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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

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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Further reading

Books:

  • 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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