Systems Integration: How to Improve Your Cash Flow Forecasting
To obtain cash flow visibility and to be able to effectively forecast on an enterprise-wide level, an organisation needs be able to combine commercial and financial flows. This requires a consolidation of information held in ERP and treasury management systems across the business into a cash management solution.
This sounds quite straight forward until you start examining the system set-up of the vast majority of corporates, where a proliferation of systems across business units and geographical areas is common place. More often that not, these systems have been purchased at different times, from different companies, with different purposes in mind. As well as being based on different, incompatible and often out dated technologies. This is a situation, which is acerbated by mergers of companies with different IT set-ups.
The reason for this is that purchase decisions have historically been made at the subsidiary or regional level as opposed to at the Group level. The availability of different types of vendor solutions, all tailored to the specific needs of different business operations, or better suited to different geographical areas, has often led the subsidiary or region to purchase the product that best suits its needs as opposed to the needs of the company as a whole. In an organisation with a number of different business units across a number of different locations, the result is a fragmented infrastructure that is completely contrary to STP.
Naturally systems integration has a part to play in ensuring that these systems work together. However, this involves a complex infrastructure of system interfaces that need to be custom built, resulting in a high support cost for the organisation. These interfaces tend to extract and load information in a batch process, making real-time forecasting and cash flow control impossibility. Also, with a dispersed system environment, manual intervention is inevitable. Not only does this make the accuracy of any forecasts or cash flows questionable, it also opens an organisation up to the danger of fraudulent activity.
In order to obtain true, real-time cash visibility and an accurate company-wide forecast, a consolidation of systems across the enterprise is required. If an organisation deploys one ERP system and one treasury management system globally, all that is required is for these to feed into a centralised cash management solution. Such an approach is becoming more common due to increasing legislation such as Sarbanes Oxley driving purchase decisions to the Group level, where the cost, efficiency and risk benefits associated with consolidation and centralisation are clear and readily realised.
Additionally, centralising treasury operations often consolidates an organisation’s banking relationships, leaving one or two key players managing the business. In terms of keeping on top of cash flows this approach makes perfect sense.
Despite all of the obvious benefits of centralisation there is a downside. With a centralised set-up, receipts are managed by a large global players rather than a local bank, meaning it often takes much longer for payments to clear. The corporate will then experience a delay in how quickly it can access funds, which is detrimental to working capital efficiency.
By using web-based technology to give subsidiaries an interface to central treasury, corporates can realise the best of both worlds. Subsidiaries manage their own money and maintain local bank relationships while giving corporate treasury the visibility it requires by entering their forecasts and cash flows into the central treasury system via a web browser. This allows central treasury to effectively manage all hedge requirements, ensuring that any exposure is covered and any cash surplus used effectively.
On paper this is an ideal answer, but technology can only do so much. If the subsidiaries are not held accountable for their forecasts, central treasury cannot ensure it’s receiving the correct data. Many corporates have or are implementing measures to make subsidiaries responsible for these reports and to incentivise them to forecast accurately. A subsidiary that forecasts well, for example, could have less of a margin on the treasury centre base interest rate, meaning that their operation performs better financially, which translates to better bonuses.
In conclusion, effective cash flow visibility and forecasting comes from consolidation – not integration. Only by ensuring that systems are common across a business can a corporation exercise the type of meaningful, real-time cash management control that delivers economic gain. But a desire to standardise should not override functionality. Companies that really want financial gain should be looking for best of breed in both ERP and treasury management. Adopting a ‘one-size fits all’ strategy won’t deliver enough. If these systems are complemented by web-based technology and the right incentives an organisation really can get the best of both worlds.