SAP for Finance
A Treasurer’s Guide to Digital TransformationImprove Working Capital Management and Boost Your Cash Conversion Cycle
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Table of Contents
4 Managing Cash in a Digital Economy
7 Optimizing Working Capital: Better Cash, Better Operations, Better Performance
9 CraftingYourGamePlan:KeystoSuccess
© 2018 SAP SE or an SAP affiliate company. All rights reserved.
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Let’s talk about your corporate cash in a digital world – where it is, where it should be, and how you can use it to benefit your organization. It’s a story that begins with currencies and bank accounts and extends beyond your treasury and finance organization to your operations. In this brochure, you will learn how SAP can help you manage all aspects of your corporate treasury and improve operations across your business. As a corporate treasurer, your potential to thrive in a digital economy is limitless.
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and bank relationship management, as seen in Figure 1. In all of these areas, organizations have opportunities for improving operational efficiencies and financial health by optimizing where and how cash is used. Driving improvements in many of these areas will call for bridging the divide between siloed treasury tasks and operational functions in areas such as procurement and sales.
ZEROINGINONYOURPRIORITIESWhen crafting a business or process improve-ment strategy, the best starting points are your current challenges and corporate priorities. According to a recent PwC benchmark survey,1 CFOs’ priority lists include access to and man-agement of cash, currency fluctuation risks, capital structure, working capital requirements,
Managing Cash in a Digital Economy
Figure1:TheCFO’sPrioritiesforTreasury1
1. “The‘VirtualReality’ofTreasury–GlobalTreasuryBenchmarkSurvey2017,” PwC, January 2017.
Access to cash
Currency risk
Capital structure
Cash management
Debt management and covenants
Working capital
Bank relationships
Liquidity risk
Compliance
Governance and controls
Fraud prevention
0% 25% 50% 75% 100%
Relative score % CFOs including the item on their priority list 450
450
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FOCUSINGONYOURDIGITALCOREWe’ll begin with this basic proposition: by combining modern technology to improve cash management with consumer-like user interfaces, you can equip your staff members with new tools that minimize the time they spend on managing transactions and free up time on strategic tasks that positively impact your business. That means your personnel
can provide active counsel on risks facing the business, or serve as a valuable resource for mergers and acquisitions analysis. They can partner with sales and procurement to optimize payment terms in customer and supplier contracts. If you’re not doing this now, you’re missing an incredible opportunity to improve business performance.
Figure2:Treasury’sDigitalCore
Payment and bank communications
Financial risk management
Debt and investments
Cash and liquidity
TreasuryManagement
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For cashandliquidity, the focus is gaining mastery over your liquidity. Treasury solutions from SAP support you by providing historical cash-flow analysis, short-term cash positions, medium-term liquidity forecasts, and long-term liquidity planning functionality. By leveraging these tools, you can more easily identify surpluses for reinvestment and shortfalls in need of funding. By adding bank account management, you can reduce the manual overhead your staff expends in the tedious tasks of opening, closing, and updating accounts across your network of banks.
Speaking of banks, in the areas of payments and bankcommunications, simplicity and efficiency are the keys to success. The SAP® Multi-Bank Connectivity solution helps you streamline your bank communication channels through direct and cloud-based connectivity, giving you access to all of your relationships in a single cockpit. With simple workflows, the solution also helps you cut down the amount of time your staff spends reviewing, approving, and releasing pay-ments. The last piece of the puzzle is in-house banking, which helps simplify the ever-expanding webs of subsidiaries and bank relationships, cuts down on external transactions – and their related
fees, and supports netting between your different business units. The solution does all of this while keeping intercompany reconciliations accurate in real time.
For debtandinvestments, the goal is real-time visibility and monitoring. From knowing what is outstanding to keeping a careful eye on the inter-play between new debt and existing covenants, SAP solutions enable you to see everything in one place to avoid costly conflicts. From commercial paper and repos to derivatives swaps, bank loans, and letters of credit, all your information is tracked and available for you – with full compliance with applicable U.S. GAAP and EU International Financial Reporting Standards.
Finally, we can’t talk about a treasury without talking about risk. In the arena of financialriskmanagement, our focus is on integrating multiple information sources to provide you with a more comprehensive, real-time view of your risk profile. By providing this insight and enabling you to take swift action to mitigate identified risks, SAP gives you the tools you need to efficiently manage your foreign exchange, interest rate, commodity price, credit, and counterparty risks.
By combining modern technology to improve cash management with consumer-like user interfaces, you can equip your staff members with the tools that minimize the time they spend on managing transactions and free up time on strategic tasks that positively impact your business.
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For a corporate treasury, a key responsibility is deciding where to invest the organization’s cash. Money market funds may be top of mind, but a comprehensive strategy should also look at operational uses of cash in accounts payable, accounts receivable, and inventory that can deliver substantially greater returns with no risk. By using the cash conversion cycle as a framework, you can easily see the impact of operations on cash balances, returns, and risk: • Dayspayableoutstanding(DPO):Payables are an investment in your suppliers. Paying too soon, by setting standard terms shorter than your competitors, reduces your cash on hand and inhibits your ability to invest in areas that could yield a positive return. However, early payment can be strategic when it is made in exchange for a discount that yields greater returns than you could achieve elsewhere. Paying too late may bolster cash on hand, but it can also negatively impact your suppliers’ financial health and increase fulfillment risk. Optimizing DPO means finding the right balance between extending terms to competitive levels, accelerating payment to capture discounts, and even negotiating faster net terms to mitigate the risk of supplier default and nondelivery. Supply chain finance can also play a role, accelerating payment to suppliers by using attractive third-party financing, not your own cash.
• Dayssalesoutstanding(DSO): Receivables are an investment in your customers. Demanding payment faster than your competitors may cost you a sale, unless your price or quality differentiates you from the rest. Offering much longer terms than your competitors can lead to lower cash balances without a strong competitive justification. Accepting a cus-tomer’s early-payment discount offer can add cash to your bank account and is a smart move if the cost
Optimizing Working Capital: Better Cash, Better Operations, Better Performance
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Each of these elements provides the organization with a lever that frees up cash flow to invest in your business. Extending your DPO by paying later or shortening your DSO by either negotiating shorter net terms or collecting more efficiently increases available cash. Improving supply chain visibility and efficiency lowers your required inventory invest-ment, bolstering the amount of cash on hand.
You have choices on where to apply this extra cash. You can invest in an early-payment discount program, paying certain suppliers earlier to secure returns that typically range from 12%–24% APR. This is as risk free as a money market fund, with far superior return for this short-term use of cash. You can invest in strategic suppliers by offering them more favorable payment terms, with the goal of lessening your risk exposure in case of their default. Conversely, you can focus your investments in long-term priorities such as growth (by funding new store locations or new R&D activities), workforce improvement (through employee bonuses), or ownership (through stock buybacks or dividends). The choices are up to you. To take full advantage of these opportunities, however, you must think about operational activ-ities from the perspective of optimizing cash flow.
of that capital is preferable to your other fund-ing sources. Managing discounts on both the buy and sell side of your business can also offer an interesting arbitrage opportunity. Optimizing DSO means setting terms long enough to appeal to your customers and short enough to keep on par with your competitors – accelerating them when you can earn a greater return than you’re paying in a discount, and always collecting pay-ment promptly when due.
• Daysinventoryoutstanding(DIO): Inventory is an investment in your sales organization. Hold-ing too little means risking the ability to fulfill a new order on time. Holding too much means having less cash to deploy elsewhere, incurring ongoing carrying costs, and risking the potential for spoilage (for perishable items) or obsoles-cence (for nonperishables), which both com-promise or eliminate their economic value. Optimizing your DIO means having stock levels high enough to never lose a sale but low enough to minimize time-based loss. This means having full visibility of inventory and manufacturing capacity in your organization and throughout your supply chain, with an equal degree of visibility of inventory in transit.
By using the cash conversion cycle as a framework, you can easily see the impact of operations on cash balances, returns, and risk.
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items that they put off or can’t handle. This could require development of new skills to support a digitally driven enterprise. Plan ahead for profes-sional development and training, so that your team is ready to deliver on the promise that your technology investment makes possible.
SELLTHEVALUEBOTHUPANDDOWNExecutive buy-in without staff-level support leads to slow rollouts, poor adoption, and vanishing ROI. Staff support without executive buy-in means that your project may never get the funding it needs to deliver the value you had planned. It is easy to get lost in the technical details, but the human elements of transparency, open commu-nication, and collaborative planning can spell the difference between an initiative’s success or failure.
FINDATRUSTEDPARTNERThere are many solutions in the market that offer sourcing, procurement, or payables solutions that can assist in a digital transformation. There are not so many with an integrated suite and support-ing services that cut across the source-to-settle spectrum, with the financial resources to invest in future development. Your diverse working group should help to assess the trade-offs to meet your specific requirements. Use those insights when engaging with potential providers to ensure that they can complement your in-house capabilities. With the right internal and external partners, you’ll be well positioned to deliver on your vision for a digital treasury transformation.
With so many interrelated processes and func-tions, your treasury transformation journey may be a struggle to get off the ground. Here are five recommendations to help get you started.
ESTABLISHYOURWORKINGGROUPBefore you engage with anyone outside of your business, you should spend time with a broadly representative group of colleagues to flesh out where you are and where you want to be, and to help identify genuine needs versus a long list of wants. To make this work, you will be in close partnership with sales, accounts receivable, pro-curement, accounts payable, and IT. Invite them early on in this process, so you’re in a good position to carry that team-oriented approach forward.
FOCUSONCONSOLIDATIONIn the past, each element we discussed as part of your digital treasury core was likely managed in its own separate best-of-breed application. This is no longer practical or desirable. The amount of data and data sources in the enterprise has exploded. Companies are finding that their next challenge is to bring all this data back together to provide a much sought-after single source of truth. Use this opportunity to consolidate data access and delivery for your treasury department, empowering it to help lead this transformation.
ANTICIPATETRAININGNEEDSYour goal is to fundamentally transform treasury, automating many time-consuming tasks and freeing up your staff’s time to execute on strategic
Crafting Your Game Plan: Keys to Success
FIND OUT MORE ABOUT SAP® SOLUTIONS AND SERVICES SAP has the solutions and services to drive your treasury’s digital transformation. With SAP, you choose an expert partner to build a custom-made plan to help you increase free cash flow and optimize working capital.
For information on treasury solutions from SAP, please visit us here. For information about our working capital management services, please visit us here.
© 2018 SAP SE or an SAP affiliate company. All rights reserved.
© 2018 SAP SE or an SAP affi liate company. All rights reserved.
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