Managing Cash Flow in Times of Crisis

SAP Executive Insight Leadership in Times of Crisis: A Series

MANAGING CASH FLOW IN TIMES OF CRISIS SOLUTIONS FOR IMPROVING CASH AND LIQUIDITY MANAGEMENT Cash is the lifeblood of any business, and with the turmoil in the financial markets, many companies are struggling to ensure the cash flow and liquidity needed to maintain normal operations. Once primarily the domain of cash managers and treasury managers, today’s critical cash-flow and liquidity concerns are demanding executive-level attention.

With credit restrictions and an overall decline in demand for most goods and services, chief financial officers are witnessing business drivers change from sales growth to liquidity coverage – and from return-on-capital-employed to cash-to-cash cycles. Now, liquidity flexibility must be protected first and foremost. Long-term goals will not be achieved if short-term liquidity obligations cannot be met.

Against this backdrop, most companies must increasingly depend on their commercial cash flows to sustain operations. This has critical implications for executives across all industries and geographies. By answering the following questions, this SAP Executive Insight explores specific actions companies can take to ensure high cash- flow velocity and vital liquidity: • How can I protect the health of my commercial cash flows? • How can I gain better visibility into sources and uses of cash? • How can I increase control over my global cash balances?

2 SAP Executive Insight – Managing Cash Flow in Times of Crisis EXECUTIVE SUMMARY AT A GLANCE

Protect Your Cash and Liquidity Leadership Makes the Difference paring the actual performance of With the global economy in crisis, com- in Times of Crisis companies across a wide range of panies are seriously challenged to main- sizes and industries. tain desired profit margins and generate One thing is for sure: with every eco- the cash and liquidity required to fund nomic crisis comes opportunity. Some SAP conducts benchmarking and normal operations. There are strategies, companies will go from good to great, best-practice studies in many busi- however, that can help you cope: and others will just fade away, making ness areas. Analyzing the perfor- • Ensure healthy cash flows. Because room for more innovative competitors. mance of industry leaders offers it is the company’s primary source of To be among the winners, executives executives the metrics needed to cash, you must manage your ac- should strongly consider best practic- assess their own company’s past counts receivable to make sure that es that provide a balanced approach successes and guide today’s crucial the amount and timing of critical cash to moving forward by including both decisions. For example, benchmark- flows are not compromised. For cost reductions and smart invest- ing reveals that companies with the example, you can accelerate the cash ments. SAP has developed a series of capability of making real-time credit conversion cycle with process Executive Insights that highlight strat- decisions have on average 40% low- improvements that streamline the egies your business can use imme- er days sales outstanding (see the receivables cycle. diately to run more efficiently and figure). In addition to financial best • Gain greater visibility into the improve the customer experience – practices, executives would be well sources and uses of your cash. even in today’s economy. advised to consider the efforts in Get a complete view of your entire recent years to optimize the physi- financial value chain. The resulting Benchmarking – The Facts of cal supply chain. Cash cycles have insight can improve your ability to the Matter similar upstream and downstream forecast cash and optimize overall implications. cash management. The insights presented in this paper • Increase control over cash on hand. are based on decades of experience For more information about the SAP® Manage the cash you have to provide in helping our customers become benchmarking and best-practices maximum value for your business. best-run businesses. An important program, visit www.sap.com/usa Such control, however, is particularly tool in these efforts is the understand- /solutions/benchmarking or contact challenging for companies with global ing gained from measuring and com- [email protected]. operations that have cash balances fragmented across many banks in different geographies. Get better con- Days Sales Outstanding Versus Best-Practice Adoption R2=82% nected to your banks, and pursue 70 60.0 59.0 the best cash strategies for your 60 50 41.0 41.8 38.5 company. 40 30 20 The right technology can help your Sales Days Outstanding 10 company achieve these objectives by 0 streamlining the critical business pro- 1 2 3 4 5 Average Overall Best-Practice Adoption Score cesses that keep your cash flowing. (1 = No coverage, 5 = Full coverage) Best practice: Credit decisions can be made in real time based on existing credit lines and a customer’s credit rating.

Figure: How Real-Time Credit Decisions Impact Days Sales Outstanding

SAP Executive Insight – Managing Cash Flow in Times of Crisis 3 ENSURING THE HEALTH OF COMMERCIAL CASH FLOWS BEFORE AND AFTER THE SALE

Accelerate the Cash Conversion expanding the order-to-cash cycle to • Monitor outstanding accounts receiv- Cycle become a “credit-to-cash” cycle by tak- able closely to drive timely collections ing the following steps: and ensure low DSO. Make sure your With external financing from capital mar- • Add an up-front credit evaluation. For systems alert you as problems arise. kets and banks increasingly difficult to most companies, this type of credit • Conduct careful receivable aging anal- obtain, companies must rely on their evaluation is done manually through ysis. For many companies, exceptions commercial cash flows to provide ade- the judgment of seasoned analysts. such as billing disputes and past-due quate cash and liquidity to fund normal However, human effort alone is often accounts constrain cash flow, drive up operations. Since most firms don’t have inadequate to keep up with credit DSO, and increase the risk of profits the option of “stretching” their payables request volumes – and this approach due to potential bad-debt write-offs. due to the risk of alienating suppliers, a might fail to spot early signs of a Consider research showing that even company should focus attention on its potential customer’s deteriorating in relatively good economies, up to order-to-cash cycle. This in turn places financial situation. In addition, a selling 25% of a company’s accounts receiv- great emphasis on how companies company must evaluate each credit able can be tied up in billing disputes. manage the main source of incoming decision in terms of its cumulative In this economy, it’s critical that you cash flow – their accounts receivable effect on exposure to the buying com- can analyze your exceptions easily pipeline.1 pany. This is particularly difficult for and prioritize your follow-up. global companies or those selling • Systematically pursue follow-up col- To optimize the order-to-cash cycle, through several channels. Sophisticat- lections on overdue accounts. Dis- your company must: ed analytic applications can augment jointed internal communications can • Extend your order-to-cash cycle to internal skills and are key to gaining hamper the resolution of past-due focus on the “up-front” credit deci- greater control over trade credit risk. accounts and billing disputes. Typical- sion when selling to customers on • Do not rely on a single before-sale ly, dispute and collection coordinators account. This will help ensure low evaluation. You should continually must verify details of the claim with days sales outstanding (DSO) and monitor the customer base for signs coworkers in sales, shipping, billing, prevent bad-debt write-offs. of worsening financial conditions and or operations to get to the bottom of • Ensure that accounts receivable are make adjustments to your credit poli- the issue. Ensure that everyone has converted to cash as quickly as possi- cies accordingly. Is a customer taking access to the same view of the prob- ble once the sale has been made. longer to pay? Is its financial condition lem, and provide reminders and work- showing other signs of stress such as flow capabilities to push for timely Adopt a Credit-to-Cash Model rising days payables outstanding resolution. (because it is stretching out customer You can manage cash-flow risks even payments to preserve cash), growing Technology can help streamline the before a sale is made. Here’s one exam- inventories, or decreasing cash bal- entire receivables cycle by consolidating ple. This challenging economy may well ances? Ensure that you have visibility vital information and enabling employ- affect a company’s ability to meet cur- to these kinds of issues before they ees across the company to collaborate rent obligations, such as payments to affect you. more effectively. vendors. Your customer may delay payments and drive up DSO, or default on Ensure Liquidity After the Sale payment altogether and trigger a bad- debt write-off. For the selling company, After the sale, companies must ensure this means increased risk. To better the customer’s payment is received and manage this risk, many companies are converted to cash quickly:

1. This assumes the company sells to its customers on account, rather than receiving payment at the point or time of purchase.

4 SAP Executive Insight – Managing Cash Flow in Times of Crisis GAINING VISIBILITY INTO SOURCES AND USES OF CASH BETTER FORECASTING AND CASH UTILIZATION

End-to-End Views of the Financial Obstacles in the Way systems and spreadsheets used to Value Chain manage their information and produce Treasury analysts need access to up-to- reports on which critical decisions Forecasting, control, and stewardship the-minute financial data to assess cash depend. Real-time information feeds of a company’s cash flows are vital requirements and build more accurate from integrated systems can reduce functions. And to manage cash and cash forecasts – especially for short- information latency and reporting time liquidity precisely, corporate treasury term requirements. Often standing in lag. In addition, real-time information departments require accurate and time- the way are: feeds, via electronic bank integra- ly visibility into the company’s sources • A lack of data integration. In many tions, that flow directly to a compa- and uses of cash. Lack of visibility, on cases, analysts must gather data from ny’s cash management systems the other hand, hinders forecasting and a number of different systems and in significantly reduce reconciliation prevents companies from taking imme- varying data formats. These include times and provide a near-real-time diate action on emergent issues and AR, AP, and treasury management view of cash balances and their opportunities. systems, as well as cash and bank location. ledgers. Moreover, if the goal is to • Ensure greater visibility to more pre- Traditionally, companies have focused extend the forecast’s time horizon, cisely match sources and uses of more narrowly on cash management. other data sources such as sales cash. This allows treasury profession- However, due to the increasing impor- order management and purchase als to improve decision making, act tance of commercial cash flows as the order management systems are also quickly on cash requirements, and company’s primary source of liquidity, required. invest surplus cash for optimal treasury departments need to: • Manual operations such as the use of returns. • Gain a more comprehensive view of spreadsheets to manage forecasts. the entire financial value chain. This Gathering information and performing includes the customer- and supplier- complicated modeling manually are facing business processes that repre- very labor intensive and time consum- sent the sources and uses of a ing. According to a leading authority company’s cash. Sources include on finance practices, treasury ana- accounts receivable (AR), investment lysts can spend up to 51% of their income, and payments from subsid- time simply gathering information. iaries. Uses include accounts payable (AP), payroll, debt payments, and Benefits of Integration payments to subsidiaries. This is very important to the ability to better man- Today treasurers must make critical age short-term cash requirements. decisions quickly. The information- • Achieve greater forecasting precision gathering time lag can be a significant with visibility into the processes and liability. How can we streamline the data that are upstream or down- information cycle? stream of these typical applications. • Start by integrating systems. Treasury For example, sales order manage- departments that manage critical ment systems and purchase order information in enterprise software management systems both contain applications can shorten their informa- critical data on transactions that tion gathering cycle. Further, compa- eventually find their way into AR and nies can eliminate stand-alone AP, triggering a payment inflow or outflow.

SAP Executive Insight – Managing Cash Flow in Times of Crisis 5 CONTROLLING CASH ON HAND A GLOBAL CHALLENGE

Get Closer to Your Money Establish the Right Cash Strategy Stef-TFE Group During difficult economic conditions, Once bank connectivity is established, Industry: Logistics service providers treasury departments want even more companies have more flexibility in their control over cash balances and the banking strategies. Now is the time to: Summary receipt and disbursement of cash • Rethink current approaches. For Based in Paris, Stef-TFE Group has across the company. This is particularly example, some companies find that three primary businesses – each with its crucial to global companies that typically keeping cash at the local level has dis- own organization and corporate culture. collect, hold, and disburse cash from advantages. It can place added bur- Together, these businesses provide multiple locations around the world. den on local accounting staff that temperature-controlled warehousing might lack cash management exper- and transportation for fish and other To achieve greater control over cash tise. Further, having pockets of cash fresh and frozen food products for balances: in so many different physical locations manufacturers, retailers, and food • Gain real-time visibility. For companies is problematic in that it may not be service professionals. The company and with accounts disbursed across multi- withdrawn easily or wired quickly its partners operate nearly 200 sites ple geographies, the need for daily or enough to meet payment obligations across France, Italy, Spain, Portugal, even intraday information on cash bal- in other regions. As a result, many and the United Kingdom. ances is imperative. firms are reevaluating whether to Results with SAP® Software • Get connected with electronic com- maintain cash balances in bank • Real-time management of collections munications that link a company’s accounts in far-flung locations, cen- and dispute processes banks and its enterprise cash man- tralize it through cash pooling, or use • Reduction in days sales outstanding agement and enterprise resource a combination of both approaches. of three days planning systems. Electronic bank • Concentrate cash. Many firms choose • Reduction in bad-debt write-off of interfaces help eliminate manual to centralize their cash management 10% rekeying of the same data from a through physical or notional cash • Improved cash flow bank portal into a company’s cash pooling. In this case, legal entities in management systems. They also other locations transfer cash to a cen- reduce errors and the need to manual- tralized treasury function where the ly reconcile bank data with internal cash is managed in an internal systems. account on their behalf. This enables “With the new functionality in treasury departments to have greater place, we have reduced days sales Delivering up-to-date bank data directly control over cash balances and the to a company’s cash management or timing, approval, and release of pay- outstanding by three days, accounting systems provides near-real- ments – either to external parties or improved the average dispute time information and enables more subsidiaries. By concentrating cash, effective cash decisions. For example, a companies can also earn higher resolution time, and trimmed company in the healthcare industry uses returns on debit balances, negotiate bad-debt write-offs by 10%.” electronic bank interfaces to download better rates on financing, and reduce data on a daily basis from its several fees associated with cash transfers. Bernard Jicquel, IT Project Manager, banks into its cash ledgers, where it is Stef-TFE Group automatically reconciled. Before noon, the firm’s treasury professionals have complete visibility into approximately 96% of their cash.

6 SAP Executive Insight – Managing Cash Flow in Times of Crisis MOVING AHEAD THE ROLE OF TECHNOLOGY

As companies struggle with the effects An important first step to solving these of the global economic slowdown, their challenges is standardizing on a unified ability to generate adequate liquidity to technology platform that provides a con- meet maturing obligations may be chal- sistent view of the end-to-end financial lenged. To manage successfully in this value chain, without the cost and pain of crisis, executives must gain: having to integrate multiple systems. • Better control over commercial sources of cash to ensure healthy Standardized systems solve the data cash flow. This means getting a han- integration problem. By aggregating dle on billing disputes and past-due data from many systems and data accounts to ensure low DSO and sources into a single repository, com- minimize bad debt. You must resolve panies can generate more accurate these exceptions quickly and effi- forecasts and resolve AR process ciently. In the best of times, having a exceptions more effectively. In addition, quarter of your commercial cash this approach helps organizations com- flows tied up in billing disputes is a ply with financial reporting standards. problem. During an economic slow- For example, systems managing finan- down – with liquidity at a premium – cial transactions must interface directly About the Authors the effect can be dangerous. with general ledgers to maintain report- • Stronger capabilities to accurately ing integrity. Chakib Bouhdary is chief value forecast cash. This is often a difficult officer of SAP AG. He is the founder task, because it requires the ability to Cash is the lifeblood of any business. of SAP’s value engineering frame- integrate data from across the enter- Integrated financial management tech- work. His mission is to make every prise systems that set cash require- nology provides the critical insights and SAP customer a best-run business. ments in motion. workflows that enable companies to Over the past six years, he has built • Greater visibility into and control effectively manage their cash through a world-class organization of over cash on hand. Executives must the current crisis and to build a solid professionals that is focused on manage their cash more effectively to foundation for future vitality. creating value along the entire IT ensure they know exactly how much investment cycle for prospects and customers. they have on hand, where cash balances are located, and how quickly Jim D’Addario is director of solution that cash can be accessed. Visibility marketing for the SAP® ERP into external cash balances is an Financials solution, responsible for important part of the cash manage- extending SAP’s leadership position ment equation. in enterprise financial management software. Prior to joining the software industry, he worked for a major global investment bank.

SAP Executive Insight – Managing Cash Flow in Times of Crisis 7 SUPPORT FROM SAP www.sap.com/contactsap ASSOCIATED PROCESSES AND SOLUTIONS

SAP supports end-to-end, integrated • The SAP Collections Management processes with built-in industry best application helps your collections pro- practices. Among these processes is fessionals be more effective in prioritiz- optimization of working capital. This ing and processing past-due accounts ensures the availability of adequate cash – enabling faster resolutions and reduc- flow and liquidity to fund business operations in days sales outstanding. tions. It combines rigorous forecasting • The SAP Treasury and Risk Manage- and liquidity management with effective ment application helps you make more management of all sources and uses of effective decisions using timely infor- cash such as receivables, collections, mation on current market conditions. customer credit, payables, payments, • The SAP Cash and Liquidity Manage- and investments. ment application enables you to forecast and manage liquidity more This process is supported by a variety of effectively by accessing sources and solutions, including the following: using data from multiple systems. • The SAP® Credit Management appli- • The SAP In-House Cash application cation enables faster and more accu- enables you to improve control over rate trade credit decisions both at the cash and liquidity. Gain greater efficien- initial approval and in the continual cy by centrally managing cash and pay- monitoring of account relationships. ments on behalf of your subsidiaries. • The SAP Dispute Management application enables faster resolution of billing disputes by streamlining internal communications and collaboration and through more effective information management.

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