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Home > Cash Flow Management Best Practice > Best Practices in Cash Flow Management and Reporting

Cash Flow Management Best Practice

Best Practices in Cash Flow Management and Reporting

by Hans-Dieter Scheuermann

Executive Summary

The article compares classical ex post Cash Flow Reporting with modern ex ante Cash Flow Analysis & Management. It sets focus on integrated Cash Management and Cash Flow forecast and explains how integrated Data Management works. Insights in Optimization of Financial Supply Chains complete the picture.

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Introduction: Benefits of Integrated Cash Flow Information

With margins getting squeezed, the optimized use of the resource known as capital has never been more important for companies. At the same time, the globalization of the markets means that new risks must be hedged due to volatile currencies. Risks from interest rates, supply, and quality must become transparent. Customer and vendor credit risk with their link to dependent ‘risk family trees’ after the subprime crisis is obvious. Company performance hinges to a great extent on an efficient and effective internal treasury. Managers need to access accurate company data at the “push of a button,” complete transparency and disclosure of risk factors, and integration with all relevant business processes.

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Cash Flow Reporting

The importance of cash-flow management with the components of cash-flow reporting and cash-flow monitoring has changed dramatically. Cash- flow monitoring has been an important part of managing a company for years, but it always was an ex-post view on the balance sheet. The structure was defined by legislation. So, IAS7 defines indirect cash flow with:

  • Annual net profit /loss

  • Cash flow from operating activities

  • Cash flow from investing activities

  • Cash flow from financing activities

representing the cash flow. So, cash flow reporting is an established part of a corporate’s period end reporting.

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Cash Flow Accounting and Liquidity Planning

Cash-flow reporting is aided by cash-flow accounting, which records changes in cash flows directly. Incoming and outgoing payments of liquid funds, such as cash in hand and bank savings, are analyzed in real time and recorded according to their cash flow classes in revenues and expenditures.

The primary task of cash accounting is to provide information on a corporate’s solvency and internal financing potential. It delivers the actuals and is, therefore, the basis for cash flow analysis and liquidity planning. (Liquidity planning, and its potential integration with sales, personnel, production and investment plans, is beyond the scope of this article.)

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Integrated Cash Flow Management

Modern cash-flow management is based on an ex-ante principle with current information on the cash position and short/medium-term cash forecast. This article focuses on the integration of cash-flow management and optimization of working capital by means of financial supply-chain management.

Integrated Financial Infrastructure

As integrated IT systems map the entire logistical and accounting business process, in terms of its impact on liquidity as well as its risk, they provide crucial benefits for short-term and medium-term liquidity management. Each business transaction is still processed in the company department to which it is functionally assigned. However, different integration levels are updated and aggregated in the background, so that the information can be viewed by the relevant people in the appropriate form. These levels are:

  • Integration of values and quantities

  • Integration of deadlines and time requirements

  • Integration of commitments and availabilities

  • Cash-flow integration

This means, for example, that all the stages in the cash-relevant business processes in an integrated accounting system are evaluated in real time, and the expected cash flow can be forecast using information that is always up to date. This is shown in the example of the sales order–invoicing–incoming payment process chain (Figure 1)below . In the sales department, the order is managed using a purely logistical approach.

At the same time, the forecast for the expected cash inflow runs in the background, based on the agreed delivery data and terms of payment. Every commodity transaction change that results in a change to the value (through delivery quantity, price, or term of payment) or to the forecast cash-flow date is immediately and automatically updated in the cash forecast.

When the order is billed, the actual terms of payment and billing amounts as well as the customer’s payment history (for example, taking advantage of discounts, tendency to delay payments) are used. This makes the forecast even more accurate. In the cash forecast, the updated values appear in the forecast from invoices process step.

When the actual payments arrive from the customer, for example, as checks, the cash forecast is updated again, this time with the agreed valuation date at the presenting bank. This example shows just how much transparency in terms of cash flow and risk (according to currency, countries, or creditworthiness of customer groups) can be achieved. This forecast accuracy offers great opportunities for intra-enterprise risk netting and managing short term financial transactions.

Integrated Business Partners of Supply & Delivery Chain

Like the tight integration of commodity transactions in the logistical supply chain, the exchange of accounting and financial data also becomes more important. By merging traditionally separate financial functions such as accounting and treasury, financial information is obtained. This means that payment advice information, particularly from large customers, is integrated into active cash management at an early stage—and before the actual payment is received—so that planning can be done using reliable data. For the day-to-day processing of accounting functions, data is passed on with the required level of detail, and with the partner assignment characteristics and references, using electronic payment advice notes, and then automatically processed using the recipient’s IT system. Standardized encryption and message standards (for example, REMADV in EDIFACT and now XML SEPA Bank Transfer Standards) enable this rationalization at an international level. Electronic connectivity thus becomes an important qualification criterion when companies choose their vendors.

Integrated Bank Partners

Whatever applies to partners in commodity transactions applies to an even greater extent to the bank—the partner in financial transactions—because here, a financial transaction must be up-to-date and secure for it to be successful. The company can thus participate in the information services offered in the area of financials and, at the same time, meet the need for information required by an active in-house treasury. Electronic communication with the financial partner ensures market transparency and the availability of up-to-date external market data for the company’s own computer systems. In addition to providing information on financial market data and the company’s own offering, day-to-day processing in money-market and foreign-exchange trading, as well as financial transactions for financial assets and raising cash are predestined for the electronic exchange of information. The flow of information in a money-market transaction is used here as an example:

Money market – payment order – (confirmation) – account statement

Performing a money-market transaction from quotation through to conclusion is still supported for the most part by traditional means of communication such as telephone, telex, and fax. With electronic connectivity, the transaction can be completed more reliably. FOREX marketplaces, such as “360°” in Germany, in which the bank customer triggers the automatic execution of money-market transactions, are becoming more and more relevant. The electronic payment order with non-repudiation status management enables financial transactions to be executed in a timely manner within the planning and value-date deadlines. Reference information is sent with the order and, with confirmation from the bank via the account statement, this information results in reduced administration expenses. Automated controls ensure that the information flow complies with security regulations.

Integrated Cash Management & Treasury and Accounting Within your Corporation

Powerful bank accounting functions are required as the basis for intra-enterprise financial controlling. Using a standardized, integrated data basis, processes optimized for accounting are combined with cash-management analyses. Highly developed bank accounting with detailed structuring using subaccounts (settlement accounts) is characterized by:

  • Administration on an open account basis;

  • Value-date-based recording of values;

  • The storing of parallel currencies;

  • Automated posting using automatic payment transactions;

  • Automated processing of money-market and foreign-exchange trading transactions in the treasury back office;

  • Automatic clearing using electronic bank transactions.

These functions enable the permanent reconciliation, balance-sheet assignment, and evaluation of all items, and are integrated with the automated processing of all payment transactions for the relevant cash and subledger accounts.

In addition, the following options exist for payment transactions:

  • Manual fast entry of bank statements with the option of clearing current account items;

  • The entry, management, and deletion of payment advice notes as value-date-based (pre-) information for all payment orders and/or incoming payments in the form of incoming checks, bank statements, and bill of exchange discounting;

  • The creation of check deposit lists with posting proposal, management of outstanding checks, and returns monitoring

  • Billing holdings management and commitment management

  • An interest scale calculation with automatic interest settlement and costing-based interest calculation.

The key factor here is that the bank accounting functions are integrated with the general ledger. The networking of cash flows and the customer and vendor processing that is closely linked with this create the integrated database for cash management and forecast, and financial planning.

In the interfaces to modern electronic banking services, manual entry work is further reduced to get closer to the goal of being able to plan ahead as early as possible. Automated controls require human intervention only if defined rules apply or in defined exceptional circumstances.

Specifically, this leads to a key improvement in organizational processes through:

  • Automated posting of the account statement;

  • Statement entry with automatic management of the settlement accounts;

  • Transfer to automatic incoming payments processing in accounts receivable;

  • Automatic posting of the costs of the payment transaction (bank charges, fees);

  • Maintaining foreign currency accounts with automatic posting of exchange rate differences.

This enables payment transactions in many areas to be processed more securely, faster, and more effectively. Automatic cash concentration represents a considerable improvement to short-term balance management and planning in the area of bank accounts. Financial transactions can be configured using advice notes and can thus be planned in advance—individually and to the exact day—for the participating accounts.

The following specific features are especially worth mentioning:

  • Consideration of payment methods and core deposits;

  • Cross-company summaries;

  • Multiple levels enabled by grouping accounts;

  • Possibility to make manual corrections;

  • Creation of correspondence.

Of course, postings are also made directly to the general ledger accounts, if posting-relevant clearing activities are involved.

In the cash position, you can see all incoming and outgoing payments updated on a daily basis. It comprises all bank-related transactions, differentiated according to the sources of information. To create a planning- and value-date-based cash position over the short term (nought to five days), the actual data must be entered dependent on the value date. This is ensured by integrating bank accounting.

Short-Term and Medium-Term Cash Management and Forecast

In financials, the tasks of adequate and orderly accounting merge with the functions for controlling and safeguarding liquidity and profitability. By including all of a company’s payment-related and planning-relevant transactions, and consolidating them across all the corporate functions and units, the cornerstone is set for sound evaluations and analyses.

As an integral part of the application software, Treasury is integrated with the logistical and financial processes. Based on the financial results (banking, accounting and receivables, and collections management), the disclosure of the actual bank balance leads to the cash position.

If you take this observation further and include:

  • The expected cash flows from completed or planned capital-market-driven foreign-exchange transactions;

  • The interest-rate adjustment schedules/repayment schedules from granted and received loans;

  • The receivables and payables;

  • The planned items available;

  • The open sales orders; and

  • The current purchase orders.

you can extend liquidity forecasting, step by step, into the medium term. As a result of modern transmission technologies and end-to-end partner relationships between the customer, vendor, and bank, the information is available at short notice to any desired degree of detail (for example, automatic transfer and clearing of payment advice notes). The displays in cash management and forecast can be set to any degree of detail and show the development of:

  • Liquidity as a whole;

  • The planned amounts;

  • The risk classes.

in local and foreign currencies.

Modern financial supply-chain management presents a good opportunity to test traditional payables and receivables processes in accounting, and to design a meaningful and affordable distribution of tasks as part of an integrated approach to process optimization in O2C (order to cash) and P2P (purchase to pay).

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Optimization of Working Capital through Financial Supply Chain Management

The CFO is at the heart of complex internal and external relationships that need to be connected intelligently. As the company’s integrating force, they must also take care of all the individual aspects of the financial supply chain (FSC). This chain encompasses all processes and transactions that have a direct impact on cash flow and working capital. As the diagram below illustrates, the financial supply chain starts with the selection of business partners and continues with the payment process, drawing up reports and analyses, and making cash-flow forecasts.

Effective FSC management can be a great blessing for the CFO, because it can positively influence customers, financial forecasting, and working capital. The advantages of successful FSC planning for your company include:

  • Improved inventory monitoring and cash-flow management;

  • Reduction in the working capital by 20% and more;

  • Lower installment payments for the required working capital;

  • Earlier identification of problems with business transactions;

  • More efficient, automated financial systems.

Until recently, the individual financial functions were usually regarded by CFOs not within the context of an integrated supply chain, but rather as separate entities. An integrated approach enables better resource management and makes it easier to adjust the financial supply chain to operational requirements. Such an approach offers CFOs the following benefits:

  • Integrated cash-flow management;

  • More exact profitability forecasts through more up-to-date and precise information about customers;

  • Better use of the working capital and avoidance of an expensive working capital float;

  • Greater drilldown depth in financial reports;

  • Faster and more efficient resolution of payment problems;

  • Comprehensive overview of business partners;

  • Improved support for strategic planning.

Moreover, an integrated financial supply chain accelerates the processes between the vendor and the customer, which represents a decisive competitive factor in today’s transient business environment.

Financing and invoice processing are usually the most expensive factors in financials, and tie up large amounts of capital. Traditional ERP systems can accompany these processes, but are often not yet integrated with the related systems to customers, vendors, and banks. SAP® Financial Supply Chain Management (FSCM) is a concept that encompasses the entire process—from selecting vendors and customers, through the payment process, reporting, and analysis—in other words, all processes that directly have an impact on cash flow and working capital, and not just within the company, but also throughout the business partner network. A Swiss SAP customer stated: “The SAP solution supports, improves, and optimizes the business processes in the financial supply chain by drastically cutting the days of sales outstanding (DSO), and reducing the cost of finance, ultimately optimizing the working capital.”

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Case Study

A Swiss pharmaceutical company provides a strong example of modern cash-flow management and reporting beyond traditional boundaries.

A centralized treasury function based on SAP Technology Infrastructure was not the subject of these experiences, but helped as an enabler. The company saw treasury as a central service provider with the goal of cost reductions and efficiency gains for finance and IT.

The core tasks are providing optimal funding and safeguarding business from forex exposures.

In relation to Bank Relationship Management they achieved the goal of reducing bank fees and increasing automation in Bank Communication.

The ease of communication with bank partners, business wise and IT wise was an additional value add.

In protecting the internal supply chain from external challenges (such as financing fees and exchange rates) they secured the Supply Chain Finance.

The company considers Treasury as a financial supply-chain-oriented one and its inhouse bank concept is based on the management mission, which sees the Treasury as a service provider for the business, its vision to partly internalize business of external banks, and its strategic decision for central Treasury to run SAP and “pick up your customer at his front door”.

In 2004, the company started the global rollout of InHouse Bank with key enablers of physical cash pooling with non-resident and Bank streamlining to three global cash-management banks with strong IT automation and standardization.

The InHouse Bank achieved classical benefits in Cash pooling by more than 150 affiliates participating with 42 countries, 34 currencies

  • by Interest savings > CHF 5 million

  • by ST Cash reduced by 80%.

Intercompany payments initialized (volume > CHF22 billion pa)

  • Interest savings and lower bank fees > CHF1 million

Forex hedging internalized (volume > CHF 30 billion pa)

  • Netting gains & margin savings > CHF 1 million

Streamlined Banking

  • Fewer bank accounts, fewer Treasury HQ headcount etc.

Additional benefits for the financial supply chain included:

  • Automation of bank postings and Automated EBS upload and Payment File- upload host to host

  • Intercompany invoicing and reconciliation upgrade by currency streamlining + elimination of local FX P&L, automation of payment allocation (850’ 000 invoices p. a.)and local finance headcount reduction

  • Communication with banks (IT) through elimation of local EBS interfaces, process automation and standardization. Payment interfaces are standardized and file upload is automated.

On their radar screen, they define the outlook towards a payment and collection factory, with further benefits for the financial supply chain. Cross-border payments can be turned into domestic payments, saving bank fees, Forex spreads and value-dated, as well enabling the closing of more than 100 bank accounts. IT complexity can be reduced—no more interfaces from local SAP to banks, routing of electronic payments and collections can be done via IHB, and payment workflow can be streamlined and concentrated onto SAP. Centralized cash flow becomes information and transactional-wise. A centrally controlled standardized disbursement channel aids compliance & security when it is Swift & SAP-based.

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SAP FSCM can greatly simplify financial supply-chain management in an organization. With this set of applications, companies can more easily address the multifaceted challenges of managing cash flow and optimizing working capital—two critical elements for successful financial performance today.

The outcome of the experience of this Finance Best Practice Network (see also the article, Advantages of Finance Best Practice Networks) shows clearly that traditional cash-flow reporting is “out” and only seen as a complementary communication to stakeholders with no impact on the cash-flow management on an operational level, which is key in today’s turbulent financial environment.

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Further reading


  • Kerber, Stephan, and Dirk Warntje. Cash Accounting and Cash Flow Planning with SAP Liquidity Planner. Dedham, MA: SAP Press, 2006.
  • Pfaff, Donovan, Bernd Skiera, and Juergen Weiss. Financial Supply Chain Management. Braintree, MA: Galileo Press, 2002.
  • Reid, Cedric, and Dieter Scheuermann. The CFO as Business Integrator. Hoboken, NJ: Wiley, 2003.


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