Recession advisory: In today’s economy, cash management is king

These days, companies in every industry—especially manufacturing—are struggling with finances as the economic downturn puts a stranglehold on lending capital. That’s why manufacturers need to adopt treasury management systems that integrate finance, supply chain, and operations to remain solvent in the short and long term.<br/>

11/21/2008



These days, companies in every industry—especially manufacturing—are struggling with finances as the economic downturn puts a stranglehold on lending capital.

According to Jim D'Addario, SAP ’s director of solution marketing, ERP Financials, there are three problems in particular.

"First, credit markets are locked up," he says. "Banks are not lending to each other, so banks are not lending to end users, such as manufacturers." As a result, manufacturers have little financing available.

Second, the deteriorating economy is causing the commercial cash flow that the manufacturer receives from sales to customers—days sales outstanding, or DSO—to degrade and slow down. "This combination means the cash that manufacturers depend on from loans and customer payments is decreasing," states D'Addario.

The third is volatility in the commodity market. Prices of raw materials that manufacturers use are rising, or are volatile. "Most manufacturers aren't in a position to pass on increases in their input prices to customers, so they must better manage commodity prices to maintain their profit margins," D'Addario adds.

Part of the resulting overall challenge is getting capital. But an even more significant challenge is determining how much you need based on how much you have. The standard "accuracy gap" in liquidity assessment and forecasting is no longer acceptable for cash-on-hand survival.

Not your father’s liquidity

Until recently, inadequate technology has been the treasury department's Achilles’ heel. The error margin for adjustments in hedging, in-house cash transfer, and accounts payable/receivable strategies is now too thin for companies to rely on archaic spreadsheets and disconnected treasury systems that provide an incomplete picture of current cash on-hand. In sum, error margins in liquidity assessment and forecasting are no longer acceptable for survival.

In the wake of the current global crisis and volatile commodity, interest rate, and foreign exchange markets, it’s very challenging for global businesses to ensure they have access to liquidity, are able to protect profit margins, and can comply with regulatory and financial reporting standards.


The SAP In-House Cash solution helps companies manage fragmented cash balances and payment processes by placing the responsibility in the hands of those who are most qualified: treasury professionals. The application has capabilities to centrally manage global liquidity and payment transactions for even the most complex organizations.

As a result, treasury departments require a higher degree of visibility and control over the complex, interconnected processes associated with managing cash, liquidity, investment operations, and risk. In response, more global businesses are turning to comprehensive treasury management software.

Manufacturers need treasury management systems that integrate finance, supply chain, and other operational areas. These systems will help them remain solvent in the short and long term. Such systems are being used today by large multinationals to more effectively manage cash and payment processes; ensure liquidity; evaluate interest; manage foreign exchange, interest rate, and commodity risks; and manage financial transactions from deal-capturing to accounting.

According to Svatopluk Alexander, managing director of commercial services for BearingPoint , manufacturers are much more interested in treasury management systems for a number of reasons. “They want increased automation, standardization, communication, and visibility when it comes to core treasury activities such as cash forecasting, global cash management, risk management, and working capital management processes," says Alexander.

One such solution is SAP Treasury and Risk Management. Treasury applications from SAP are integrated with each other, and with the SAP General Ledger to ensure transactions and positions are automatically recorded to meet financial reporting and compliance mandates.

The applications allow businesses to sense and respond to changing market conditions in real time. They also allow users to manage a full spectrum of cash, liquidity, and financial risk. Professionals can analyze and manage the full range of market risks, including commodity, interest rate, and foreign exchange risks.

One satisfied customer is Fujitsu Siemens Computers , Maarssen, Netherlands.

"We are a European-based company competing with U.S. vendors, selling products built with components purchased in U.S. dollars," reports Sabine Schweiger, head of corporate treasury. "For us, cash is a strategic resource for growth. You must have a clear picture of your current cash position and future cash needs for successful operation of the business."

Fujitsu Siemens Computers’ previous treasury management software could not support its vision of a single, integrated application powering a shared global service.

"We had a fragmented IT landscape, with multiple systems," explains Schweiger. "We needed an integrated solution with seamless interfaces to all departments—from product operations through sales, accounts payable and receivable, general ledger, and treasury accounting."

For Fujitsu Siemens, SAP Treasury and Risk Management enables end-to-end automation of treasury and in-house banking processes in full compliance with international financial reporting standards. A team of eight people can effectively operate Fujitsu Siemens’ in-house bank and manage groupwide cash, risk, internal and external payments, and treasury accounting for 50 subsidiaries in 11 currencies.

"The cash management team has real-time transparency into our liquidity position across the entire company, and generates detailed plans for short-term cash requirements," says Schweiger. "One of the biggest benefits is [systems] integration. It allows us to run real-time scenarios for our CFO on what the P&L will look like if the market changes."

Eight-point plan

BearingPoint's Alexander offers some recommendations for selecting the best treasury management application for a company’s needs:

1. Create a comprehensive list of criteria that the ideal system solution needs to meet.

2. Determine whether an in-house system or an application service provider solution makes the most sense.

3. Place special emphasis on integrated systems, and best-practice processes and controls for the future.

4. Develop a scorecard that weighs the criteria and features that the company truly needs.

5. Use the scorecard as a questionnaire when meeting with vendors.

6. Consider vendors' business continuity plans and the quality of relationship with the vendor—particularly its responsiveness to special requirements.

7. Rank vendors according to the scores achieved.

8. Conduct a cost-benefit analysis of the top-ranked vendors, considering that not all costs and benefits can readily be expressed in dollars.

In terms of implementing the selected treasury management system, Alexander stresses that it’s a challenging project that needs to be managed diligently.

"At the outset, companies must clearly define their goals in implementing the system," he states. Examples include centralized payment processing, integrated cash flow forecasting, real-time tracking of working capital movements, and Sarbanes-Oxley compliance.

"You need to be aware that systems alone cannot solve all problems," concludes Alexander. "A treasury management project is not about adopting a new system to existing business processes, but rather about shaping new processes for the future while implementing a system that is able to support these processes. It is therefore worthwhile to rethink and redesign some existing business processes in the first place."





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