SAP Solutions for Improving Cash and Liquidity Management

8/20/2019 SAP Solutions for Improving Cash and Liquidity Management

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TECHNOLOGY SOLUTIONS FOR IMPROVINGCASH AND LIQUIDITY MANAGEMENTOPTIMIZING LIQUIDITY IN AN ECONOMIC CRISIS

SAP Thought LeadershipCash and Liquidity Management


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Careful monitoring of the company’s outstanding accounts receivable is critical toensure timely collections and low days sales outstanding (DSO). Careful receivableaging analysis is a must, as is follow-up collections on overdue accounts. For manycompanies, exceptions such as billing disputes and past-due accounts can constraincash flow, drive up DSO, and increase the risk of reduced profitability due to a baddebt write-off.


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CONTENT

4 Executive Summary

5 The Challenge to Keep CommercialCash Flows Healthy

7 Visibility into Sources and

Uses of Cash

9 Increased Control overCash on Hand

10 Better Liquidity and Controlwith Technology

10 Managing Billing Disputes 10 Exchanging Data Efficiently 11 Optimizing Cash Forecasting

12 Global Cash and

Liquidity Management

13 Effective Cash and Liquidity Management with SAP® Solutions

13 To Learn More


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The economy is having a detrimentaleffect on all companies and may affecttheir ability to pay their current obliga-tions – such as payments to vendors.This increases the risk for the sellingcompany in that buyers may delay

payments, thus driving up days salesoutstanding (DSO), or default on theirpayment altogether, triggering a bad debt write-off. To guard against this, companiesmust expand the scope of the order-to-cash cycle by adding a critical step. Theso-called credit-to-cash cycle involvesan up-front credit evaluation. This isoften accomplished manually throughthe judgment of seasoned credit analysts.However, human judgment is ofteninadequate to both stay on top of the

volume of credit requests and spot earlysigns of a potential customer’s deterio-rating financial situation. In addition, aselling company must evaluate eachcredit decision in terms of its cumulativeeffect on exposure to the buying com-pany. This is particularly difficult forglobal companies or those who sellthrough several different channels.

Sophisticated analytic applications thataugment the skills of internal creditdepartments are key to gaining greater

control over trade credit risk. Companies

should not limit their evaluation to asingle, before-sale evaluation. In a wors-ening economy, they need to continuallymonitor their customer base for signsof deterioration in their financial conditionand make adjustments to their credit

policies accordingly. Are there changesin a particular customer’s payment pat-terns? Is the customer taking longer topay? Is its financial condition showingsigns of stress as indicated by increasesin its own DSO or rising days-payables-outstanding (signs it is stretching outcustomer payments to preserve cash)? Are its inventories rising or its cashbalances decreasing?

After a sale is made, the selling company

must ensure the customer’s payment isreceived in a timely manner and quicklyconverted to cash in order to ensurehealthy liquidity. Careful monitoring ofthe company’s outstanding accountsreceivable is critical to ensure timelycollections and low DSO. Careful receiv-able aging analysis is a must, as is follow-up collections on overdue accounts. Formany companies, exceptions such asbilling disputes and past-due accountscan constrain cash flow, drive up DSO,and increase the risk of reduced profit-

ability due to a bad debt write-off.

With external financing, either fromcapital markets or commercial banks,increasingly difficult to obtain, companiesmust rely on their commercial cash flowsto provide adequate cash and liquidityto fund their normal operations. This

places greater emphasis on how com-panies manage the main source ofcommercial cash flows: their accountsreceivable (AR) pipeline. (This assumesa company sells to its customers onaccount, rather than receiving paymentat the point or time of purchase.) Thegoal is to accelerate the cash conversioncycle by ensuring that accounts receiv-able are converted to cash as quickly aspossible.

To optimize the order-to-cash cycle,companies must review all aspects ofthe cycle to ensure the proper steps aretaken to protect liquidity. Since most firmsdon’t have the option of “stretching”their payables due to the risk of alienat-ing suppliers, their primary option is tofocus on their order-to-cash cycle. Toensure the health of their commercialcash flows, many firms are extending thedefinition of the order-to-cash cycle toencompass the up-front customer cred-it decisions, because cash-flow risks

can be managed before a sale is made.

THE CHALLENGE TO KEEP COMMERCIAL CASHFLOWS HEALTHY MANAGING THE ACCOUNTS RECEIVABLE PIPELINE

5SAP Thought Leadership – Technology Solutions for Improving Cash and Liquidity Management


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Billing disputes can be particularlyproblematic. Even in relatively goodeconomic times, studies have shownthey can tie up as much as 25% of acompany’s accounts receivable. Thisis particularly troubling during an eco-nomic downturn when other factors arecontributing to receivables aging andrising DSO. What makes disputes so

problematic is the disjointed internalcommunication involved in resolvingthem. Dispute or collections coordinatorstypically have only the customer’s sideof the issue to work with. To solve theproblem quickly, they need to verify the

customer’s claim with coworkers insales, shipping, billing, or operations toget to the bottom of the issue. Back-and-forth e-mail and telephone commu-nications are increasingly ineffectivedue to the time lag involved in locatingthe necessary information to resolvethe issue quickly. Technology can playa significant role here. Enterprise soft-

ware applications can help streamlinethe receivables cycle by consolidating vital information and enabling employeesacross the company to collaboratemore effectively to resolve past-dueaccounts and billing disputes.

Two key obstaclesstand in the way ofextending the view into

the financial value chainand obtaining up-to-the-minute data on cashrequirements and bal-ances: data integrationand spreadsheets usedto manage forecasts.

6 SAP Thought Leadership – Technology Solutions for Improving Cash and Liquidity Management


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Forecasting, control, and stewardshipof a company’s cash flows are vitalfunctions performed by the corporatetreasury department. To more preciselymanage the company’s cash and liquidityrequirements, the treasury department

must have accurate and timely visibilityinto the company’s sources and usesof cash to improve forecasting and theability to take action on emergentissues.

Optimal cash management requirescomplete visibility into all incoming andoutgoing payment flows. Traditionally,treasury departments have focusedmore narrowly on areas of cash, liquidity,and risk management. However, due to

the increasing importance of commercialcash flows as companies’ primary sourceof liquidity, many treasury departmentsrequire a more comprehensive view toinclude all aspects of the financial valuechain – the customer-facing and supplier-facing business processes that representthe sources and uses of a company’scash. This is very important to theirability to better manage short-term cashrequirements. Cash forecasts typicallyutilize data on sources (such as AR,investment income, and payments from

subsidiaries) and data on uses (such asaccounts payable [AP], payroll, debtpayments, and payments to subsidiaries).However, greater forecasting precisioncan be achieved by gaining visibility into

processes and data sources “upstream”or “downstream” of the typical sourcesand uses applications. For example,applications such as sales-order man-agement systems and purchase-ordersystems contain critical data on trans-

actions that will eventually find their wayinto AR and AP, triggering a paymentinflow or outflow.

Two key obstacles stand in the way ofextending the view into the financial valuechain and obtaining up-to-the-minutedata on cash requirements and balances:data integration and spreadsheets usedto manage forecasts. Data integrationis a critical obstacle to accessing theinformation required to build a cash

forecast, especially for short-termrequirements. To get the informationthey need to gain visibility into cash

requirements, treasury analysts mustgather data from a number of differentsystems that contain varying data anddata formats. These include AR and AP systems as well as treasury man-agement and cash and bank ledgers.

If the goal is to extend the forecast’stime horizon, additional data sourcessuch as sales-order management andpurchase-order management systemsare required. Either way, informationcan be very labor intensive and timeconsuming to locate; treasury analystscan spend over half of their time simplygathering data. Complicated informationgathering and modeling takes a longtime.

In today’s environment, where treasurersmust make critical decisions quickly, theinformation-gathering time lag can be

VISIBILITY INTO SOURCES AND USES OF CASHGAINING A COMPREHENSIVE VIEW ACROSSTHE FINANCIAL VALUE CHAIN

Downloading electronic bank statements directly to acompany’s cash management systems – skipping thespreadsheets – significantly reduces reconciliation timesand provides a more real-time view of cash balances andtheir location. With greater visibility comes the ability to

more precisely match sources and uses of cash, allowingtreasury professionals to improve decision making, actquickly on cash requirements, and invest surplus cashfor optimal returns.



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a significant liability. How can theinformation-gathering cycle be stream-lined? It begins with integrated systems.The more effectively treasury depart-ments can manage critical informationin enterprise software applications, the

shorter their information-gatheringcycle will be. Many companies still usestand-alone systems and spreadsheetsto manage their information and producereports on which critical decisionsdepend. Real-time information feedsfrom systems that manage certain busi-ness functions can reduce informationlatency and reporting time lag. In addition,

electronic integrations with the compa-ny’s banks can also help. Downloadingelectronic bank statements directly to acompany’s cash management systems– skipping the spreadsheets – signifi-cantly reduces reconciliation times and

provides a more real-time view of cashbalances and their location. With greater visibility comes the ability to more pre-cisely match sources and uses of cash,allowing treasury professionals toimprove decision making, act quicklyon cash requirements, and investsurplus cash for optimal returns.

Often the costs ofexchanging data betweensystems is a very real

obstacle. Standardizedsystems from a single vendor can solve thedata integration problem.Further, financial reportingstandards often dictatethat systems managingfinancial transactions

interface directly withgeneral ledgers tomaintain data integrity.



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Particularly in difficult economic condi-tions, treasury departments want greatercontrol over their cash balances andthe receipt and disbursement of cashacross the company. Global companiestypically collect, bank, and disburse cash

from multiple locations across the world.Having pockets of cash in so many dif-ferent physical locations is problematicin that cash may not be quickly andeasily withdrawn or wired to meetpayment obligations in other regions.

Control over cash begins with visibility. As mentioned previously, achievinggreater control over cash balancesdisbursed across multiple geographiesbegins with the visibility provided by

electronic communications that link acompany’s banks and its enterprise cashmanagement systems. For companies with many collecting and disbursinglocations across multiple geographies,the requirement for daily or even intradayinformation on cash balances isimperative.

Electronic bank interfaces help eliminatemanual, paper-based processes bydelivering up-to-date bank data directlyto a company’s cash management or

accounting systems. This provides acritical edge in that importing electronicdata minimizes the need to manuallyreconcile bank data with internal systemsor rekey it from a bank portal into the

company’s cash management systemsfor the same purpose. The result isnear-real-time information and betterdecision making. For example, a com-pany in the energy business utilizeselectronic bank interfaces to download

balance data from its several banks intoits cash ledgers daily, where it is auto-matically reconciled. Before noon, thecompany’s treasury professionals havecomplete visibility into approximately96% of their cash and can make moreeffective decisions on how to employ it.

Once bank connectivity is established,companies can begin to make decisionsabout how they store their cash. Manyfirms are reevaluating whether or notthey want to maintain cash balances in

bank accounts in far-flung locations,centralize balances through cash pooling,or use a combination of both. Often firmsfind that keeping cash at the local levelhas disadvantages. For one, it places

an added burden on local accountingstaff that may not have cash manage-ment expertise. Fragmented cash bal-ances usually prevent the companyfrom maximizing investment returns onexcess cash balances. Accordingly,

many firms have chosen to centralizetheir cash management through physicalor notional cash pooling. To do this, legalentities in other locations transfer theircash to a centralized treasury functionthat manages the cash in an internalaccount on their behalf. This enablestreasury departments to have greatercontrol over cash balances as well asover the timing, approval, and releaseof payments – either to external partiesor to subsidiaries. Additionally, by con-centrating cash, companies can earn

higher returns on debit balances, nego-tiate better rates on debit balances,and reduce fees associated with cashtransfers.

INCREASED CONTROL OVER CASH ON HANDOPTIMIZING WITH ELECTRONIC BANK INTERFACES

In-house virtual banks help companies address thechallenges associated with managing fragmented cashbalances by placing the responsibility in the hands ofthose who are most qualified – the treasury professionals.

They also enable treasury to manage financing, investment,and hedging operations more effectively, resulting in greateroperating efficiencies and investment returns.



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that technology can play a significantrole in streamlining them.

While there can be a myriad of reasonsbehind them, billing disputes typicallyarise when either the amount on the

invoice is incorrect or there is a problem with the order. For the person handlinga dispute (either an AR or collectionsprofessional), the key to resolving itquickly is locating the information neededto validate the customer’s claim. How-ever, that information often residesoutside of the finance organization. Inan attempt to locate the necessaryinformation, the finance person typicallysends out a flurry of phone calls ande-mails to colleagues in other depart-

ments. Waiting for the response is what drives up the cycle time.

Enterprise dispute managementapplications first formalize the commu-nications chain through workflow andcollaboration functionality. Next, theyfacilitate the dispute processing byproviding everyone in the solution chain with access to all necessary supportingdocumentation such as invoices, pur-chase orders, and sales orders. Finally,by enforcing rules on handling times and

escalations, they ensure that everyone’sattention is focused on solving theproblem. The results can be dramatic.For example, using this technique, alarge U.S.-based chemicals companyreduced its average time to resolvedisputes by 29% and the amount of working capital tied up in billing disputesby 25%. It also achieved significantreductions in DSO.

Exchanging Data Efficiently

Technology can also play a significantrole in helping companies gain bettercontrol over their cash. Global compa-nies find that having cash balances in

several regions can make it difficult tocontrol and access them. In addition, nothaving up-to-date visibility into thosebalances significantly reduces the trea-sury department’s effectiveness in bothmanaging cash and putting it to work.For most companies, visibility begins with the ability to exchange informationelectronically with their banking partners.Importing electronic bank data directlyinto cash management systems cansignificantly reduce the time it takes to

develop a clear picture of how muchcash is available and where it’s located.

Along with its benefits, electronic bankconnectivity also comes at a cost. Aseach bank uses proprietary systemsand data formats, it places a burden onthe company to interface banking data with internal financial systems. TheSociety for Worldwide Interbank FinancialTelecommunications (SWIFT) estimatesthat a single custom-built interface cancost upward of US$25,000 to build and

much more to maintain. Here, standardscan help. As more banks adopt open,Internet-based standards for connectivity,the cost of building and maintainingelectronic interfaces becomes moreeconomical. Organizations such asSWIFT are pioneering data standardssuch as ISO 20022 that will helpnormalize financial data file formatsand make it easier for companies

BETTER LIQUIDITY AND CONTROL WITHTECHNOLOGY MANAGING BILLING DISPUTES,DATA EXCHANGE, AND CASH FORECASTING

SAP’s approach to helping companiesmanage their cash and its sources anduses begins with the most criticalsource of cash: a company’s commer-cial cash flows. Our experience withmany customers across the globe indi-

cates that this starts with managing theup-front customer credit decision moreeffectively – particularly for companies who sell to other businesses.

As companies struggle with the effectsof the global economic slowdown, theirability to fulfill their payment obligationsto their vendors may become compro-mised. The selling company must care-fully evaluate each potential sales orderfor its inherent repayment risk – without

unnecessarily delaying the sale. Theeffect on cash flow can be significant.Our research shows that companies thatdiligently manage their up-front creditdecisions enjoy DSO of 40% less thantheir peers – in addition to realizing sig-nificant reductions in bad debt write-offs.

Managing Billing Disputes

Gaining greater control over the ARcycle can also help companies improvecash-flow velocity. One particular issue

that plagues the AR cycle and drives upDSO is billing disputes. In the best oftimes, a company with a quarter of itscommercial cash flows tied up in billingdisputes has a problem. During aneconomic slowdown, with liquidity ata premium, the effect can be disastrous.With the concomitant rise in DSO,billing disputes unnecessarily slowcash generation. The good news is



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Today many treasury departmentsstruggle with spreadsheet-based pro-cesses and specialized systems thatrequire significant manual effort to man-age. The resulting automation gaps anddata integrity issues require treasury pro-

fessionals to spend considerable timegathering, reconciling, and rekeying data.The SAP® ERP Financials solution andtreasury applications from SAP addressevery aspect of your financial supplychain management and treasury func-tions. Powerful analytics enable treasuryand other finance professionals to obtaintimely and accurate information for effec-tive financial decision making. SAP ERPFinancials also integrates fully with theSAP General Ledger application to sup-

port international financial reportingrequirements and regulatory compliance.

The SAP Treasury and Risk Managementapplication helps you make more effec-tive decisions utilizing timely informationon current market conditions.

The SAP Cash and Liquidity Managementapplication enables you to forecast andmanage liquidity more effectively by accessing sources and using data frommultiple systems.

The SAP In-House Cash applicationenables you to improve control over cashand liquidity and gain greater efficiencyby centrally managing cash and pay-ments on behalf of your subsidiaries.

SAP Integration Package for SWIFTenables companies to consolidatedisparate bank integrations into a single,standards-based gateway to over 8,000global banks.

The SAP Bank Communication Man-agement application helps streamlinepayment processing, strengthen com-pliance, and achieve straight-throughprocessing across multiple banks.

The SAP Credit Management applica-tion enables faster and more accuratetrade credit decisions both at the initialapproval and in the continual monitoringof account relationships.

The SAP Dispute Management appli-cation enables faster resolution ofbilling disputes by streamlining internalcommunications and collaboration andthrough more effective informationmanagement.

The SAP Collections Managementapplication helps collections profes-sionals to be more effective in prioritizingand processing past-due accounts,enabling faster resolutions and reduc-

tions in DSO.

To Learn More

To learn more about how SAP can help your enterprise better manage cashand liquidity, please visit www.sap .com/usa/solutions/business-suite /erp/financials.

EFFECTIVE CASH AND LIQUIDITY MANAGEMENT WITH SAP® SOLUTIONSSTREAMLINING TREASURY AND FINANCIAL SUPPLYCHAIN FUNCTIONS


http://www.sap.com/usa/solutions/business-suite%20/erp/financialshttp://www.sap.com/usa/solutions/business-suite%20/erp/financialshttp://www.sap.com/usa/solutions/business-suite%20/erp/financialshttp://www.sap.com/usa/solutions/business-suite%20/erp/financialshttp://www.sap.com/usa/solutions/business-suite%20/erp/financialshttp://www.sap.com/usa/solutions/business-suite%20/erp/financials


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SAP Solutions for Improving Cash and Liquidity Management

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