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									This article appeared in the Jan Feb Mar 2006 issue of SAP Insider and appears here with permission from the publisher, Wellesley Information Services (WIS), www.WISpubs.com.
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Transform Your Cash Flow Processes with Financial Supply Chain Management
by Jürgen Weiss, SAP AG Benchmarks of business performance indicate that ERP systems and other enterprise technologies have transformed customer and supply chain processes, but that finance’s performance has hardly changed. While some companies have profoundly improved the performance of their financial processes through ERP systems, financial functions are still neglected in many businesses, and days sales outstanding (DSO) and working capital needs are considerably high in many industries.1 Finance department costs consume more than 1% of revenues in many companies, and CFOs struggle with poor transparency of their daily cash flows. In times when unprecedented economic uncertainty and soaring shareholder expectations are putting every function under closer scrutiny than ever before, the finance function should be driving business, not holding it back. The primary objective for a better and more optimized finance department is still the same: Manage cash and tie up as little working capital as possible. The key performance indicator in this context is the cash flow cycle, which encompasses the time period from when a supplier delivers materials until the receivables department collects cash from customers
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(see sidebar below). The longer the cash flow cycle is, the higher the working capital needs; every reduction made within the cash flow cycle will immediately free up liquid assets. So how do you streamline the cash flow cycle?

and one that runs through a company’s business like a thread, tying together every function and process. Just like in the physical supply chain, every day that’s lost in the cash-to-cash cycle equals lost revenue. The benefits of a financial supply chain go far beyond cutting costs. Days in payables, for example, can be reduced by decreasing payment terms. On the other hand, companies want to avoid putting their relationships with key suppliers at risk, so they must strategically differentiate how they deal with their individual suppliers. An efficient financial supply chain will drive forward every aspect of the business, give management the tools it needs for continuous improvement, and provide

Think of Finance as a Supply Chain
One approach is to consider finance itself as a supply chain — a multifaceted, end-to-end flow of transactions, cash, value, and information that touches customers, suppliers, banks, and internal functions and relationships. Unlike the physical supply chain, the financial supply chain deals with the flow of cash instead of goods. But the financial supply chain is clearly a supply chain —

Breaking Down the Cash Flow Cycle
The cash flow cycle is the period of time required for a corporation to receive invested funds back in the form of cash. The full cash flow cycle can be divided into two distinct cycles:
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The operating cycle — the time period between acquiring inventory from suppliers and the actual cash collection of receivables The cash cycle — the time period between the cash payment for inventory and the cash collection of accounts receivables generated in the sale of the final product

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A 2002 study by Killen & Associates states that, through their ERP systems, companies could reduce their working capital needs by as much as 20% to 25%, and a typical US$1 billion company could save more than US$7 million in annual costs.

Therefore, the cash flow cycle is also defined as days sales outstanding plus days in inventory minus days in payables. Reducing the length of the cash flow cycle will immediately create liquidity.

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more visibility into a company’s financial supply chain network to deal with evergrowing compliance requirements.

What a Financial Supply Chain Means to Your Finance Department
What do companies traditionally expect from their finance department? Probably much more mundane transaction processing than they should. Requiring finance to do more with less people — another common overhead-reduction measure — is simply not a viable option, especially since finance is no longer just a back-office administrative position, and is now being asked to take a more strategic seat in the business. The reasons why finance departments are now helping to set strategic directions and make important business decisions are clear. In a complex world, businesses have become complex organisms — getting more complicated day by day. The financial supply chain deals with a supply network of commercial relationships, with each member playing an integral role in delivering the value proposition of the company at the hub. It is a network that is highly evolved, sophisticated, and dynamic, but one that can be a nightmare to manage since finance is intimately involved in every activity in each one of today’s value networks. Processing and transactions, governance of policies and procedures, guidance on process management, information flows within and beyond the organization — finance plays a critical role in them all.

located — within the hands of the supply network’s discrete members. The new species of finance function will help companies reap the benefits of an efficient financial supply chain: reducing working capital needs, decreasing nonproductive float, improving cash flow management, and shortening settlement times. According to Gartner analyst Lee Geishecker, “an efficient financial supply chain is one of the key differentiators in the global economy to free up [companies’] hidden working capital resources.” SAP Financial Supply Chain Management (SAP FSCM) is a suite of components that helps the finance department cope with the challenges that integrated financial supply chains pose — both on the sell side (order-tocash) and on the buy side (invoice-to-pay). Sustaining revenue growth has always been one of management’s biggest challenges. Now, as competition intensifies and customers become less loyal and more demanding, keeping revenues up is more difficult than ever. Many businesses have responded with sophisticated frontoffice customer relationship management (CRM) solutions. But all too often, back-office processes remain reactive rather than proactive and are based

on discrete, disjointed tools incapable of drawing on the wealth of data across the company. The big benefit of sell-side FSCM is the provision of high-quality, timely information to customers and the sales force. Since not every customer is profitable, today’s organizations must understand the true costs of servicing each customer — and therefore the customer’s real value. This means managing, tracking, and measuring all customer-facing processes, including those in the financial supply chain. Only then can investments target acquiring and retaining increasingly profitable customers.

Order-to-Cash: From the Back Office to the Front Line
To succeed, today’s companies must serve their customers quickly, consistently, and accurately. This means integrating frontend processes even more closely with backend data and business rules, and empowering front-office staff to carry out some functions traditionally handled in the back office. SAP FSCM provides a wide range of tools to support and optimize all the processes involved in the order-to-cash cycle (see Figure 1).

The Evolution of Finance
The result is a new species of finance function. Not only must finance paddle with all its might to keep up with the flow of transactions, but it must also monitor the financial supply chain from an optimization perspective. Finance must not seek to manage every detail itself, but devolve workload and responsibility to where it should rightly be

Figure 1

The Full Set of SAP Financial Supply Chain Management Components for Processes Across the Cash-to-Cash Cycle

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SAP Credit Management SAP Credit Management handles processes related to managing customer credit lines. By integrating financial and nonfinancial perspectives of the customer base, SAP Credit Management enables an organization to reduce credit risk and optimize credit terms on an individual customer basis. For example, the Blocked Order List function within SAP Credit Management provides credit managers or sales representatives a snapshot of all orders that cannot be processed because of an insufficient customer credit limit (see Figure 2). This will promote speedy processing of these blocked orders to avoid upset customers or lost sales. SAP Credit Management makes it possible to deploy a standardized creditcontrol solution that integrates data from multiple systems. As a result, accounts receivable personnel can take proactive steps to reduce credit risks and eliminate losses on uncollected receivables. If the organization relies upon external standards, SAP Credit Management enables credit-scoring information from third-party services like Dun & Bradstreet, Creditreform, or Deltavista to be transferred into the solution. By integrating external scoring standards with their own credit standards, companies can implement a real-time solution that improves decision making and reduces credit risk. The centralized credit-rules engine provided with SAP Credit Management enables businesses to segment customers according to their creditworthiness and payment reliability, which provides a powerful decision-support capability for sales, marketing, and other customer relationship management functions. SAP Biller Direct SAP Biller Direct displays account, billing, and payment information via the Internet, meaning that customers can access both their open items and any available credits from the Web and

Figure 2

Credit Management Blocked Order List

Figure 3

Internet-Based Invoice Presentment and Payment with SAP Biller Direct SAP Cash and Liquidity Management enables real-time visibility of bills and invoices when performing liquidity management.2
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offset these items against outstanding receivables. Close integration with SAP Dispute Management (see next section for more detail) enables collaboration with business partners online and allows customers to view the status of their disputes, thereby improving customer relationship management (see Figure 3). Tight integration with

SAP Cash and Liquidity Management helps you monitor how your strategic planning affects cash flow — from both a macro and a micro perspective. The component allows companies to efficiently manage and optimize their liquidity situation.

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SAP Dispute Management SAP Dispute Management supports the processing of receivables-related disputes. Many companies have to deal with a huge number of payment deductions or payment delays. These organizations experience declining cash collection percentages and eroding days sales outstanding. SAP Dispute Management lets companies process disputes using reason codes for the different types of business transactions from which complaints might arise. The dispute status, along with the reason codes, controls subsequent actions on the dispute — including notifying employees via workflow or generating an email to customers. All information related to a dispute is summarized in one central object: the dispute case (see Figure 4). This is like an electronic folder bundling all data and information available per customer dispute.

Sell-Side Benefits of FSCM
Throughout the order-to-cash process, SAP FSCM equips the front office with the tools and information it needs to service customers, process orders, and collect cash more quickly and effectively. Benefits are not just directed toward the customer, however; integrated financial functions can also help increase customer profitability and reduce administrative costs.

Using electronic bills, for example, can save a company up to 70% of its invoicing costs, enable non-EDI (Electronic Data Interchange) companies to trade electronically, and allow bills to be personalized. This personalization creates greater cross-selling and upselling opportunities, as well as higher lifetime value for each customer. Another key example of a sell-side FSCM benefit is in dispute management. Disputes cost companies and their

SAP Collections Management SAP Collections Management supports employees in receivables management or in accounts receivable to manage receivables proactively and prioritize accounts from a riskmanagement perspective. Employees can select the customer accounts for which they are responsible from the company’s receivables balance. The worklist, which is generated daily in this way, is an extract of the total receivables balance. SAP Collections Management enables employees to navigate the customer account directly from the worklist. There they can see all of the information required for preparing the customer contact in an overview (see Figure 5). Once a collection agent has an overview of the customer account, he can contact the customer and document the result of this initial contact in the system. For example, he can create disputes or promises to pay and trace them later at the invoice level.

Figure 4

Dispute Case in SAP Dispute Management

Figure 5

Customer Overview in SAP Collections Management

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customers vast amounts of time and resources. Processing an individual complaint can cost between US$128 and US$640 — yet around 90% of all complaints are justified, and are usually resolved by a credit memo. Arming the front office with decision support and dispute management tools to coordinate across departments and quickly handle disputes can speed up the process and dramatically reduce costs.

assignments, for example), as well as incomplete or wrong external information (such as price discrepancies or duplicate invoices). SAP Biller Direct Beyond its sell-side functionality, SAP Biller Direct is also available with payside invoicing capabilities. Accounts payable departments in all industries are often overburdened with vendor inquiries regarding payment status. As a result, productivity is lost, workloads are taxed, and accounts payable performance metrics can deteriorate. To achieve excellence in the accounts payable area, corporations can use SAP Biller Direct as a Web-based solution to present payment status information to their suppliers and vendors. This self-service allows vendors to quickly get answers for their account inquiries and get detailed views of invoices and payment history to examine individual transactions.

Furthermore, this SAP FSCM component can receive payments from external business partners and transfer the payments to affiliates (central payment receipt). All these payments immediately update cash position — the central report within SAP Cash and Liquidity Management — and thereby complete the cash manager’s global view on the company’s incoming and outgoing cash flows.

The Buy-Side Opportunity
SAP FSCM can also help companies improve their invoice-to-pay process, which is often time-consuming, laborintensive, and purely paper-based, resulting in a lack of invoice transparency, lost discounts, late payments, value date losses, and poor bank and vendor relationships. The finance function, and specifically accounts payable, is integral to delivering processing improvements that deal with high transaction volumes, decentralized organizations, and security concerns, as well as providing efficient exceptions management. To improve and streamline the invoice-to-pay process, companies are looking to engage straight through processing (STP), the automation of processing financial transactions end to end — from initiation to settlement. SAP Financial Supply Chain Management includes three solutions that can help companies achieve this STP goal. SAP Invoice Management The SAP Invoice Management system allows companies to process incoming invoices electronically and in a structured manner. Available with the mySAP ERP 2005 release, this new solution provides functionality for exception handling and analysis, and can be combined with optical character recognition (OCR) software from partners to scan paper invoices. Accounts payable clerks can quickly identify incorrect or missing internal information (wrong account

Conclusion
Managing financial supply chains represents the next area in corporate finance poised for innovation through the use of ERP solutions. Businesses today, in a number of industries, are transforming processes tied to their most precious financial metric — cash flow. SAP FSCM can greatly simplify financial supply chain management efforts in many organizations. With the full set of FSCM applications, companies can more easily address the multifaceted challenges of managing cash flow and optimizing working capital — critical elements for successful financial performance today. For more information, please visit www.service.sap.com/fscm.

SAP In-House Cash Multinational organizations often manage a complex network of international business units and banking relationships. The growing number of affiliates for international organizations has led to a large increase in the number of internal and external payments, as well as bank accounts. SAP In-House Cash enables companies to reduce substantial costs associated with cross-border payments and global intra-company transactions. With SAP In-House Cash, international companies can centrally process payments made by their affiliates by netting and consolidating internal accounts. This internal netting allows considerable savings in the administration of various banks, and internal and cross-national payments. SAP In-House Cash also allows companies to settle affiliates’ debts with external business partners (central payment).

Jürgen Weiss is Director of Product Management in the Financials General Business Unit (GBU) at SAP AG. He has degrees in economics and business administration from the Universities of Heidelberg and Hagen. Jürgen joined SAP in 1997 after a previous position as PR Manager in a large German bank. He has held various positions at SAP and joined the Financials GBU in 2000. Jürgen is globally responsible for Financial Supply Chain Management applications including Electronic Bill Presentment and Payment, Dispute Management, and Credit Management. Among his responsibilities are the roll-in of customer requirements and the rollout of the SAP FSCM solution.

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