CTS T&D Finance Functional Awareness VGB

Février 2001
Cash For Growth

Cash Training for
Specialists
Finance
Functional Awareness
All rights reserved © 2001 ALSTOM
Cash training for specialists – T&D - Finance – Functional Awareness – Version anglaise p1
OBJECTIVES OF THE TRAINING
 Understand what’s at stake for ALSTOM and your unit
 Show the consistency of the CFG Programme within Pace 21
 Share an understanding of the mechanics of cash generation
 Determine how to proceed within your units

 Identify the main operational levers that each of us can act on
AGENDA OF THE TRAINING
 Morning :
– Presentation of the basic concepts of Cash for Growth :

Capital Employed, Economic Value Creation and Net
Present Value
– Application to functional specialties:

• Self evaluation – practices affecting Capital Employed
• Functional levers for optimising Capital Employed
 Afternoon:
– Case studies
– Group discussion on :
• Identification of practical first steps
• How to go about capitalising best practices and setting
up a network and knowledge base for sharing them
PRACTICAL ISSUES
 Time schedule / Breaks - Lunch
 Post it and Rapporteur
 Documentation
 Web site on ALTAIR

INDIVIDUAL PRESENTATION
 Name
 Unit
 Responsibilities
 Where are you in deploying CFG programme ?
 Based on your personal experience, what are the points that
stand out so far (difficulties / surprises, …) ?
 What do you expect to get from this workshop ?
 What brought you to this seminar ?
Part I
Presentation of the basic
concepts of Cash for Growth :
Capital Employed, Economic
Value Creation and Net Present
Value
AGENDA
 Stakes of an improvement of ALSTOM Cash position
 Basics of finance (balance sheet) and Capital

Employed
 Basics of cash management – Economic value creation

(EVC)
 Net present value (NPV)

Stakes of an improvement of
ALSTOM Cash position
Stakes of an improvement of ALSTOM Cash
position
 What was the operating income for the year ended 31 March
2001 (€ millions) ?
 What was the interest charge for the year ended 31 March 2001
(€ millions) ?
ALSTOM Group : Your unit :

• 1233
• 1151
• 729
• 707
• 595
ALSTOM Group :
Your unit :
• 329
• 186
• 156
• 81
• 60
position
 What was the amount of Capital Employed at 31 March

2001 (€ millions) ?
 What was the level of Net Cash at 31 March 2001 (€ millions) ?
• ALSTOM Group :
• 6586
Your unit :
• 5338
• 3825
• 2416
• 1283
• ALSTOM Group : Your unit :

• -1633
• - 1139
• -231
• +1358
• +1672
Cash training for specialists – T&D - Finance – Functional Awareness – Version anglaise p 10
position
CONTEXT
 A negative consolidated Net Cash position of € 1.1bn at end

March 2000 after securitisation of € 1.3 bn
 The Net Cash situation at end March 2001 has worsened by €
0.5 bn, in spite of an increase of € 0.4 bn in securitisation
 Steady increase of Capital Employed of more than € 1 bn
per year over recent years
 Annual consolidated financial expenses of € 329 million for
2000/01 against € 1151 million operating income

 Most of the Sectors do not generate their profit in cash
 ALSTOM needs more cash to sustain its organic growth and
pursue its acquisition programme
position
CONTEXT
 CFG launched on 30 March 2000
 CFG declared a top priority by the Executive Committee and

Pierre BILGER, as part of ALSTOM PACE 21 Program
 Program Manager : Jean-Luc CHANTRAN
 A central Cash For Growth Program team with sector Cash

For Growth teams
 Power is participating in the CFG programme since

September 2000
position
OBJECTIVES OF THE PROGRAMME CFG
 Improve financial performance :
– Release cash in the short to medium term, by reducing

Capital Employed (10% of annual sales)
– Ensure annual cash contribution, before effect of

financing, is above operating profit
 Keep on managing Working Capital, through permanent

improvement
 Increase management and all employees' awareness and

focus on cash generation and asset productivity
position
Overall methodology and schedule

May 2000 30 June Nov. 2000
2000
All ALSTOM units
Quick Hits
Immediate actions
Starting with 6 pilot sites
In Depth Approach
Roll out in other sites

Define appropriate metrics at unit level in line with

Metrics Finance 2000
Training and Build awareness of cash issues

communication Provide practical tools through functional training
WHEN LAUNCHED, PILOTS IDENTIFY SIGNIFICANT
POTENTIAL (CAPITAL EMPLOYED REDUCTION)
€710 M potential identified in units representing

15% of turnover
Total Power Transport T&D(2)
23% of sales(1) 21% of sales 26% of sales 17% of sales
19%
16%
10% 8%
Receivables 8%
WIP 8% 8%
6%
3% 4% 4%
Payables 1%
1% 3%
Fixed assets 0% 0%
Total amount€710 M(2) €326 €142 €241
identified
1) Numbers are a proportion of external sales
2) T&D receivables, WIP and payables are taken over sample of pilots representing 48% of the total T&D pilot sales
FOUR KEY FACTORS REQUIRED TO
MAKE THE PILOTS A SUCCESS
 Systematic progress reviews involving the entire management

team and the initiative leaders every 15 days or every month
 Available Cash Winner and MD dedicating at least one day a

week to helping and motivating the initiative teams
 Structured teams with objectives and plans – e.g. 5 to 10 key

members from purchasing, logistics, production, sales, after
sales for each cash release initiative dedicate an average 20% of
their time, which represents around 15 Full Time Equivalents per
unit over several months
 Pressure kept over long term - initiatives implement quick hits

and process and organization changes. Significant results begin
to appear 2 to 6 months after the start of implementation
T & D Cash For Growth Team
 Sector Cash For Growth Team :
– Olivier Marc, Cash Vice President

– Emmanuel Charret, Sector Cash Controller
– Internal Cash Consultants :
• Lionel Lambert
• Horst Dieter Sperling
• Manfred Simon
• Manfred Vogl
 Relayed by Business Cash Correspondents

 Relayed by Unit Cash Winners
Basics of finance : balance sheet
Capital Employed
Relation between profits and the
creation / reduction of Capital Employed
Owners’
BALANCE SHEET Equity
: 7 000 €
 Mr. Brown wants to create his own company to
manufacture and sell trail bikes. To get started, he needs :
– a building (acquisition cost : 10 000 €)
– machines to assemble the bikes (acquisition cost : 2 Buildings :
000 €) 10 000 €
– a basic stock of all the components needed to assemble
the bikes (acquisition cost : 1 200 €)
Machines : 2 Owners’
 From the above, it is clear that Mr. Brown needs to find 000 € Equity : 7 000
resources totalling 13 200€. Building: 10 000 €
– he already has 7 000 € €
– he needs to take out a bank loan as well. The bank
loans him 5 500 €.
– his suppliers give him a line of credit (1200 €)
 He thus has 500€ remaining that he can deposit in the
bank. Machines : 2
 The balance sheet of the Brown Company after completion 000 € Financial
of the start-up is shown at the right. debts : 5
500 €
Inventories :
Account
€ 1 200 payables :
1 200 €
Cash in bank :
500€
Total : 13 700 € Total : 13 700 €
 Bilan de clôture
BALANCE SHEET
 Before the bikes can be sold, they

must be assembled. Assembly is
Buildings :
performed by salaried employees 10 000 €
whose wages and benefits total € Machines : 2 Owners’
400 000 € Equity : 7 000
Building : 10 €
000 €
 Salaries and benefits paid increase

Machines : 2
the carrying value of inventories 000 € Financial
debts : 5
500 €
Inventories :
Account
€ 1600 payables :
1 200 €
Cash in bank : 100
 The Brown Company’s balance €
Total : 13 700 € Total : 13 700 €
sheet looks as follows after
payment of salaries and benefits
BALANCE SHEET
Buildings :
 Mr. Brown sells half of his 10 000 €
Machines : 2 Owners’
inventory (800 €) to a 000 € Equity :
client for 1 100 €. Building: 10 000
€
Paid-in
Capital:7000 €
Profit on sales :
 The balance sheet reflects 300
Machines : 2
this transaction as shown 000 € Financial
at the right. debts : 5
500 €
Inventories : 800 €
Accounts
Accounts
receivable : payable :
1100€ 1 200 €
Cash in bank : 100
€
Total : 14 000 € Total : 14 000 €
BALANCE SHEET
Buildings :
 The suppliers insist on 10 000 €
payment of their debts ( € 1 Machines : 2 Owners’
000 € Equity :
200). Building : 10
000 €
Paid-in
Capital:7000 €
 What can Mr. Brown do ? Profit on sales :
300
Machines : 2
000 € Financial
debts : 5
500 €
Inventories : 800 €
Accounts
receivables :
1100€
Cash in bank : 100
€
Total : 14 000 € Total : 14 000 €
BALANCE SHEET - CONCLUSION
 The Balance Sheet is an equilibrium between RESOURCES USED in operating the business
(ASSETS) and RESOURCES PROVIDED from outside the business (LIABILITIES + EQUITY)
ASSETS LIAB+EQ
EQUITY
Fixed assets •Paid-in Capital
• Profits
FINANCIAL
Operating DEBTS Financial
(1)
debts
Assets(Dettes Financières)
PAYABLES
• Inventories(Fournisseurs)
Operating
• Receivables (Acomptes)Liabilities
ADVANCES
• Advances
LE BILAN • Payables
Cash
CAPITAL EMPLOYED (CE)
 The Balance Sheet can be analysed differently to emphasize more clearly the components which are under
the responsibility of operating personnel and those which depend on the contribution of outside financial
markets, which cannot be influenced directly by operating personnel.
OPERATIONAL FINANCIAL
ASSETS LIAB + EQ DOMAIN DOMAIN
CAPITAL EMPLOYED
= RESOURCES
PROVIDED
Fixed assets Owners’
EQUITY Equity
(Capitaux Propres)
FINANCIAL
DEBTS Fixed assets Owners’
Operating Financial
(1) debts
Assets
(Dettes Financières)
PAYABLES
Equity
(a)
(Fournisseurs) Working
ADVANCES
• Inventories Operating capital (a-b)
Liabilities
(Acomptes)
(b)
Net Cash
• Receivables
LE BILAN • Advances
Cash • Payables
BALANCE
BALANCE SHEET BETWEEN SOURCES
AND USES
CAPITAL EMPLOYED
(CE)
 Capital Employed is the sum of fixed assets and
working capital
Fixed Assets
CAPITAL EMPLOYED
Working
Capital
Capital Employed thus represents the amount of

resources used to operate the business.
creation / reduction of capital
employed (1/5)
 The following is a multiple choice questionnaire with ten questions.
For each question, your group should give one response. You have
two minutes to prepare each question. At the end of the allotted
time (20 minutes) we will collect your responses.
 Reminder
ASSETS LIAB + EQ
Equity
Fixed assets •Paid-in Capital
• Profits
FINANCIAL Capital
Operating DEBTS(1) Financial employed
Assets
(Dettes Financières)
debts
PAYABLES
• Inventories(Fournisseurs)
Operating
ADVANCES
Liabilities
• Receivables (Acomptes)
• Advances
LE BILAN • Payables
Cash
employed (2/5)
 The following is a multiple choice questionnaire with ten questions. For each
question, your group should give one response. You have two minutes to prepare
each question. At the end of the allotted time (20 minutes) we will collect your
responses.
Possible responses
1 The invoicing of the A - Income
client following B -Reduction of Capital Employed
delivery and transfer
of ownership has an C - Income and reduction of
impact on which of Capital Employed
the following? D - No impact
2 Pre-payment by the A - Income
client has an impact B- Reduction of Capital Employed

on which of the
following? C- Income and reduction of
Capital Employed
D - No impact
employed (3/5)
Possible responses
3 Paying suppliers A - Income
sooner will have B - Reduction of Capital Employed
what impact?
C - Increase in Capital Employed
D - No impact
4 The resale of a A - Income
fixed asset has B - Reduction of Capital Employed
an impact on
which of the C – Income and reduction of
following? Capital Employed
D - No impact
5 The receipt of A - Income

raw materials B - Reduction of Capital Employed

has an impact
on which of the C - Increase in Capital Employed
following? D - No impact
employed (4/5)
Possible responses
6 A reduction in Operating Income
the inventory Reduction of Capital Employed
coverage rate
will have an Profits and reduction of Capital
impact on which Employed
of the following? No impact
7 Payment from a Operating Income
client has an Reduction of Capital Employed
impact on which
of the following? Income and reduction of Capital
Employed
No impact
8 What is the Operating Income

impact of Reduction of Capital Employed
manufacturing
products without Increase in Capital Employed
billing? No impact
employed (5/5)
Possible responses
9 Payment to a supplier Income
has an impact on Increase in Capital
which of the Employed
following?
Income and increase in
Capital Employed
No impact
10 A production manager Income
decides to re-integrate a
manufacturing process Increase in Capital
that was previously sub- Employed
contracted. This decision
Income and increase in
has an impact on which
of the following? Capital Employed

No impact
Operating manager – a key player
in optimising the management of
capital employed
(EVC)
Value creation
By way of 4 “fundamentals”
-------
Net Present Value (NPV)
Agenda
1- Like a shareholder :
look for the best
“Return on Investment”
2- Improve EVC by means of a higher

Rotation of Capital Employed
3- Combine EVC performance with focus on growth :

CASH FOR GROWTH
4- Some CASH indicator and the Net Present Value

(NPV)
Another way of looking at the
Balance Sheet
 Reminder :
– The Balance Sheet represents the balance between the Assets used by a business and the contributions of shareholders and lenders (liabilities and equity) as everyone knows :
ASSETS = LIABILITIES + EQUITY
– By rearranging the two sides of the Balance Sheet, a different presentation can be made, balancing the Capital needed by an enterprise with its source, the preceeding equation then becomes :
CAPITAL EMPLOYED = RESOURCES PROVIDED

The key equation :
CAPITAL EMPLOYED = RESOURCES
PROVIDED
 The Balance Sheet demonstrates the balance between SOURCES and USES,
and highlights the importance of WORKING CAPITAL and NET CASH
ASSETS LIAB + EQ DOMAIN DOMAIN
(USES) (SOURCES)
CAPITAL EMPLOYED = RESOURCES
PROVIDED
EQUITY
FIXED ASSETS
EQUITY
FIXED ASSETS
INVENTORIES FINANCIAL
DEBTS
RECEIVABLES NET CASH
WORKING CAPITAL
CASH PAYABLES
ADVANCES
BALANCE
BALANCE SHEET BETWEEN SOURCES
AND USES
The “RETURN
on INVESTMENT” reflex
 Shareholders expect a certain return (measured as a Return on their Investment). As for
lenders, they negotiate a rate of interest (which is equivalent to a Return on Investment)
RETURN on
DOMAIN DOMAIN
INVESTMENT
reflex
EQUITY
CAPITAL
EMPLOYED Expected rate of return
NET CASH
Negotiated interest rate
SHAREHOLDERS AND
MANAGEMENT
LENDERS
Return on Investment
 What return is expected by Lenders and Shareholders ?
TWO WAYS TO FINANCE ALSTOM
Loan Low risk 7%
Stock Market
Greater risk 20
%
The average of the returns expected by lenders and shareholders is the

WACC.
Its value, for ALSTOM, is 13.6 % before tax
WACC
(Weighted Average Cost of Capital)
 Breakdown of WACC (before tax)
Shareholde
r
Equity Financial
Cost of Cost Debt
Shareholde
WACC = r x Shareholde
+ of
Debt
x Shareholder
Equity Equity +
r Equity +
Financial Financial
Debt Debt
Cost of Shareholder Equity is Cost of Debt is the average

the return expected before-tax rate of interest
by Shareholders
Example of the calculation of WACC
Shareholder Financial
Cost of Equity Cost Debt
WACC = Shareholder
Equity
x + of
Debt
x
Shareholder Shareholder
Equity + Equity +
Financial Financial
Debt Debt
20% x 50% + 7% x 50%

13,6%
Two basic fundamentals
 Fundamental N°1
The providers of resources think in terms of RETURN on INVESTMENT
 Fundamental N°2
Because the Capital employed by a company is

2 precisely equal to its resources, the company must
also think in terms of RETURN on INVESTMENT

1
Measuring Profits is Not Enough
 What counts is measuring profits and comparing them with the cost of
Capital Employed
Cost of
= WACC x Capital Employed
Capital
Employed
return
expected my investment
by
shareholders
and lenders
EVC Definition
(Economic Value Created)
 For a Business and a Unit :
EVC = NOPBT - [ Capital

Employed X WACC ]
Net Operating Profit
Cost of Capital Employed
Before Tax
NOPBT is the Net Operating Profit Before Tax,

financial result and management fees
look for the best


CASH FOR GROWTH
4- Some CASH indicators et the Net Present Value

(NPV)
EVC : Economic Value Created
 Improve EVC by means of a higher Rotation of Capital Employed
EVC is a KPI
(Key Performance Indicator)
The 2 basic elements of EVC

The value creation tree
The expression of expected
performance
EXPECTED OPERATIONAL CAPITAL

= X
PERFORMANCE PROFITABILITY ROTATION
The Value Creation Tree ….
….. or how every operational

decision or example of good
practice can generate additional
cash and thus additional value
for Shareholders
One way to summarise the different
components of Value Creation
 The Value Tree
Activity
NOPBT
Operating
Profits
LEVERS _
FOR Working Capital
CREATING Capital
(CAPITAL EVC
VALUE EMPLOYED) Emplyed
Fixed Assets X
Cost of Shareholder
Equity
WACC
Cost of Debt
The Cash Tree can be presented the
same way
 Each employee, at his own level, contributes to the generation of cash …
Win a contract -
Ensure perfect quality Activity
(product/service) -
1st Source
Of Cash :
Defend margins - Operating
Reduce costs - Operating Profits Profitability
Improve productivity -
Reduce inventories -
VALUE
Negotiate with customers - WORKING
Collect receivables - CAPITAL 2nd Source
Negotiate with suppliers - of Cash :
(CAPITAL
Capital
EMPLOYED)
Rotation
Sell non-productive assets

-
FIXED ASSETS
Only invest what is required
- Levers for generating These two sources of Value
cash Creation are also sources of
CASH FLOW
 Fundamental n°3
Each employee can, through his decisions or operational practices, have a positive impact on cash generation and company Value
3
2
1
look for the best

3- Combine EVC performance with focus on

growth : CASH FOR GROWTH
4- Some CASH indicators and the Net Present Value

(NPV)
Combine EVC performance
with focus on growth :
CASH FOR GROWTH

Caution - optimisation of EVC
without
growth may be unproductive
 Depending on the effectiveness of investments and the level of operational
performance, the company will …
Growth
Increase the Optimise the

deterioration of creation of
Investments
value value
Disinvestment
Limit the Limit the

deterioration creation of
of value value
Negative Positive
EVC
Seeking the best result :
Positive EVC and investment growth
 Depending on the situation, management must adjust strategy …
Growth
Cut back on Maintain the

investments Increase the Optimise the investment
deterioration of creation of policy
Investments
value value
Disinvestment
Limit the Limit the Leverage

deterioration creation of profitability for
further
of value value
Increase investment
profitability
Negative Positive
EVC
 Fundamental n°4
The generation of cash by means of

investment reduction does not create long
term value!
Only positive cash generation associated

with a policy of growth can guarantee
4 sustained Value Creation
3
This is the source of the programme :
2 CASH FOR GROWTH

1
look for the best


CASH FOR GROWTH
4- Some CASH indicators and the Net

Present Value (NPV)
Some definitions
NET CASH
NET CASH FLOW FREE CASH FLOW

NET CASH
 NET CASH is a situation, a level at the end of a period

NOTE : the following illustration assumes negative NET CASH
NET CASH is the difference between CASH (asset accounts) and

long and short term Financial Debts
CAPITAL EQUITY
EMPLOYED
(CE)
NET CASH
NET CASH =
CASH (asset accounts)
- FINANCIAL DEBT
NET CASH
 NET CASH is a situation, a level at the end of a period.

NOTE : the following illustration assumes negative NET CASH
The two sources available for financing Capital Employed

are :
• borrowings (negative NET CASH)

• shareholder contributions (EQUITY)
CAPITAL EQUITY
EMPLOYED FINANCING OF
CAPITAL EMPLOYED
CE
NET CASH
NET CASH
 In order to reduce Net Cash (negative) (which is the objective) :
– Reduce Capital Employed

– Increase profits ( which increases Equity )
CAPITAL EQUITY
EMPLOYED
NET CASH
NET CASH FLOW
 NET CASH FLOW is a variation. It is the change between two situations :

that at the beginning of a period and that at the end
N-1 N
NET CASH
NET CASH
end of period NET CASH FLOW
beginning of period For example - € 30M Positive
For example - € 50M
NET CASH FLOW

for the period
For example + € 20M
FREE CASH FLOW Caution :
KPI
 The notion of FREE CASH FLOW is one that is derived from that of NET CASH
FLOW
Responsibility
FREE CASH FLOW
of Operating
NET CASH FLOW Personnel
• Corporate
management fees
• Financial Results
FREE CASH FLOW is the operational portion NET CASH FLOW
look for the best


CASH FOR GROWTH
4- Some CASH indicators and the Net

Present Value (NPV)
 Net Present Value (NPV) :
– A tool for estimating the time-effect of CASH IN and CASH OUT
 A EURO today does not have the same value as a EURO tomorrow.
1€ CAPITALISATION 1€ X ( 1 + i )
PRESENT FUTURE
1€ / ( 1 + i ) DISCOUNT 1€
i is called the discount rate for the period.

It is the Cost of Capital
Taking time into account
PRESENT 1€ / ( 1 + i ) DISCOUNT 1€ FUTURE
DISCOUNT
100 € 113,6 €
ONE YEAR
WITH A DISCOUNT RATE OF i = 13,6% (WACC)
 The discounting of cash flows (CF) over several periods
Period 1 Period 2 Period 3 Period 4

PRESENT CF 1 CF 2 CF 3 CF 4
CF1
N (1 + i)
CF2
( 1 + i )2
P
CF3
( 1 + i )3
V CF4
( 1 + i )4
 The formula
NPV =
Period 0
CF1 CF2 CF3 CF4

(1 + i) + ( 1 + i )2
+ ( 1 + i )3
+ ( 1 + i )4
Period 1 Period 2 Period 3 Period 4
Example of a project
Name of the project :

MOROCCO
Unit leader : CIO
Start date: Nov-99
Duration : 6 years
REMINDER of the Cost of Capital:

WACC = 13,6%
The MOROCCO Contract
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
CASH IN 3 700 6 100 16 700 15 400 700 560
A : Cumulative 3 700 9 800 26 500 41 900 42 600 43 160

CASH IN
CASH OUT 8 000 13 600 14 700 2 900 1 500 900

B : Cumulative 39 200
CASH OUT 8 000 21 600 36 300 40 700 41 600
Annual
NET CASH FLOW -4 300 -7 500 2 000 12 500 -800 -340
(Cash in – Cash out))
CUMULATIVE
NETCASH FLOW -4 300 -11 800 -9 800 2 700 1 900 1 560
(A – B)
Annual -3 785 -5 812 1 364 7 506 -423 -158
Discounted NCF
Cumulative -3 785 -9 597 -8 233 -727 -1 150 -1 308

Discounted NCF
Discounted at a rate of 13,6% per year .
The cumulative NET CASH FLOW of year 6 corresponds

to the gross margin at the conclusion of the contract
(disregarding the effect of depreciation)
CASH IN 3 700 6 100 16 700 15 400 700 560
A : Cumulative 3 700 9 800 26 500 41 900 42 600 43 160

CASH IN
CASH OUT 8 000 13 600 14 700 2 900 1 500 900

B : Cumulative
CASH OUT 8 000 21 600 36 300 39 200 40 700 41 600
Annual Gross
NET CASH FLOW -4 300 -7 500 2 000 12 500 -800 -340 Margin
(Cash in – Cash out)) before
CUMULATIVE
NETCASH FLOW -4 300 -11 800 -9 800 2 700 1 900 1 560 discount
(A – B)
Annual -3 785 -5 812 1 364 7 506 -423 -158
Discounted NCF
Cumulative -3 785 -9 597 -8 233 -727 -1 150 -1 308

Discounted NCF Gross
Margin
Discounted at a rate of 13,6% per year After
discount
The cumulative NET CASH FLOW of year 6 corresponds
to the gross margin at the conclusion of the contract
(disregarding the effect of depreciation)
 The project profitability
– Before discounting :
Cumulative Net Cash Flow / Cumulative Cash In :

1 560 / 43 160 = 3,6 %
– After discounting :
Cumulative Discounted Net Cash Flow / Cumulative Discounted

Cash In :
- 1 308 / 29 253 = - 4,4 %
 Simulation : a downpayment of 10 % instead of 8.6 %

CASH IN 4 300 6 000 16 500 15 300 600 460
A : Cumulative 4 300 10 300 26 800 41 100 42 700 43 160

CASH IN
CASH OUT 8 000 13 600 14 700 2 900 1 500 900

B : Cumulative
CASH OUT 8 000 21 600 36 300 39 200 40 700 41 600
Annual Gross
NET CASH FLOW -3 700 -7 600 1 800 12 400 -900 -440 Margin
CUMULATIVE before
NETCASH FLOW -3 700 -11 300 -9 500 2 900 2 000 1 560 discount
(A – B)
Annual -3 257 -5 889 1 228 7 446 -476 -205
Discounted NCF
Cumulative -3 257 -9 146 -7 918 -473 -948 -1 153

Margin
After
discount
A downpayment of 10 % instead of 8.6 %

improves NPV by 12 % (-1 153 vs -1 308)
 Simulation : The optimisation of production planning permits

postponement of the delivery of a € 2000 component from year 2 to
year 3
CASH IN 4 300 6 000 16 500 15 300 600 460
A : Cumulative 4 300 10 300 26 800 42 100 42 700 43 160

CASH IN
CASH OUT 8 000 11 600 16 700 2 900 1 500 900

B : Cumulative
CASH OUT 8 000 19 600 36 300 39 200 40 700 41 600
Annual Gross
NET CASH FLOW -3 700 -5 600 -200 12 400 -900 -440 Margin
CUMULATIVE before
NETCASH FLOW
-3 700 -9 300 -9 500 2 900 2 000 1 560 discount
(A – B)
Annual 7 446
-3 257 -4 339 -136 -476 -205

Discounted NCF
Cumulative -3 257 -7 596 -7 733 -287 -763 -968

Margin
After
discount
Postponement of the payment 5 % of total cash out by one year
improves the NPV by a further 16 % (-968 vs -1 153)
Using a software tool for
calculation of NPV
 OBJECTIVE :
– Simulate the effect of a delay in CASH OUT
– Simulate the effect of an anticipation of CASH IN
– Visualise flows by means of the resulting graphs
Cumulative cash in /cash out graph
50000
40000
CI cumulative
30000 CI disct.. cumul.
Euro
20000 CO cumulative
10000 CO disct. cumul..
0 Balance cumul
Bal. disct. cumul.
-10000 1 2 3 4 5 6
-20000
Years
Simulation tool (to be used in the course of negotiation)

Control or readjustment tool (to be used during implementation)
REMARK CONCERNING THE DISCOUNT
RATE TO BE USED FOR NEGOTIATIONS
 The rate of 13.6% is strictly for internal use. In no case should it be

used for negotiating with clients and suppliers.
 In the framework of negotiations with clients or suppliers, it is
recommended to calculate the room for price flexibility on the basis
of a rate which is close to the funds market rate, for example 5%.
 Practically speaking, this level of effort should be sufficient to gain
acceptance for any propositions involving timing of payments.
Also, the transaction will appear even more favorable when it is
discounted at the 13.6% rate.
Example : we can accept the payment of 900 right away rather than
1000 in three years, because
– 900 > 1 000 / 1,053 (= 863)

– And 900 is also > 1 000 / 1,136 3 (=682)
The rate of 13.6% is strictly for internal use. In no case should it be used for
negotiating with clients and suppliers
Part II
Application of Cash for Growth
concepts to individual functional
specialties
Objectives
At the end of the training you should:
 Understand
– The “cash levers”
– The necessity of cooperation with other functions & units
– The use of NPV in project decision making
– Key metrics in cash management
 Be ready to implement first actions

SUMMARY
 EVC and the timing of cash flows (NPV) illustrated by examples
 Critical to cash for Finance
 Cash Discovery
 Finance Cash levers and the CFG method
 Metrics
Economic Value Creation and
Impact of the timing of cash
flows (NPV) illustrated by
examples
Cash is key and time is key for

Cash
Sequence 1 - exercises
EXERCISE 1 – EVC AWARENESS OF
PROFIT OR CAPITAL EMPLOYED
 For the year N, an industrial company shows the following financial results :
– Sales : 1 000 k€
– NOPBT : 40 k€, or 4 % of sales
– Capital employed (fixed assets (20)+ inventories (380) + receivables (150)- advances (170) – payables (180)) : 200 k€
Questions :
– Calculate the EVC (Economic Value Created)
– Calculate the impact on EVC of an improvement in NOPBT equal to 1% of sales
– Calculate the impact on EVC of an improvement (reduction) in the level of Capital Employed equal to 10% of sales
– What is your conclusion?
EXERCISE 3 - Work in Progress
lever of move to demand-based delivery
(1/3)
 The AKUNA Unit has signed a contract to deliver a power station to its client. To build this power station, AKUNA needs to buy 2 distinct components
(1 000 K Euro each).
 The planning of the project is as follows:

– Installation of the first component must start in January.
– Installation of the second component must start in May.
 For both components, payment to the supplier is due on the delivery date
EXERCISE 3 - Work in Progress Lever of
move to demand-based delivery (2/3)
 The project manager of AKUNA has two choices for delivery of the
components :
– 1st Option : to ship the two components together on the

delivery date of the 1st component (January).
st
1 OPTION
Start installation of 1st nd
Start installation of 2
component component
CASH IN
January May
CASH OUT
2 000 k€
Delivery and payment of
the two components
to the supplier
EXERCISE 3 - Work in Progress Lever of
move to demand-based delivery (3/3)
– 2nd Option : to have the first component delivered in January

and the second in May
nd
2 OPTION
st
Start
installation of 1 installation of 2nd
Start
component component
CASH IN
January May
CASH OUT
1 000 k€
1 000 k€
st the 2nd
component to the
the 1 component to the
supplier
supplier
 QUESTION : What is the best policy between option 1 and option

2? (the discount rate to be used is 13,6%, or 1% per month to
Critical to cash for Finance
sequence 2
QUESTIONS
 What are the effects on cash position of the practices shown on the following pages?
 What are some of the possible explanations for these practices ?
 What can be done to modify these practices ?

EXERCISE 1 – INVOICING or
DEMAND of PAYMENT
 Distribution of processing of invoices or demand of payment over the month
Distribution of processing of
invoices over the month
(July 2000, Total subsidiaries)
Total / € 10560 K in July
(k€)
5.1% 18% 19% 58%
2000
1000
1759
1211
1105
918
Work
792 days
646 641 680
505 493
428
285 238 284
192 127
0 98 76 82
0
Week 1 Week 2 Week 3 Week 4
EXERCISE 2 - RECEIVABLES
 Management of overdue accounts
1 month Start actions to Paymen

get payments ts
Debt
becomes
overdue
 What are the effects on cash position of the practices

shown on this page?
 What are some of the possible explanations for this

practice, due to ALSTOM practices or customer
organisation ?
 What can be done to modify this practice ?
EXERCISE 3 – PAYABLES
 Payment terms
Current situation :
You have the choice between 2 payment schedules for GPC’s (General purchasing conditions)
• 90 days at month end from the 10th
• 30 days at month end from the 10th + 2% discount
What do you choose ?
Payment terms by category Total

purchases ( F/Y 1999 / 2000 )
(M€)
50
40
30
20
27.3
10
9.8 11.6
0
GPC at 90 GPC at 30 Non-GPC
days days
EXERCISE 4 - Payment based on the
date of delivery (contract
conditions)
 What is the impact of invoicing (or demand of payment) based on

the date of delivery instead of the date of material availability
(customer or supplier) ?
sequence 3
Cash Discovery
CASH DISCOVERY
 The participants should answer the questions as follows:

– Yes : I
– No : 0
They note by themselves to assess the cash practices of their own

unit (in sub group)
ASSESSMENT DISCOVERY (1/6)
N Questions Answer
Project Management
1 Is a curve of cash receipts and cash expenditures Y /N
systematically prepared for each project ?
2 Is this curve of cash receipts and cash expenditures updated Y /N
regularly ?
3 Do you calculate the Net Present Value of your projects ? Y /N
4 Is there a monthly project planning meeting ? Y /N
N Questions Answer
Inventories
1 Is there any survey on cycle time reduction ? Y /N
2 Is there any study on make or buy ? Y /N
3 Is there a monthly production planning meeting ? Y /N
N Questions Answer
Accounts receivable
TERMS AND C ONDITIONS
1 Are terms and conditions adapted to contract risk profile ? Y /N
2 Do the objectives of sales personnel include terms and conditions ? Y /N
3 Do you intermediary progress payments during your contracts ? Y/N
N Questions Answer
Accounts receivable
C REDIT GRANTING PROCESS
1 Is there a credit manager function in your unit (risk assessment, collection) ? Y /N
2 Do you have a client risk evaluation process ? Y/N
3 Do you set limits where credit approval is necessary ? Y /N
N Questions Answer
Accounts receivable
BILLING PROC ESS
1 Do you have procedures adapted to the complexity of the billing Y /N

process (or demand of payment) for each business segment ?
2 Do you have a forecast of your billing (or demand of payment) ? Y /N
3 Do you bill the client and send the invoice,(or demand of Y /N

payment) according the contract conditions within a couple of
days ?
4 Do you have the major part of the billing (or demand of payment) Y /N
process at the end of the month ?
5 Do the project team / production people understand the key Y /N
events for billing (or demand of payment)?
6 Do you understand and prepare the relevant attachments that Y /N
need to be sent with invoice(or demand of payment) in a timely

manner?
N Questions Answer
Accounts receivable
C OLLEC TIONS PROC ESS Y/N
1 Is collection responsibility clearly defined ? Y/N
2 Is collection performance included in the incentives (bonus plan) of Y/N

your unit ?
3 Do you check at delivery or as soon as service has been provided that Y/N
there is no obstacle for payment (technical, contractual)
4 Do you know the acceptance process of your customers ? Y/N
5 Do you have a monthly collection review together with operational Y/N

people ?
6 Does your unit name someone as being responsible for negotiation ? Y/N
7 Is your collections process adapted to customer segmentation ? Y/N
8 Do you have standard internal documents to communicate collection Y/N

issues between finance and operational people ?
9 Do you stop delivery or service in case you are not paid for previous Y/N
invoices ?
10 Do you have a standard period of time after which the involvement of Y/N
a lawyer is considered?
N Questions Answer
PAYABLES
1 Are there standard purchasing conditions ? Y /N
2 For subcontractors, do purchasing terms and conditions reflect Y /N

selling terms and conditions ?
3 Does your payment process ensure that payment is made only Y /N
after effective delivery ?
4 Is the performance of purchasing agents judged on both prices Y /N
and payment terms obtained ?
N Questions Answer
Fixed assets
1 Do you realize some lease back operations ? Y /N
2 Do you sell unused fixed assets periodically ? Y /N
3 Do you know the “use rate” of assets ? Y /N

Cash Levers and CFG
Methodology
Sequence 4
Presentation of the Main Cash
Levers
INVENTORIES
 EXAMPLES OF CAUSES OF NON-OPTIMISATION OF CASH (1/3)
– Project planning does not take into consideration payment milestones
– No cash curve on projects
– Net Present Value of cash flow simulations is not calculated
– Projects done by several units are not always well managed : responsibilities of each unit, ….
INVENTORIES
– Non-optimisation of the production or project cycle
– Production, project managed according to a flow logic as opposed to a demand logic

INVENTORIES
– Make or buy : purchase of components instead of functions
– Production modification without taking into account existing inventories, in-process goods, and purchase orders already issued
– The purchase orders are issued without taking in account the needs calculated by the monthly production planning
INVENTORIES - ACTIONS
 Reducing the amount of raw material inventory to a “safe” level can

release € 2.9 to 4.0 M cash
Current status : Cash Coverage

release rate
potential (months)
•Average inventory (99/00) € 6.0 M Average situation
(M€)
(99/00)
• Average monthly consumption 0 2.9
(99/00) :
€ 2.1 M
•Coverage rate (1) : ~3 months
Hypothesis :
2.9 1.5
Coverage rate:
Delivery and production lead times 1.5 month
should allow coverage rate between 4.0 1
Coverage rate:
1 and 1.5 month
1 month
Cash release potential

6.0 0
• ~€ 2.9 M (1.5 month coverage)
• ~€ 4.0 M (1 month coverage)
(1) Average inventory
Average consumption
INVENTORIES - ACTIONS
 Cycle time reduction should release ~ 1,7 M€
Current status : 7.6 M

• Move to new factory will result in time cycle
reduction of approx. 50%
80% are 55% are due
critical 3.34 4.2 to raw
Hypotheses : supplies materials
• WIP is 2 months old purchases
WIP
• 55% of WIP stems from raw materials purchases
• critical supplies (80% of raw material value) are Impact of
purchased one month later WIP at 31. critical suppliers
March 2000
Existing plant
Calculation :
• Average rotation rate of WIP is 6
• Monthly WIP creation : (6 X 7.6) / 12 = € 3.8M
• Cash potential : 3.8 X 55%X 80 % = € 1.7M

New plant
15 days 1-2 3 months

weeks
Delay due
Design to critical Manufacturing
supply lead
time
RECEIVABLES
CREDIT GRANTING PROCESS
 EXAMPLES OF CAUSES OF NON-OPTIMISATION OF CASH
– There is no analysis of financial statements or examination of credit rating reports
– No credit granting process, with a monthly credit management committee
– No guarantees or means of payment which permit sales without absorbing undue credit risk
– No review of client’s past payment histories
– No limits for irregular clients with tainted histories

RECEIVABLES
- TERMS AND CONDITIONS
– Sales personnel are not sufficiently informed/trained about the trade-off between price and T&C’s. Should be decided on the basis of discounted cash flows. Their objectives are in terms of price – volume - margin
– T&C’s are negotiated after the price discussions have been completed (sequential rather than parallel negotiation)
– Customers set up penalty milestones during the contract even if they are not needed
– Terms and conditions not adapted to contract risk profile (RTA procedure)
RECEIVABLES - ACTIONS
 Renegotiation of conditions of payment can release € 0.9 to 1.8 M cash
Sales(1)
(M€) Payment terms (99/00)
Current status :
• Receivables : € 49,6 M
35
29,1
• Yearly sales to customers paying 30
at more than 90 days : € 21.4 M
25 21,4
Hypothesis : 20
14
• Switch all or half of 15 12,7
customers paying at 90 days
to 60 days
10 16.4% 37.5%
18% 27.5%
5 0,4 0,1
0.5%
0 0.1%
RECEIVABLES - ACTIONS
Preliminary
 Improving terms and conditions should release €2.0 M
Current and potential breakdowns

of payments schedule
Current status : For contracts > € 250 K
100%
• Low proportion of down payments and 50%
progress payments 90% 75 %
• Contracts over € 250 K represent 51% of total 80%
sales of € 66 M
70%
60%
30%
Hypothesis : 50%
• Inventories : € 9.3 M 40%

• Switch average down payment rate from 6% 30%
to 20% and average progress payments 20%
20%
rate from 19% to 30% for 60% of 19%
projects 10%
• The distribution and mix of sales is uniform 6%
0%
over the year (uniform duration of 6 months) Completition
Down Progress
• 66 M x 51% x ( 14/2 + 11/4) x 60% = € 2 M payement payments payment
: Current average payments schedule
: Proposed average payments scedule
RECEIVABLES
– BILLING PROCESS
– Knowledge of client’s administrative processes (receipt of invoices) insufficient and not formalised
– Insufficient coordination with the Sales Engineer and/or the Project Manager
– If payment requests are refused or amended, a later payment date is accepted

RECEIVABLES
– BILLING PROCESS / DEMAND OF
PAYMENT
– No differentiated processing rules for simple as opposed to complex invoices (or demand of payment)
– Means of payment are not taken into account in processing invoices (or demand of payment)
– Means of payment do not assure prompt payment
– The organisation of projects or production tends to force billing at the end of the month
– Invoices (or demand of payment) sent at the end of the month can result in delay of start of payment period to the following month
RECEIVABLES
– BILLING PROCESS / DEMAND OF
PAYMENT
– The billing information is collected at the end of the production

process
– There is no paperwork flow with order entry
– The expenses on cost-plus contracts are gathered with difficulty

when invoices (or demands of payment) are made up
RECEIVABLES – ACTION
 Avoiding the mailing of invoices (or demand of payment) during the last few
days of the month offers a potential gain of 2 M€
Distribution of processing of
Current situation :
invoices over the month
(July 2000, Total subsidiaries)
• Invoices are processed over an average of 4-5
Total / € 10560 M in July
working days (~1 week) for IT and 1-2
working days for IEB Amount/day
• The majority of billing orders arrive at the end of (k€)
the 5.1% 18% 19% 58%
2000
month
• All of the month’s invoices are processed in the
current
accounting month
Hypotheses :
• Accounts receivable : € 31.1 M – Year’s Sales : € 1000

115M 1759
• Figures for July are representative

• Receipt of invoice marks the start of the payment 1211
1105
period in 90% of the cases ( for progress payments 918
Work
792 days
the start of the payment period is the date of 646 641 680
505 493
preparation and/or mailing of the progress report), 428
285 284
• Invoices processed during the last two 0 98 76 82
238 192 127
working days of the month are received by 0
the client the following month

Week 1 Week 2 Week 3 Week 4
Calculation :
 Reducing discontinuity in process will accelerate billing and release from €

1.1 to 2.5 M cash
Current status : Shipped not invoiced amounts with closure of

• Receivables : € 49,6 M accounts date
• Monthly amount invoiced : € 10.7 M
6,5
Hypothesis : 6
31/03
21/01
• Discontinuities in invoicing process 5,5
result in delays of between 3 and 21/04

5
7 days each month 18/02
• This delay may be reduced to 0 4,5
Cash release potential : 4
3,5
• (3 / 30) x 10.7 = € 1.1 M
(3 days saved) 3
19/05
• (7 / 30) x 10.7 = € 2.5 M
(7 days saved) 2,5
20/12/99
27/12/99
03/01/00
10/01/00
17/01/00
24/01/00
31/01/00
07/02/00
14/02/00
21/02/00
28/02/00
06/03/00
13/03/00
20/03/00
27/03/00
03/04/00
10/04/00
17/04/00
24/04/00
01/05/00
08/05/00
15/05/00
Closure of accounts date
RECEIVABLES – COLLECTIONS
PROCESS - CAUSES
– Follow-up of customer receipts is considered to be at the boundary of the responsibilities of each actor (Sales Engineer, Project Manager, Accountant)
– Absence of a methodology for collections, for which :

• The first contacts for overdue payments are made too late – there are no preventive actions for large amounts
• Legal, technical and administrative problems are not revealed until client is contacted for overdue payments
– There is no overdue receivables monthly review
– No targeted actions on customers because of absence of customer segmentation
– Sales personnel are not systematically informed of payment problems with their clients
 More proactive management of overdue receivables should release €1.3 M
Current status : €5.7 M
30% attributed to
• Proactive measures to recover payments 1.7 unresolved claims
started one month after amount
becomes overdue
4.0 70% attributed to
client
Hypotheses :
• Accounts receivable : € 21.0 M Overdue over one month at

June 2000
• More proactive collection will accelerate
payment on 53% (75% of 70%) of overdue
amounts
X
Start proactive
1 month actions to get Paymen
payments ts
Calculation :
• Average turnover of receivables: 5.5 (2.4 Debt

becomes
mos) overdue
• Average monthly receivables falling due : Average Average receivables Average monthly
monthly due payment of
5.5 x 5.3 / 12 = € 2.4 M receivables receivables
falling
Potential : due
€ 2.4 M € 5.3 M € 2.4 M
• 53 % x 2.4 = € 1.3 M
 Better performance on collections should produce an improvement of 4.2 M

€ in cash balances
Current situation :
• Client contact on overdue amounts neither systematic

nor preventive
• Weaknesses in collections efforts Aging of receivables balances
• Monthly analysis of receivables balances by customer as of end of June 2000 (total
is not done. Southeast)
Amount
(M€) (M€)
Hypotheses :
5 4
4
• Receivables : € 31.1 M 0.8
3 2
• Systematic preventive action ( through 4NS and bank 1.5
2 1.2
drafts ) should reduce 30-day overdue accounts by 3.2 1.0
1 1.4 1
20% and 60-90 day overdue accounts by 30% 1.0
• More aggressive and better-targeted action should 0 Age
eliminate overdue accounts of more than 120 days 1 mo. 2-3 mos. 4-9 mos. > 9 mos.
and reduce the remainder of 60-90 day overdue
accounts by another 30%

( except for doubtful and litigious
Improvement potential
accounts ~0.3 M€ )
Doubtful and litigious
Calculation :
accounts ( 0.3 M € )
4 x 20% = 0.8
2 x 30% = 0.6
2 x 70% x 30% = 0.4
(2.7- 0.3) = 2.4
€ 4.2 –MT&D - Finance – Functional Awareness – Version anglaise
Cash training for specialists p 114
PAYABLES - CAUSES
 Lack of coordination between purchasing, logistics, inventories management :
– Early payment triggered by advance delivery at sole initiative of supplier
– Early payment triggered by receipt of invoice and not by delivery as stipulated in purchase conditions
– Delivery late without systematically alerting buyer in charge of negotiation
 Non-application of general purchasing conditions
 Purchasing department judged solely on prices obtained, without taking into account terms and conditions of payment
PAYABLES - ACTION
 Choice of 90 day payment terms on GPC’s should improve cash balances by

1.6 M €
Current situation : Payment terms by category Total

purchases ( F/Y 1999 / 2000 )
ALSTOM has the choice between 2 payment (M€)
schedules for GPC’s
50
• 90 days at month end from the 10th
• 30 days at month end from the 10th + 2%
discount 40
Hypotheses :
30
• Payables : € 15.9 M
• Discounts received during 99/00 : € 196 K
20
• ALSTOM chooses 90 day terms
• Payment ratios are constant 27.3

• There are no discounts other than for GPC 10
9.8 11.6
0
GPC at 90 GPC at 30 Non-GPC
days days
The Cash for Growth Method

NOKA EXERCISE
a. PRE - ASSESSMENT
EXERCISE (1/4)
The context of the unit
 Principal activity
– Production and engineering
 Basic data
– 239 M€ in sales
– 1263 employees
– Cost of sales = 80 % sales
 Products
– Production : standard products, using a mature technology with short

production lead times (50 %) – average manufacturing lead time : 4
weeks
– Projects : Tailor-made products with long lead times (50%) – average
manufacturing lead time : 8 weeks
a. PRE ASSESSMENT
EXERCISE (2/4)
BALANCE SHEET OF THE NOKA UNIT, March 31, 2000

159.5 159.5
Trade payables 43.6
Receivables
Payables
88.8
Trade receivables 82.2 87.0
Other payables (2) 17.7
Contract prepayments (3) 27.5

Progress billings (1) 4.8
Raw Materials 11.0
Inventories
Semi finished goods inventories 9.8 Financial debts 28.7 28.7
53.8
Work In 33.0
Progress
Equity
Equity 42.0 42.0
Fixed assets 17.4 17.4
Cash 1.3 1.3
Assets (M€) Liabilities (M€)
In CfG project scope
(1) Invoices issued and payment not received (2) Taxes, provision for year-end bonuses, provision for
vacation
(3) Prepayments from customers
a. PRE ASSESSMENT
EXERCISE (3/4)
OBJECTIVES :
 You have just been appointed by to the NOKA Unit in March 2000
 The new accounting period will begin on April 1, 2000
 Your role is as follows :

– Starting from the balance sheet on page 84, identify all the potential levers which will allow you to improve the Cash situation of the NOKA Unit
• Begin by calculating several metrics, such as : Working Capital, Capital Employed, Net Cash and the rotation ratios with respect to sales (receivables, inventories, capital employed (see page 86)
• Working from your experience and the from the ratios you have calculated, provide an initial list of improvement opportunities and the actions to be undertaken to achieve them.
• It may be helpful to make comparisons between corresponding amounts of assets and liabilities on the balance sheet, for example the amount of customer advances with the amount of work in progress, etc.)
a. PRE ASSESSMENT
EXERCISE (4/4)
METRICS FORMULA CALCULATION PROBLEMS / SOLUTIONS
+inventories
+receivables
-payables
WORKING CAPITAL (others and
contract
prepayment
included)
+fixed assets
CAPITAL EMPLOYED
+working capital
+cash (assets)
NET CASH
- financial debts
TRADE RECEIVABLES sales

TURN trade receivables
sales
INVENTORIES / WIP TURN
inventories
sales
CAPITAL EMPLOYED TURN
CE
The method
All areas of potential are systematically
identified, analysed and targeted through a
three phase approach
Pre-assessment Implementati
Assessment Detailed plan
on
Assess savings Develop specific
a. • Define scope map d. potential g. initiatives and action
on selected asset plans :
• Cash impact of classes through CFG • Scope
operational methodology using • Cash objectives and
practices extrapolation as metrics
required • Schedule of
For each assessed deliverables and
potential, activities
b. e. define : • Team (owner)
Assess existing
initiatives and effort • Root causes • Integrate
h. with
• Drivers
• Realization existing thrusts and
efforts
c. complexity
Systematically define f. • Secure
priorities for
assessment : Prioritise opportunities organizational
against value of Commitment
• Asset classes
• Levers potential and
• Samples to be achievement • Institutionalise,
analysed complexity embed
and maintain
momentum
Up to 3 weeks (1) 8 weeks (1) 4 weeks (1)
(1) Typical durations, to be adjusted as a function of unit size & complexity

Copyright BCG
a. PRE ASSESSMENT
EXERCISE (2/4)
BALANCE SHEET OF THE NOKA UNIT, March 31, 2000

159.5 159.5
Trade payables 43.6
Receivables
Payables
88.8
Trade receivables 82.2 87.0
Other payables (2) 17.7
Contract prepayments (3) 27.5

Progress billings (1) 4.8
Raw Materials 11.0
Inventories
emi finished goods inventories 9.8 Financial debts 28.7 28.7
53.8
Work In 33.0
Progress
Equity
Equity 42.0 42.0
Fixed assets 17.4 17.4
Cash 1.3 1.3
Assets (M€) Liabilities (M€)
In CfG project scope
(1) Invoices issued and payment not received (2) Taxes, provision for year-end bonuses, provision for
vacation
(3) Prepayments from customers
b. Assess existing initiatives
and effort
 Cash is generally managed today, but with a stronger emphasis on manufacturing than on projects
Grading : 1=not done, 3= addressed but not best practice, 5= world class
1 2 3 4 5
Overall cash management -
Self n
it io
Accounts receivable : Un luat
-Standardized terms and conditions (manufacturing) a
-Negotiated terms and conditions (projects) ev
-Regular "shipped not invoiced review"
-Credit risk assessment of customer base
-Management of overdue receivables
Inventory :
-Raw material management against production schedule and supply chain
characteristics
-Work in progress managed against pull manufacturing (manufacturing)
-Work in progress managed against plan (projects)
-Finished goods inventory managed against demand characterization and
production schedule
-Finished goods inventory managed against project plan
Accounts payable :
-Automatic review of payment dates

-Standardized terms and conditions
Fixed assets :
-Regular assessment of need for asset
-Regular assessment of existence of asset
-Capital allocation management process
Other :
-Remuneration and performance linked to cash management
Copyright BCG
All activities Specific to
projects
c. Prioritisation of key levers
Identified
Manufacturing
1. Differentiate between projects and High Top priorities Longer term
manufacturing (~4 M€)
2. Move to demand based on delivery on 1
2.a. Raw materials 2.a.
2.b. Semi-finished products 2.b.
2.c. Finished products
3
3. Purchase to delivery cycle time
reduction 6.a. 5
4. Renegotiate terms and conditions of
payment with customers paying at 90 Initial
days estimation 4
5. Improve overdue collection of cash Quick hits Dogs
potential
6. Accelerate billing: at Unit level (a) ; at 6.b
after sales service (b)
7. Renegotiate terms and conditions of

payment with suppliers paid at 30 days
7
8. Prevent early payments due to early

deliveries 8 2.c.
9 10
9. Sell off unused assets Low
10. Investment planning and procedures
(~k€)
Implementation
Low High
difficulty
Copyright BCG
d. Assess savings potential
on selected asset classes
 An example : reducing discontinuity in process will accelerate billing and
n
release from € 1.1 to 2.5 M cash
e
Current status : Evolution not invoiced amounts with closure
of accounts date
•Monthly amount invoiced(1) : €
m
6,5
10.7 M
i
6
31/03
c
Hypothesis : 21/01
5,5
•Discontinuities in invoicing process 21/04
e
5
result in 18/02
delays of between 3 and 7 days each
p
4,5
month
•This delay may be reduced to 0 4
S
3,5
Cash release potential :
3
19/05
(3 / 30) x 10.7 = € 1.1 M
(3 days saved) 2,5
(7 / 10) x 10.7 = € 2.5 M

20/12/99
27/12/99
03/01/00
10/01/00
17/01/00
24/01/00
31/01/00
07/02/00
14/02/00
21/02/00
28/02/00
06/03/00
13/03/00
20/03/00
27/03/00
03/04/00
10/04/00
17/04/00
24/04/00
01/05/00
08/05/00
15/05/00
(1) Average
(7 daysofsaved)
99/00 invoices
Source: AMT controller, CFG team analysis
Closure of accounts date
e. For each assessed potential,
define root causes, drivers and
realisation complexity
 RECEIVABLES :
n
– A first assessment of the receivables management process reveals several problems which explain the cash potential
e
i m
Terms and Payment Overdues
conditions Invoice prepared transaction collection
c
defined managed managed
p e
S
Favorable Significant
payment terms number of
granted to invoices High level of
customers on created at overdues
risky projects month end
Copyright BCG
e. For each assessed potential,
define root causes, drivers and
realisation complexity
 Problems with the receivables management process point to potential key

root causes
Problems  Significant number of invoices raised at month end
en
No differentiated processing rules for simple and complex
im
Potential root invoices
causes
c
 Process overload as simple and complex invoices are treated
e
in a rush at the same time
p
 Several recurrent operations require manual work :
S
 Paperwork and data exchange for exportation packing list
 Handwritten credit notes
 Etc.
 Some invoices (most complex) not raised at month end

because of log jam
Expected effects  Significant delay on cash received

of root cause
 Clarity of documents sent to customers is affected: e.g. terms
Copyright BCG
and conditions are not summarized on invoices which results
in questions from customers
f. Summary of projects to
be launched
Total potential
What / where (€M) Difficulty(1) Who When
Reduce inventory levels 7.0 M. Bethoux Aug.

• Raw materials 3.1 M-H P. Goutagneux Sept.
• Customer WIP 2.4 H P. Goutagneux Oct.
• Protected parts 1.5 L P. Goutagneux
Improve receivables process 5.4 M. Bethoux

management
• Overdue collection 2.2 L P. Millet Aug.
• Acceleration of billing 1.8 M M.J. Lefeuvre Oct.
• Terms and conditions 1.4 H C. Chevassus (France) / T. Barbot (export) TBD
Accelerate invoicing at after sales 1.4 B. Le Bras

service 0.6 L D. Mercier Aug.
• Immediate invoicing of labor 0.6 M C. Chevassus Aug.
• Terms and conditions 0.2 M D. Mercier Sept.
• Accelerated invoicing process
To be specified M. Euvrard
Payables 0.7 L-M MM. Gayte - Van Den Broeck - Tietard Aug.
• Terms & conditions To be specified Sept.
A. Dirckx
• Avoid early payments
M. Bethoux
Fixed assets L J.F. Defay TBD
• Balance sheet clean-up
(1) L=Low, M=Medium, H=High
Caution : These estimates are not necessarily additive

as they may require activities with opposite effect on
Copyright BCG
cash
g. ACTION PLANS – Project
monitoring report
 Report - Acceleration of the contract billing process
n
Date : 2/10/00 Project Leader :
e
Version N° 1 M.J. LEFEUVRE
Objective : Trend Initial value

Reduce billing delay (.........) : ............. Thi
the s hea
m
doc ding
um is fi
(indicator) Current value : ............... ind ent co lled
i
ica i
tor ntain n usin
sec ed i g
.................. tion n th
e
c
Objective (...........) : ...........
e
Respect of time limit :
•
•
•
p
Y N
• Identification of indicator parameters

Principal
S
• Preparation of terms of reference to produce the indicator
achievements : • List of causes already identified
• Establishment of a report to weight importance of causes
• Analyse the delay over 3 months

Next steps : • Set objectives for each segment
•
Expected difficulties • Return to D. Bouton
and ideas for • before : 2/10/00
resolution :
Copyright BCG
g. ACTION PLANS -
Acceleration of the
contract billing process
n
 Planning
T4 00 T1 00
Ind Name of task Duration Start End
e
Sept 00 Oct 00 Nov 00 Dec 00 Jan 01 Feb 01 Mar 01
1.
Billing delays are analysed and 0%
23 days 20/09/00 20/10/00
a segmentation is established (to be defined)
1.1
Construct a data base on jobs/projects 8 days 20/09/00 29/09/00
0%
to be billed (billing terms, contractual billing
dates, amount ) 0%
m
1.2
4 days 02/10/00 05/10/00
Analysis phase for listing payment codes
i
0%
1.3 Validate contractual dates 1 day 06/10/00 06/10/00
1.4 Calculate the billing delay by job/project 0%
c
2 days 09/10/0 10/10/00
over 0
the 3 preceding months
1.5
0%
Establish segmentation 3 days 11/10/00 13/10/00
e
1.6 0%
03/10/0 03/10/00
Validate the segmentation 1 day 0
1.7
0%
Set objectives by segment
p
13 days 04/10/00 20/10/00
S
2 32 days 20/09/00 03/11/00
The causes of delays are identified and 42%
ranked 100%
2.1 8 days 20/09/00 29/09/00
List causes already identified
2.2 3 days 23/10/00 25/10/00

0%
Consolidate the principal delays
2.3 5 days 23/10/00 27/10/00
0%
Analyse the causes
2.4 1 day 31/10/00 31/10/00
0%
Validate the causes
2.5 Rank the causes 2 days 02/11/00 03/11/00

0%
METRICS
Sequence 5
GROUP REPORTING - CASH FOR
GROWTH METRICS
The different indicators and ratios that will be followed at Group level :
The ratios are extracted from CARAT Reporting
 Ratios :
– Receivables turns
• Sales/ Trade receivables
– Inventories and Work in progress turns
• Sales/Inventories and Work in progress
– Working capital turns
• Sales / Working Capital
– Capital employed turns
• Sales / Capital Employed
– Free Cash Flow
• Free Cash Flow / EBIT
 Indicators :
– Net Cash
– Free Cash Flow
– Economic Value Creation
REPORTING – CASH FOR GROWTH
PERFORMANCE INDICATORS BY BALANCE
SHEET ITEM – EXERCISE
Question :
 What are the internal indicators or ratios used to measure

improvment of Cash position (for each balance sheet item, for
example)?
REPORTING – CASH FOR GROWTH
PERFORMANCE INDICATORS BY BALANCE
SHEET ITEM – Proposed solution
 RECEIVABLES :
– Amount of deliveries awaiting billing / sales
– Amount of receivables / sales, compared with standard conditions
– Amount of overdue client accounts / sales compared with objectives
– Invoicing delay
– Claims /sales
– Late payment interest / overdue client account
 PAYABLES
– Amount of payables / purchase
–
 INVENTORIES :
– Work in progress + amounts recovered on contracts / contract
prepayments
–
 PROJECT PROFITABILITY
– Cumulative net cash flow / cumulative cash in (after discounting), for the
main projects
Part III
Case study
Part IV
Group discussion on :
Identification of practical first
steps
How to capitalise and share best
practices
Practical first steps
 Final exercise in two sub-groups
Starting with an inventory of ideas collected by participants on post-its, and

making use of the chart “Classification of levers by priority” (from Part II),
each group :
– Identifies as many levers for its function as possible

– Places them on the chart according to “potential” and “difficulty”
– Presents its conclusions
Organising the capitalisation and
sharing of best practices
 What measures do you propose for organising the capitalisation and

sharing of information on best practices?
– Post it (5 minutes) – 3 post-its per participant
– Debriefing (claissification and prioritisation ) 20 minutes

Appendix
AGENDA
1. ALSTOM and Cash

2. Definitions
3. The 9 levers
1. ALSTOM and Cash
 Why is Cash an absolute  What is the global objective

priority for ALSTOM? for the programme?
 Because Cash is the key  It is to save at least 10% of
indicator to measure the
performance of the our sales in capital
company. employed over 2 years
 Why does a company need  Who will be involved in
Cash? Cash for Growth?
 We need Cash to fuel the  Everybody, but first the
future. management. Managers,
 Why do we take Cash as a are responsible for
performance indicator? delivering Cash.
 Because Cash is the only

common measurement tool
to compare the performance
of everybody in the
company.
2. DEFINITIONS
WORKING CAPITAL, FIXED ASSET Caution :
AND CAPITAL EMPLOYED KPI
– Working Capital and Fixed Assets (Capital Employed) represent

the capital needs generated by the Investment Cycle and by the
Operating Cycle
The Investment
Cycle: CAPITAL
FIXED ASSETS :
CURRENT EMPLOYED
CURRENT LIABILITIES : •Land
ASSETS : -PAYABLES •Factory
-ADVANCES •Equipment
The Operating
-INVENTORIES
-RECEIVABLES
WORKING
CAPITAL
Cycle:
WORKING
CE
CAPITAL
2. DEFINITIONS
NET CASH FLOW
 NET CASH FLOW (two approaches)

The indirect approach
(illustration with negative NET The direct approach
CASH)
NET CASH FLOW NET CASH FLOW

VARIATION CASH RECEIPTS
VARIATION
DISBURSEMENTS
EQUITY CASH IN
CAPITAL
CASH OUT
EMPLOYED
NET CASH FLOW = NET CASH FLOW =

Variation (Equity)
- (CASH
- Variation (Capital Employed) (CASH IN) OUT)
The indirect approach places the emphasis on the underlying

operational mechanisms which generate NET CASH FLOW
2. DEFINITIONS
NET CASH FLOW
 NET CASH FLOW (two approaches) - example

The indirect approach
(illustration with negative NET CASH)
The direct approach
NET CASH FLOW

START Fixed Equity = + 15
Assets : 120 200 CASH IN :
CASH OUT : 1440
Working - Investment : 25
Capital : 130 NET CASH = - Payments : 1400
- 50
Fixed NET CASH FLOW

FINISH Assets : 145 Equity = + 15
200
Working
Capital : 90 NET CASH =
-35
Assumption: no profit for the period

2. DEFINITIONS
EBIT / NOPBT
 NOPBT (Net Operating Profit Before Taxes, financial charges and

management fees)
+ Sales
- Cost of sales
- Non production o/h expenditure
- Production o/h over/(under) recovery
- Other operating income
- Other operating expenses
- Non operating income / expenses
= EBIT
(Earnings Before Interest and Taxes)
+Share in net income of Equity investees

-Goodwill amortization
= NOPBT
(Net profit before tax, financial charges and
management fees)
3. THE NINE KEY LEVERS TO
IMPROVE CASH (1/4)
Asset Key actions required

Lever Definition
class for estimating potential
1. Reduction of Sale of outdated or unused Possibility to sell unused
inventory levels inventory inventories (outdated finished
products / WIP stocks)
Alignment of inventory
keeping rules with Analysis of components
components characteristics criticality, delivery times, costs
across BU's, across categories
Consolidation of inventory
management (incl. Analysis of volume of identical
customers’ inventories and inventories and inventory time
Inventories suppliers’ inventories) series vs. sales, vs. supplies
(incl. customers and suppliers)
Purchase to delivery cycle
time reduction Segment products along levels
of standardization
Mapping of marketing /
purchasing / manufacturing /
expediting process for standard
products
Mapping of design / purchasing /
manufacturing / expediting
process for projects
Identification of critical paths
2. Move to demand- Moving from make-for- Market expectations analysis
based delivery inventory to make-to-order Deliveries mapping and cycle
for a set of product time
Copyright BCG
IMPROVE CASH (2/4)

Lever Definition
3.a. Alignment of Tight linkage of pricing Correlation between terms of

customers’ terms and policy and terms of payment payment and price
conditions of Analysis of account settlement
payment Replacement of payments by client group
due on provisional/final Analysis of T&C's across clients,
acceptance with warranty BU's
Receivables bonds
3.b. Aggressive Optimisation of receivable Receivables process mapping

management of process through and efficiency analysis on a
receivable process • Revised processes sample of contracts
• Clearer responsibilities Analysis of overdraft relative to
• Faster links with sale
customers Installation/commissioning
process mapping
Strict management of Identification of necessary
insurance and litigations procedures and responsibilities
4.a. Alignment of Consistency of terms of payment
Tight linkage of purchasing

suppliers’ terms of policy and terms of payment within suppliers group, within
payment countries
Alignment with best practices
Payables
and negotiation with suppliers
Identification of necessary
4.b. Aggressive Strict management of procedures
management of delivery payments, of Payable process mapping and
payable process insurance, of litigations efficiency analysis on samples
Copyright BCG
IMPROVE CASH (3/4)

Lever Definition
5. Sale and lease Sale and lease back of non Analysis of historical growth of
back specialized production or asset value vs leasing pricing
management assets with Analysis of replacement
short life cycles frequency
(computers ...), high Service providers identification
financing costs or high value and evolution of potential
(real estate in prime Evaluation of fiscal impacts
location)
6. Outsourcing Outsourcing of non- Segmentation of value added
differentiating services or steps
Fixed production steps • Strategic value
assets • Utilization level
Assessment of outsourcing
policies by units and potential to
align on best practice
7.a. Improvement of Reduction of unnecessary Production chain and capacity
production and investment / sale of released mapping
equipment or surface through Production flow balance and
testing asset
utilization • Optimized production bottleneck analysis
chain management Historical growth of buffer
• Production downtime stocks
reduction Analysis of preventive/reactive
• Improved production maintenance
planning / flexibility
Copyright BCG
IMPROVE CASH (4/4)

Lever Definition
7.b. Alignment of Reduction of capital Mapping of capex process

capital expenditures expenditures through units and business
• Avoiding over- Analysis of historical trends ;
specification consistency check with 7a and
• Avoiding cumulated 8
bottom-up protections
and overspend
• Alignment of
expenditures with
manufacturing strategy /
Fixed decoupling from
assets historical trends
(Cont'd) 8. Consolidation of Reduction of a highof
• Postponement number
non- Analysis of cost of minimal
locations of locations
critical to better infrastructure on site
leverage
investments Production reallocation
• Production scale effect simulation
• Necessary site Impact on shareholder value
infrastructure
Cash 9. Aggressive Use of advanced financing Analysis of financing
management of cash techniques to minimize mechanisms for each BU
position financing cost
• Eg : securitisation
Copyright BCG

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Février 2001

Cash For Growth

 Understand what’s at stake for ALSTOM and your unit

 Show the consistency of the CFG Programme within Pace 21

 Share an understanding of the mechanics of cash generation

 Determine how to proceed within your units

 Identify the main operational levers that each of us can act on

– Presentation of the basic concepts of Cash for Growth :

– Application to functional specialties:

 Time schedule / Breaks - Lunch

 Post it and Rapporteur

 Web site on ALTAIR

 Stakes of an improvement of ALSTOM Cash position

 Basics of finance (balance sheet) and Capital

 Basics of cash management – Economic value creation

 Net present value (NPV)

ALSTOM Group : Your unit :

 What was the amount of Capital Employed at 31 March

 What was the level of Net Cash at 31 March 2001 (€ millions) ?

• ALSTOM Group : Your unit :

 A negative consolidated Net Cash position of € 1.1bn at end

2000/01 against € 1151 million operating income

 CFG declared a top priority by the Executive Committee and

 Program Manager : Jean-Luc CHANTRAN

 A central Cash For Growth Program team with sector Cash

 Power is participating in the CFG programme since

OBJECTIVES OF THE PROGRAMME CFG

 Improve financial performance :

– Release cash in the short to medium term, by reducing

– Ensure annual cash contribution, before effect of

 Keep on managing Working Capital, through permanent

 Increase management and all employees' awareness and

Overall methodology and schedule

Starting with 6 pilot sites

Roll out in other sites

Define appropriate metrics at unit level in line with

Training and Build awareness of cash issues

€710 M potential identified in units representing

 Systematic progress reviews involving the entire management

 Available Cash Winner and MD dedicating at least one day a

 Structured teams with objectives and plans – e.g. 5 to 10 key

 Pressure kept over long term - initiatives implement quick hits

 Sector Cash For Growth Team :

– Olivier Marc, Cash Vice President

 Relayed by Business Cash Correspondents

 Relayed by Unit Cash Winners

 Before the bikes can be sold, they

 Salaries and benefits paid increase

Capital Employed thus represents the amount of

client has an impact B- Reduction of Capital Employed

5 The receipt of A - Income

raw materials B - Reduction of Capital Employed

8 What is the Operating Income

of the following? Capital Employed

2- Improve EVC by means of a higher

3- Combine EVC performance with focus on growth :

4- Some CASH indicator and the Net Present Value

CAPITAL EMPLOYED = RESOURCES PROVIDED

 What return is expected by Lenders and Shareholders ?

TWO WAYS TO FINANCE ALSTOM