonhan@bris.bentleys.com.au March, 2020

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Context Legislation

Section 43 - Requirement for sufficient liquidity This section requires that an approved provider have sufficient liquidity in order to refund refundable deposit balances, accommodation bond balances or entry contribution balances, which can be expected to fall due in the following 12 months. This is intended to ensure that approved providers maintain ready access to funds to allow them to repay lump sum balances, as, and when, they fall

• due. Approved providers are expected to continuously have sufficient liquidity to refund these lump sum payments. For example, at 28 June of any

year, an approved provider would need enough liquidity for the next 12 months, not just until the end of the current financial year. EXPLANATORY STATEMENT, Issued by the authority of the Assistant Minister for Social Services Aged Care Act 1997: Fees and Payments Principles 2014 (No. 2)

Section 44 – Requirement to implement, maintain and comply with liquidity management strategy This section requires approved providers holding refundable deposit balances, accommodation bond balances or entry contribution balances to implement and maintain a written liquidity management strategy. The strategy must set out:

• the amount, expressed in whole dollars, that ensures that the approved provider has sufficient liquidity for the purposes of section 43 (the minimum level of

liquidity);

• the factors that the approved provider had regard to in determining the minimum level of liquidity.

Approved providers are expected to determine (and assess) relevant factors based on their own individual circumstances and experiences. Examples of the types of factors that approved providers may wish to consider include, their historical pattern of refunds, the characteristics of the care recipients for whom they care that may influence the timing of refunds, the average value of lump sums held and the likely timing and value of any incoming lump sum payments; and

• the form in which the approved provider will maintain the minimum level of liquidity.

In order to ensure that an approved provider is able to meet its obligation to refund lump sum balances as they fall due, it is important that the minimum level

• f liquidity for an approved provider is maintained in a form(s) that can be readily accessed. There is a wide range of financial instruments that have a high

level of liquidity including, for example, cash, bank deposits, bank bills, stand-by lines of credit and guarantees. The section also requires that an approved provider must:

• maintain, as specified in the approved provider’s liquidity management strategy, the minimum level of liquidity;
• ensure the liquidity management strategy is up to date and complies with the requirements described above; and
• modify or replace the liquidity management strategy if the approved provider becomes aware that the current liquidity management strategy no longer

complies with the requirements described above.

Context Legislation

EXPLANATORY STATEMENT, Issued by the authority of the Assistant Minister for Social Services Aged Care Act 1997: Fees and Payments Principles 2014 (No. 2)

Methodology

E-Cycle

Processes

EXPLORE as-is processes, templates, documents, workflows and existing systems and develop a detailed body of knowledge ENGAGE and discuss stakeholder pain points, challenges and

• pportunities for innovative improvements with a plan for

implementation. EXECUTE and implement the identified recommendations with relevant change management strategies, training and support EVALUATE the success of the implementation and analyse change effects and the impact of process improvements. ENHANCE the implementation through continual service improvement, lessons learnt, risk mitigation and stakeholder engagement.

Methodology

E-Cycle

Explore Engage Execute Evaluate Enhance

1. Review of existing treasury structures, processes and resources 2. Treasury Health Check (via Gap Analysis) 1. Treasury risk management and governance; 2. Policy and procedures; 3. Team structure; 4. Personnel (training and performance); and 5. Treasury reporting and performance.

Methodology

E-Cycle

Explore Engage Execute Evaluate Enhance

1. Management and Board consultation

Methodology

E-Cycle

Explore Engage Execute Evaluate Enhance

1. Delivery of Policies and Frameworks 1. Treasury overview; 2. Treasury & Investment Management Strategy; 3. Treasury management Committee Charter; 4. Liquidity Management Strategy; and 5. Additional templates and supporting documents

(Mgmt Rep Letter, Notification of Breaches, Risk and Funding Management Report, Treasury and Liquidity Management Reports)

Methodology

E-Cycle

Explore Engage Execute Evaluate Enhance

1. Delivery of Supporting Tools and Calculators 1. 10 Year High Level Forecast; 2. Buckets Calculator; 3. MLL Calculator; 4. WACC Calculator; and 5. Project Financial Assessment (PFA) Tool

Methodology

E-Cycle

Explore Engage Execute Evaluate Enhance

1. Testing with Management & Board 2. Periodic updates and review by Management

Artefacts

Policies and Tools

Policy Description

Treasury and Investment Management Strategy (TIMS) Overarching document governing the treasury framework and

• peration (roles and responsibilities, investment strategy /

gates, financial risk management, reporting requirements). Treasury Management Committee Charter (TMCC) Details roles, responsibilities, reporting requirements, membership, skills and competencies of Treasury Management Committee. Liquidity Management Strategy (LMS) Document detailing the MLL across the organisation for regulatory and prudential purposes, including calculation methods, build up by operating segment and form in which funds may be held). Implementation Plan Document outlining the steps required to take your

• rganisation’s treasury function from its current state to a best

practice state. TREASURY TEAM TIMS TOOLS POLICIES

TREASURY FUNCTION

TMCC LMS Implementation Plan Financial Calculator PFA MLL Calculator Bucket Calculator

Artefacts

Policies and Tools

Tool Description

Financial Calculator Comprehensive suite of financial tools / calculators (Bucket Calculator, MLL Calculator, High Level 10-Year Forecast and WACC Calculator). Project Financial Assessment (PFA) Tool for conducting first pass analysis of opportunities, as defined in the TIMS. This is to be used for Gate 1 in the gated assessment process. Minimum Liquidity Liability (MLL) Calculator Detailed tool used to determine MLL per operating segment and for your organisation in aggregate. The methods in this tool align with the LMS Document. Bucker Calculator Detailed tool used to calculate sources / uses of funds within three portfolio buckets (Asset Regeneration, Defined Liabilities and Growth Funds). TREASURY TEAM TIMS TOOLS POLICIES

TREASURY FUNCTION

TMCC LMS Implementation Plan Financial Calculator PFA MLL Calculator Bucket Calculator

Dividing the balance sheet

Use of “buckets”

Asset Regeneration

Nature: Maintenance capital expenditure on existing assets. Purpose: At a minimum, you can combat any loss of value in fixed asset portfolio due to depreciation and/or amortisation.

Defined Liabilities

Nature: Provision for a set of defined liabilities expected to be repaid within a year. Purpose: Meet minimum liquidity requirements (per LMS) and provision for defined debt commitments payable within 12 months.

Growth

Nature: Available cash for use in growth (and/or risky) activities. Purpose: Understand surplus cash available for investment in non-business as usual (risky) activities to support organisation growth.

1 3 2

Bucket build-up Example 1

Asset Regeneration

2

Defined Liabilities

3

Growth

Asset Balances MLL Per Segment Growth Capital Buildings $240,000,000 RAC $13,088,912 ICT $2,000,000 RV $11,101,800 Cash at bank $44,100,450 Plant, Equipment and Vehicles $8,500,000 HC $1,996,625 Software $1,000,000 Other $7,520,000 Less Bucket 1 $14,350,000 Manual Adjustments $- Maintenance CAPEX & Rates Total MLL per Segment $33,707,185 Less Bucket 2 $33,707,185 Buildings 5% $12,000,000 ICT 20% $400,000 Plant, Equipment and Vehicles 20% $1,700,000 Bank Debt Repayments Software 25% $250,000 Scheduled Repayments $- Total Bucket 1 Outflows $14,350,000 Total Liabilities $33,707,185 Total Bucket 3 Funds

• $3,956,735

Bucket build-up Example 1

Asset Regeneration

3

Growth

$44.10 M

Cash at Bank

($14.35 M)

Less Bucket 1

($33.71 M)

Less Bucket 2

$14.35 M $33.71 M ($3.96 M)

as at March 2020 as at March 2020 as at Dec 19

2

Defined Liabilities

What to do when the 3rd bucket is empty?

Growth

3

Requires new forms of debt

Longer dated (e.g. corporate bond) Allocated against a different asset (land / buildings)

Requires new forms of equity

Community Co-op REIT

Retained profits from different operations (eg licencing of brand / use of intangibles, start-up innovation that is commercialised)

Tips, traps & areas for consideration

Bucket 1

Asset Regeneration

1

Depreciation rates vs Quantity surveyor derived future replacement costs discounted to NPS

Tips, traps & areas for consideration

Bucket 2

Defined Liabilities

2

Methods of calculation of liquidity: the need to include RV / ILU liabilities now

Tips, traps & areas for consideration

RAD changes

Your RAD / capital funding tide is going out… What do you do? (assuming 15 year wash out)

Tips, traps & areas for consideration

Stage of maturity

Stage of maturity of site portfolio (ramp up or stable?)

Tips, traps & areas for consideration

PFA Tool

Inputs: − Incremental income − Incremental expenses Purpose: High-level, consistent approach to opportunity assessment Scope: First pass assessment for presentation to board as part of “Gate 1” in gated opportunity assessment process Outputs: − Quantitative project value (NPV, IRR) − Qualitative project value (project score) Next Steps: − Presentation to board − Board accept / reject decision − If accepted, assign project sponsor and proceed to “Gate 2” of gated opportunity assessment process − Alignment to organisational goals and strategy − Accept / reject recommendation − Investment metrics / thresholds

Tips, traps & areas for consideration

PFA Tool

EXAMPLE ONLY

Tips, traps & areas for consideration

PFA Tool

When to use?

What is an opportunity?

Investing or allocating funds into something which may enhance value, including:

• 1. Increasing cash inflows;
• 2. Decreasing cash outflows
• 3. Achieving cost savings.

What triggers the requirement to use the PFA / Investment Gates?

All projects which are NOT business as usual, and:

• 1. Exceed $100,000 in value
• 2. Materially alter (by more than 10%) the form

in which liquidity is held.

Bentleys’ Treasury Portfolio Calculator

Available via Microsoft Teams

www.bentleys.com.au

hshonhan@bris.bentleys.com.au