If you are a CFO or treasury executive in a globally diverse company, then you're probably already aware of the complexities regarding cash management across multiple business units in many different countries.
In this latest episode of Bramasol's Insights to Action Podcast Series, we offer an overview of how In-House Cash Management can help streamline, simplify and reduce the costs of managing cash across a complex, multi-country environment.
Click on the player below to listen as Paul Miller, Senior Treasury Solution Architect at Bramasol, covers the what, why and how of In-House Cash.
Also, below is a transcript of the podcast episode:
Welcome to Bramasol's Insights to Action podcast library of topics covering regulatory compliance, reporting disclosures, financial management and financial transformation technologies. Bramasol is the leader in SAP based finance solutions and to co-innovator with SAP on developing and deploying purpose-built compliance capabilities. Learn more about Bramasol at www.bramasol.com
Jim Hunt: This is Jim hunt, hosting the next episode of Bramasol's Insights to Action podcast series. Today we're once again focused on the treasury area and we're lucky to have Paul Miller who is SAP treasury solution architect at Bramasol. Paul has more than 30 years of experience in finance and treasury business applications and he's got a really deep understanding of SAP finance offerings and the overall SAP ecosystem. So welcome Paul. It's good to have you.
Paul Miller: Hi Jim and thanks for having me.
Jim Hunt: Great. What we're going to do today is to focus specifically on In-House cash management and how SAP in-house cash solutions can help in a number of areas like managing the number of bank accounts and streamlining the cash flows, especially within a group or company. So, Paul's going to take us deep for a talk about in-house cash management and then we're going to come back up and talk specifically about the SAP apps. So maybe to kick it off Paul, how would you define in-house cash management?
Paul Miller: Well, in-house cash is a tool that enables treasury to act as an internal bank and most treasuries do this anyway. Back in the day, when I was sitting in the treasurer's desk, we were part of a multinational organization and we considered ourselves the internal bank for the organization. So all of our subsidiaries could focus on their day to day businesses where we could centralize the various treasury activities as it related to the cash management. Specifically in-house cash is used for processing payments centrally and processing collections centrally, but also to more efficiently manage our cash flows in pools by currency - not only by region but also globally. So in-house cash is a tool that allows us to centralize our processing payments, collections and cash pooling.
Jim Hunt: Are there specific parameters or indicators within an organization that tell you if in-house cash would be a good way to go?
Paul Miller: Oh, certainly, most customers will know because they may have a lack of visibility for cash, the elements make up their cash and their cash processing. They might not know their balances across the globe in the various countries and regions. And they may have a lack of control over their processes. There may be money that's out there that they're not aware of, that they're inefficient, that they're borrowing too much and that they're paying too much in interest rates. So companies typically who want in-house cash are the ones who want to streamline their processes. They want to improve their level of automation within their ERP and they want to start getting better data, right. And more efficiency, lower costs, etc.
Jim Hunt: So the benefits are better visibility, better management and improved bottom line, from better use of your existing cash flows.
Paul Miller: Absolutely. You're also going to get better security and controls and as you mentioned, better cash visibility. It's also going to give you more inputs into your forecasting, which is a big benefit for customers as they can reduce idle balances once they have an automated process where they're looking at their balances every day centrally billed. They'll be able to squeeze out balances that they would ordinarily have to hold and let a subsidiary run their own operations as well. And there's a big benefit to that!
Jim Hunt: So it raises to a higher level of visibility into those pockets of cash out there that may not be working for you.
Jim Hunt:That's great. What are the key metrics that you need to watch for when you're setting up in- house cash management?
Paul Miller: Well, the big thing, when you first set it up, you get a better handle on your requirements. So when we go out and do an implementation, the first thing we do is we will send a survey out to the company and we'll ask them how many legal entities do you operate with? What types of payments and collections do you use across the globe? Do you use domestic wire payments and foreign wire payments? Do you do use bulk payments to service accounts payable, etc. We try to get a feel for the type of activity that flows through the system and also in which currencies they're required and what their processing looks like. The goal of that analysis is really to get a handle on the size and the number of transactions that they use, as well as the number independent processes that we can consolidate to define our requirements for the core in-house cash processes.
Jim Hunt: Okay. That lays a great baseline about the why. Let's talk some about the how and specifically the SAP in-house cash application - - what it is, and how it helps you achieve the goals that we've been describing.
Paul Miller: Well, as I said earlier, in-house cash is really an internal bank. So let's use an example. Let's say we have a domestic company with operations in Europe and there may be four or five legal entities in Europe and four or five legal entities in the US where they're each making their own payments. And there may be an accounts payable group in each of the 10 subsidiary entities that have maybe 10 people each. So 10 times 10 is a hundred people. So what we would do within those 10 legal entities, each have their own 10 bank accounts moved from external banks to in-house cash. When we replace those 10 external banks with 10 internal banks, then our external banking is done through a single account.
Paul Miller: Or maybe one account per region. In some cases you may have country restrictions, so you might need additional accounts. But in the simplified model we could go from 10 bank accounts to one. Then we could take the hundred people who are processing the AP and reduce that down to maybe 10 right? Because now we have a centralized process. We could then free up the folks that are in the subsidiaries doing AP to do other things, maybe improve the supply chain, get better data visibility or repurpose them into other areas of the company. In any case, we can wind up in the end with a more streamlined process, lower our costs, lower the number of banks and number of bank accounts that we use. The processing to do the conciliation gets much more simplified. And so on the external world, we'd save a lot of costs. And now centralized treasury has better visibility to what used to be in 10 bank accounts, because now it's in one. And they manage it all centrally and they can look at that consolidated data for better forecasts. So that's kind of an example of how you could see that the benefits in action.
Jim Hunt: And then how would the SAP Solutions Set play into implementing this?
Paul Miller: So, now managing the internal banks is the key to in house cash. We've set up an internal bank area. So now you know, our company's treasury department is the internal Citibank or JP Morgan, if you will. When we've set up a bank internally, our US and our subsidiary companies are participants. They get internal bank accounts that are basically subsidiary accounts that they own and they're current counts. It's the internal activity that they process through their bank area of the internal bank account.
So if you think of it with the 10 local APs that used to process through their local bank accounts, now what they do is they process within SAP. There's integration to where they're now paying through their internal bank accounts for local AP processes and we can centralize that local AP processing and run it from one location as well. Now there's daily activity for all those payments going through that internal bank account. We can also process our collections through those local accounts. We can do multi-currency types of transactions and the activity on that local account allows us to charge interest or credit interest or pass FX exposures. We retain those at the subsidiary level, but process them centrally so we can benefit from netting of payments for instance - and only trading what we need to cross company.
Jim Hunt: So you've essentially used the in-house centralized bank and then virtualized it to mimic what all the external local accounts used to look like. So for all the subsidiaries, they tend to see what they've seen before. It's familiar, but it's all in-house now.
Paul Miller: It's all controlled in-house. Exactly. Hence the word "in-house".
Jim Hunt: Yeah. Great. I'm wondering, what kind of push-back do you typically see in an implementation from the subsidiary? So do they "get it" that this would be good for them or do they see the change as threatening?
Paul Miller: Well, that's the biggest challenge. You hit the nail on the head with the question because the key issue for in-house cash is change management. So the first thing companies have to get their head around is what these new processes are like. Do we have a shared service environment in place or do we have to stand one up totally new from scratch. And how do we do that? So a lot of what we do when we roll out to businesses isn't just turning on in-house cash. We have to guide them through the process and help them figure out the best way to do it using our experience and what we've done in the past to help guide them down that path. So you're right, you do get back pressure sometimes internally, but since there are usually lots of benefits we can guide them through their business case and figure out their return on investment. So the subsidiaries are generally are glad to get the help and the assistance to move forward again so they can focus on other areas. Within their organization, the subsidiaries typically want to focus on generating revenue, not necessarily the accounting function.
Jim Hunt: Right, right. And once they get that it's a benefit to them, they can get on-board pretty quickly. But like most software, you don't just drop in the new software, flip the switch, and have everybody be happy. There needs to be investment in organizational change management, training, etc. But it sounds like in this case, the road-map to get from external banking to in-house cash management is pretty well defined - - if you know what you're doing. Right? As is the case of the Bramasol implementation teams
Paul Miller: Right. From a process perspective, yes. But every customer's unique in terms of their footprint. You know, not every global operation is identical. It depends which countries you're in, what the local rules and requirements, etc. There are a lot of benefits that can be realized, as long as you get your tax and legal team to stand behind you and you make sure that you're not violating any local banking requirements for instance.
Jim Hunt: Thanks Paul. This has been a really great discussion focused on in-house cash and the SAP solutions available, along with how you would approach it. One question that always comes up now in the SAP environment is looking toward the future. Because one of the things that I hear from SAP customers and partners over and over again is the benefit of integration within one big system. It's not a standalone "treasury workstation" or in-house cash management workstation. It's really integrated intimately with the rest of your business operations. So the question always comes up is where it going in the future? How can I be sure that my investments are future-proofed? And what about S/4HANA hanging out there on the horizon? So maybe if you could address the future a little bit.
Paul Miller: Sure. Well S/4HANA is a wonderful addition that puts those services in the cloud and it gets us faster performance and better data. It gives better visibility to our data so we can have better reporting. As far as in-house cash is concerned, it hasn't been re-engineered for S/4HANA per se, but it goes along with the changes that have already happened in accounts receivable, accounts payable, and in the general ledger. The core processes haven't needed to be reintroduced completely. So, for instance, when we set up our master data internally, there'll be tiles that we can load and we can create our internal banks and accounts - that's all there and part of the S/4HANA landscape. But a lot of the core programs that enable the integration are robust and already live in the background in the core SAP and haven't had to be re-engineered. But as time permits, I'm sure they will be evolved as we move forward.
Jim Hunt: So essentially companies can make the move now and not have to worry about the future because, at the front lines, what their users see and do is probably not going to change that much.
Paul Miller: Right, not at all. In fact the improvements that have already come with Simple Finance and in the ledger and in the new cash management are already seamlessly integrated with the in-house cash app, background and infrastructure. They can turn that all on right now. And as that's improved over time they'll already be in place. So there should be no conversion going forward.
Jim Hunt: That sounds excellent. This has been a really great session. Is there anything that we didn't cover that you want to be sure and get out to our listeners before we wrap up?
Paul Miller: I think that we've addressed all the right questions and there's really not much that I would add, except that if customers have any questions, feel free to contact us directly and we can go into further detail with them about their unique requirements to enable a in house cash solution in SAP.
Jim Hunt: Definitely. There are links on the podcast web page and throughout the Bramasol site at www.bramasol.com where people can drill down and request assistance. Paul, this has been great. Thank you very much and I look forward to talking with you more in the future about other treasury applications. Thanks.
Paul Miller: Thank you. I appreciate it, Jim.
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