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 dif- ferent 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 pay- ments 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.