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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

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.”

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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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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