Redesigning your treasury function for future growth A case study Presented by Heath Shonhan Partner, Bentleys QLD hshonhan@bris.bentleys.com.au March, 2020 #902965
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)
Context Legislation 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 of 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. 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 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 opportunities for innovative improvements with a plan for implementation. and implement the identified recommendations with EXECUTE relevant change management strategies, training and support Processes 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 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. Explore Engage Execute Evaluate Enhance
Methodology E-Cycle 1. Management and Board consultation Explore Engage Execute Evaluate Enhance
Methodology E-Cycle 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) Explore Engage Execute Evaluate Enhance
Methodology E-Cycle 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 Explore Engage Execute Evaluate Enhance
Methodology E-Cycle 1. Testing with Management & Board 2. Periodic updates and review by Management Explore Engage Execute Evaluate Enhance
Artefacts Policies and Tools TREASURY FUNCTION Policy Description Treasury and Overarching document governing the treasury framework and TREASURY Investment operation (roles and responsibilities, investment strategy / Management Strategy gates, financial risk management, reporting requirements). TEAM (TIMS) Treasury Management Details roles, responsibilities, reporting requirements, Committee Charter membership, skills and competencies of Treasury POLICIES TOOLS (TMCC) Management Committee. Financial TIMS Calculator Liquidity Management Document detailing the MLL across the organisation for Strategy (LMS) regulatory and prudential purposes, including calculation PFA TMCC methods, build up by operating segment and form in which funds may be held). LMS MLL Calculator Implementation Plan Document outlining the steps required to take your organisation’s treasury function from its current state to a best Implementation Bucket practice state. Calculator Plan
Artefacts Policies and Tools TREASURY FUNCTION Tool Description Financial Calculator Comprehensive suite of financial tools / calculators (Bucket TREASURY Calculator, MLL Calculator, High Level 10-Year Forecast and WACC Calculator). TEAM Project Financial Tool for conducting first pass analysis of opportunities, as Assessment (PFA) defined in the TIMS. This is to be used for Gate 1 in the gated assessment process. POLICIES TOOLS Financial Minimum Liquidity Detailed tool used to determine MLL per operating segment TIMS Calculator Liability (MLL) and for your organisation in aggregate. The methods in this Calculator tool align with the LMS Document. PFA TMCC Bucker Calculator Detailed tool used to calculate sources / uses of funds within three portfolio buckets (Asset Regeneration, Defined Liabilities LMS MLL Calculator and Growth Funds). Implementation Bucket Calculator Plan
Dividing the balance sheet Use of “buckets” 1 2 3 Asset Regeneration Defined Liabilities Growth Nature: Maintenance capital Nature: Provision for a set of Nature: Available cash for expenditure on existing defined liabilities expected to use in growth (and/or risky) assets. be repaid within a year. activities. Purpose: At a minimum, you Purpose: Meet minimum Purpose: Understand can combat any loss of liquidity requirements (per surplus cash available for value in fixed asset portfolio LMS) and provision for investment in non-business due to depreciation and/or defined debt commitments as usual (risky) activities to amortisation. payable within 12 months. support organisation growth.
Bucket build-up Example 1 2 3 Asset Regeneration Defined Liabilities 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 $33,707,185 Less Bucket 2 $33,707,185 Total MLL per Segment 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 2 3 Asset Regeneration Defined Liabilities 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 Dec 19 as at March 2020 as at March 2020
What to do when Growth the 3 rd bucket is empty? 3 Requires new Requires new forms of equity forms of debt Retained profits from Longer dated Allocated against Community different operations (eg (e.g. corporate a different asset Co-op REIT licencing of brand / use of bond) (land / buildings) intangibles, start-up innovation that is commercialised)
Tips, traps & areas for consideration Bucket 1 Depreciation rates 1 vs Quantity surveyor derived future Asset Regeneration replacement costs discounted to NPS
Tips, traps & areas for consideration Bucket 2 Methods of calculation of 2 liquidity: the need to include RV / ILU Defined Liabilities liabilities now
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