SAP CFM In-House Cash:

A Platform For Value-Based

Enterprise Management

Juergen Klingbeil
SAP Labs Inc.

 SAP AG 2001 In-House Cash - Romanov 1

Agenda

1 Introduction

In-house Banking for Value

2 Based Enterprise
Management
SAP CFM In-House Cash: Key
3 Features And Processes

4 System Architecture Scenarios

5 Value Proposition

 SAP AG 2001 In-House Cash - Romanov 2

Agenda

1 Introduction

In-house Banking for Value

2 Based Enterprise
Management
SAP CFM In-House Cash: Key
3 Features And Processes

4 System Architecture Scenarios

5 Value Proposition

 SAP AG 2001 In-House Cash - Romanov 3

The Change In Corporate Treasury
In the next years …
… global business in regards to financial markets/products
… centralized operation
… center of a web of internal and external relationships
giving up silo-based organizational structures
… real-time integration and management of material and
financial supply chains to optimize working capital
… analysis of the future not the past
… control of risks not transactions
… adding value in its own right
… e-Enabling processes supported by role-based portal
solutions

“Treasury is the hub

of all corporate
financial activity …”

(GartnerG2)

 SAP AG 2001 In-House Cash - Romanov 4

The Driving Force: Value-Based Management

 Value-based enterprise management is increasingly important

in many companies

 Under the umbrella of value-based enterprise management, the optimization of

cash resources is regarded as an
important factor:
 "Cash counts"
 "Cash is a fact, profit is an opinion"

 This affects the task of financials, changing the focus:

 Financials play a decisive role in defining, implementing and controlling enterprise
strategies
 Because of their specialist knowledge, financial experts are predestined to manage
company risks
 In addition to strategic and service tasks, financials can contribute to a company's
growth potential by actively adding to its value

 SAP AG 2001 In-House Cash - Romanov 5

Shift of Focus in Financials

Value-based enterprise management is gaining importance in

many companies Implement
and executeenterprise management, the
Under the umbrella of value-based
enterprise
optimization of cash resources is regarded as an
strategies
important factor: Manage
Add value financial and
 "Cash counts"
other risk
 "Cash is a fact, profit is an opinion"
This affects the task of financials, changing the focus:
 Financials play a decisive role in defining, implementing and controlling
enterprise strategies
 Because of their specialistFinancials
knowledge, financial experts are predestined to
manage company risks
 In addition to strategic and service tasks, financials can contribute to a
Finance
company's Accounting
growth potentialControlling
by actively adding to its value
Management

 SAP AG 2001 In-House Cash - Romanov 6

Agenda

1 Introduction

In-house Banking for Value

2 Based Enterprise
Management
SAP CFM In-House Cash: Key
3 Features And Processes

4 System Architecture Scenarios

5 Value Proposition

 SAP AG 2001 In-House Cash - Romanov 7

Problem Scenario
Company with multiple subsidiaries invoicing each other
for goods and services

Parent
Plant U.S. XYZ INC. Plant Spain

Plant U.K. Plant Germany Plant Hong Kong

Sales U.K. Sales Germany Sales Netherlands Sales Belgium Sales France

Physical payments
 SAP AG 2001 In-House Cash - Romanov 8
Problem Scenario

  High volume of intra-group and external

payments
                   

 No international clearing systems

 Multiple bank relationships in a variety of currencies
 No global coordination of banking strategy
 High expenses for bank charges
 Opportunity costs due to float and inefficient investments
of corporate cash
 Operational inefficiencies (e.g. cash management, funding, reporting)

Requirement: Solution for a cost-saving process that enables

payment transactions within the corporate group

 SAP AG 2001 In-House Cash - Romanov 9

The Business Solution: In-house Banking

Plant U.S.
Plant Spain
Plant U.K. Plant Hong Kong
Parent XYZ INC.

In-house bank
Plant Germany
Sales France

Sales Belgium
Sales U.K.
Sales Germany Sales Netherlands

 SAP AG 2001 In-House Cash - Romanov 10

In-house Bank: Functions

 Global Cash Management

 Centralized Collections and Disbursements
 Corporate Finance & Fundings
 Multilateral Intercompany Netting
 Intercompany Payment Processing
 Intercompany Funding
 Intercompany FX Transactions
 Global Risk Management

 SAP AG 2001 In-House Cash - Romanov 11

In-house Bank: Systems

 Accounting systems (G/L, A/P, A/R)

 Cash Management System

 Netting system

 Treasury transaction systems

 debt/investments
 FX
 derivatives

 Risk Management system

 SAP AG 2001 In-House Cash - Romanov 12

In-house Bank: Systems

 a lot of different systems

 from different vendors

 not integrated

 inefficient information flows

 tremendous manual effort due to double entries

 significant potential for mistakes

Inefficient business processes with a lot of potential

for improvement

 SAP AG 2001 In-House Cash - Romanov 13

The System Solution

Totally integrated, global SAP solution

communicating directly with

very few

global network banks

 SAP AG 2001 In-House Cash - Romanov 14

mySAP Corporate Finance Management

Corporate
Corporate Headquarter
Headquarter –– Treasury
Analyzer
Credit Market Portfolio
Risk Risk
Analyzer Analyzer Analyzer

Financial Money Foreign Information

Markets Securities Debt Derivatives System
Market Exchange

Transaction Manager

In-House Cash Liquidity Planner

Financial
Banks Cash Management Accounting

IHC CM LP IHC CM LP IHC CM LP

Data from
Bank
Subsidiary 1 operational data
systems
Subsidiary 2 Subsidiary 3

 SAP AG 2001 In-House Cash - Romanov 15

Corporate Finance Management: In-House Cash

In-House Cash is a solution for companies that operates globally to

manage their intra-group and external payment transactions more
efficiently.

 
 IHC is set up at the group headquarter
 IHC is a virtual bank where the subsidiaries have current accounts
                   

In-House Cash Center processes all payments between various

affiliates.
 controls payment transactions on a regional and global level
 processes internal payment transactions on a cost-effective basis
 reduces the amount of external bank accounts needed
 optimizes cross-border payment traffic
 automates and standardizes business processes
 cash resources are kept within the group

 SAP AG 2001 In-House Cash - Romanov 16

Agenda

1 Introduction

In-house Banking for Value

2 Based Enterprise
Management
SAP CFM In-House Cash: Key
3 Features And Processes

4 System Architecture Scenarios

5 Value Proposition

 SAP AG 2001 In-House Cash - Romanov 17

In-house Cash: Features (1)

 Account management
 Interest calculation
 Charges
 Credit limits
 Account statements
 ...

 Intercompany as well as external payment processing

 Intercompany netting as inherent result
 Electronic bank statements

 SAP AG 2001 In-House Cash - Romanov 18

In-house Cash: Features (2)

 Cash concentration
 The physical transfer of account balances to master
accounts according to minimum and maximum
balances

 Interest Compensation
 Pooling of accounts for the purpose of
determining the total balance as basis
for interest optimization

 SAP AG 2001 In-House Cash - Romanov 19

Overview of the IHC- Center
FI – GL
Pmnt
Pmnt clearing
clearing
IHC
IHC
S1 S2 (1) 200 540 (2)
S1 S2
- 50 + 200 IHC
IHC IHC
IHC
+ 340 - 150 Receiv.
Receiv. Payab.
Payab.
(2) 540 200 (1)

Bank statements Limits

G/L Transfer
Conditions

Account A
+ 100
- 120
Business partner ...
Blocks

...
...
No Post.dte Val.dte Curr. Amnt

Currency
... 1
2
30.12.00
31.12.00
31.12.00
31.12.00
EUR
EUR
100.00 C
9.58 D

conversion Reporting Turnovers

 SAP AG 2001 In-House Cash - Romanov 20

Process 1: Internal Payment

Example: „Subsidiary 1 makes a payment to Subsidiary 2“

Corporate
Head Office
Group
Subsidiary 3 In-House Cash Financial
Subsidiary 2
2b. Center Accounting
Subsidiary 1 Account
2a.
management

Pmnt Program OP
1.

Payment Bank Statement

 SAP AG 2001 In-House Cash - Romanov 21

Process 2: Central Payments

Example: „Subsidiaries 1-3 make one centralized payment to an

external partner“
Corporate Head Office
Subsidiary 3 Group
In-House Cash Financial
Subsidiary 2
Center Accounting
Subsidiary 1
Account
2.
management 3.
Pmnt Program OP
1.
4.
5.

External
business 7. 6.

partner
Partner bank Head office
house bank
Payment Bank Statement

 SAP AG 2001 In-House Cash - Romanov 22

Process 3: External Incoming Payments via IHC

Example: „Partner pays subsidiary 1“

Corporate Head Office

Subsidiary 3 Group
In-House Cash Financial
Subsidiary 2 Center Accounting
Subsidiary 1 Account
management
5.
4.

External
business
partner 2. 3.

Pmnt program OP
1. Partner bank Head office
house bank
Payment Bank Statement

 SAP AG 2001 In-House Cash - Romanov 23

Subsequent Process: Intercompany Netting

Head Office

In-House Cash Center

Subsidiary 1 Subsidiary 2 Subsidiary 3

- 20 + 100 - 100
+ 50 - 50 + 20
.. .. ..
.. .. ..

= + 30 = + 50 = - 80

 SAP AG 2001 In-House Cash - Romanov 24

Currency Conversion Function

Corporate
Head Office
Group
Subsidiary 3 In-House Cash Financial
Subsidiary 2 Center Accounting
Account
Subsidiary 1 management Local
Currency currency
Conversion GBP
Function
Pmnt Program OP
Payment order)
-100 YEN Acct 1 Transaction Account
+100 YEN Acct 2
currency currency
YEN USD
Currency Conversion Function
 Converts the incoming payment items from the subsidiaries into account
currency (manual conversion of payment items with IHC supported)
 Enters the account currency and the reference transaction amount (e.g. for
bank statement purposes) in the posting documents in IHC.
 Generates an additional posting on currency position accounts.

 SAP AG 2001 In-House Cash - Romanov 25

Process 4: Intercompany Payments with several IHC Centers

Subsidiary 3
In-House Cash Financial
Subsidiary 2 Center America Accounting
Subsidiary 1 Account
2.
management

1.

3.

Subsidiary 6
In-House Cash Financial
Subsidiary 5 Center Europe Accounting
Subsidiary 4 Account
management
4.

Payment Bank Statement

 SAP AG 2001 In-House Cash - Romanov 26

Process 5: Central Payments with several IHC Centers

Subsidiary 3
In-House Cash Financial
Subsidiary 2 Center America Accounting
Subsidiary 1 Account
2.
management

1.

3.

External 5. 4. In-House Cash Financial

business Center Europe Accounting
partner Partner bank Head office Account
house bank management

Payment Bank Statement

 SAP AG 2001 In-House Cash - Romanov 27

Process 6: Cash Concentration

Account hierarchy (tree structure) with

minimum and maximum balances for each account

Hierarchy Root account

Cash concentration

Acct.
Acct.1100
Settlement sequence

1100
relationship (Hierarchy level 1)

Acct.
Acct.1101
1101 Acct.
Acct.1103
1103 Acct.
Acct.1104
1104 Hierarchy
level 2

Acct.
Acct.1107
1107 Acct.
Acct.1106
1106
Hierarchy
level 3

Acct.
Acct.1109
1109 Hierarchy
level 4

 SAP AG 2001 In-House Cash - Romanov 28

Process 7: Intercompany Funding/FX Hedging

Head Office

Company Code Subsidiary

Internal deals with Partner Head Office
Head Office ...

... web-enabled entry

Subsidiary of financial deals
covered in CFM
Transaction
Manager

 SAP AG 2001 In-House Cash - Romanov 29

Process 7: Intercompany Funding/FX Hedging

Head Office

Company Code Head Office

Internal deals with Partner Subsidiary
Subsidiary ...

... generated by
Subsidiary mirrordeals
covered in CFM
Transaction
Manager

 SAP AG 2001 In-House Cash - Romanov 30

Agenda

1 Introduction

In-house Banking for Value

2 Based Enterprise
Management
SAP CFM In-House Cash: Key
3 Features And Processes

4 System Architecture Scenarios

5 Value Proposition

 SAP AG 2001 In-House Cash - Romanov 31

Transition to Centralized, Global Treasury Organization

Global Treasury
• global treasury policy
• capital market management
• interest rate risk management
• global currency exposure management
• multilateral netting

Regional Treasury Regional Treasury Regional Treasury

Center Center Center
• regional cash mgt. • “service center” for • “service center” for
• regional liquidity cash and liquidity cash and liquidity
• foreign exchange • foreign exchange • foreign exchange
• treasury accounting • treasury accounting • treasury accounting

Local Entity/Business Unit

• local market presence
• local cash management (*)
• local liquidity management (*)
• local currency management (*)

(*) may be performed either locally or at the regional center

 SAP AG 2001 In-House Cash - Romanov 32

 SAP-CFM Distributed Landscape
Global House Banks Business Partner
Financial
Markets

Global Treasury “One” CFM instance

Global Treasury Policy
Group funding
Group risk management
In-House Cash
Capital market ALE Europe RTC
MR CR TM PA CM Data
Treasury postings Service bureau
IHC Liquidity & FX
CM LP/BWLP In-House Cash
Accounting FI CM

ALE
ALE / IDOC

I/C payment
ALE / IDOC

EBS Asia RTC

Service bureau

ALE / IDOC
CM data
TreasuryApostings Liquidity & FX
AL
E FI CM

ALE / IDOC
I/C payment CM data /I
D
EBS
Treasury postings O
C I/C Loan…

Local Subsidiary Local Subsidiary Local Subsidiary

FI CM FI CM FI CM

 SAP AG 2001 In-House Cash - Romanov 33

Mixed Financial Management System

Orbian
Business Partner

SAP R/3 4.6

Corporate Headquarter

Treasury Accountg
System System
Subsidiary AL
North America
E MR CR PA
Internet TM
PA Internet Non SAP
access LP
access
IHC
ALE

Subsidiary
E

Europe
AL

Internet
access
CM
SAP R/3 4.x

 Payments are made both via local house

banks and the group headquarters banks
Subsidiary
South America
 No decentralized internal payments
 A drop in transaction volume due to internal
netting
 SAP AG 2001 In-House Cash - Romanov 34
Centralized Financial Management System

Orbian
Business Partner

SAP R/2
Corporate Headquarter

Treasury Accounting
System System
Subsidiary AL
North America
E
FI
Internet MR CR PA
PA Internet Non SAP
access TM access
IHC LP ALE
SAP R/3 4.6
Subsidiary
E

Asia / Pacific
AL

Internet
access
Subsidiaries
SAP R/3 4.x
CM Europe

 The parent company processes all the

payments via its house banks
Subsidiary
South America
 No value date losses
 A drop in transaction volume due to internal
netting
 SAP AG 2001 In-House Cash - Romanov 35
Technical Overview
Subsidiary I
Subsidiary
R/3 4.0BIIor EDI-Converter
Subsidiary
R/3 4.0BIIIor EDI-Converter
Bank statement Payment
R/3 4.0B or EDI-Converter
Bank statement Payment
Bank statement Payment program
EDI
IDOC
House bank
IDOC
EDI

IHC Bank statement Incoming payments Financial

Accounting
(R/3 4.6C)

CFM (based on R/3 4.6C) G/L IDOC General Ledger

Electronic
Outgoing payments Bank statement RFC bank statement

BAPI PAYRQ

House bank Payment program

 SAP AG 2001 In-House Cash - Romanov 36

Agenda

1 Introduction

In-house Banking for Value

2 Based Enterprise
Management
SAP CFM In-House Cash: Key
3 Features And Processes

4 System Architecture Scenarios

5 Value Proposition

 SAP AG 2001 In-House Cash - Romanov 37

Benefits SAP CFM In-House Cash

 Standardized, streamlined and integrated business

processes & controls

 Better return on financial information

 Decrease in transaction volumes

 Decrease in foreign exchange transaction

volumes and currency exposure

 Decrease in number of bank relationships

and bank fees

 Decrease in losses due to float

Significant transaction cost savings &

increased efficiency

 SAP AG 2001 In-House Cash - Romanov 38

Value Proposition (1)

 In-house banking can increase the efficiency of the liquidity

management process, reduce costs and garner economies of
scale in external money markets:
 improved visibility and control minimize subsidiary cash
balances and permanently reduce working capital needs
 eliminating simultaneous borrowing and investing eliminates
spread costs (for each $10 million reduction, a 15 basis point
savings yields $15,000 annually)
 centralizing external trades minimizes the number of external
transactions, increasing deal size, reducing administrative
fees and improving rate of return/cost of borrowing (a 5 basis
point improvement represents annual savings of $50,000 on a
$100 million portfolio)
 these efficiencies may improve financial ratios and could
potentially impact credit rating and overall spreads

 SAP AG 2001 In-House Cash - Romanov 39

Value Proposition (2)

 Streamlined bank account structure will reduce fees and

overhead costs for polling, liquidity analysis, posting,
funding/sweeping/concentration, reconciliation and regular
account maintenance ($5,000 to $7,000 per account annually)
 Eliminating the physical flows associated with intercompany
payments reduces transaction costs (eliminating 250 wires
per month results in annual savings of $15,000 to $25,000)
 Concentrating business with fewer banks in conjunction with
more aggressive relationship management can reduce annual
fees substantially (savings of up to $3 million per year are not
uncommon for high volume industries such as retail)
 Centralizing liquidity management increases efficiency
through economies of scale and concentration of expertise.
This reduces internal costs and may provide more attractive
career paths for treasury staff.

 SAP AG 2001 In-House Cash - Romanov 40