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Optimize Working Capital through Effective Financial Supply Chain Management

As global economies gyrate from apparent stabilization to heightened risk from  the EU monetary crisis, companies face changing financial supply chain challenges—among them are rising pressure from global competition, increased risk, and fluctuating customer demand. Most companies have already taken steps to achieve cost savings and improving productivity.Organizations today are attempting to make improvements in their financial supply chains to maximize working capital, increase cash flow and reduce liquidity risk. The financial supply chain involves the flow and use of cash within the physical supply chain, during the transfer of products and services between a company and its customers and suppliers.

Optimized financial supply chain management is designed to increase transparency and the level of business processes automation. The goal is to reduce the amount of working capital tied up in the process of buying and selling goods and services between business partners. A key strategy is to streamline a company’s order-to-cash and procure-to-pay cycles to reduce latency, ensure timely billing and cash collection.

To help frame the discussion, it’s helpful to re-examine the concept of a company’s operating cycle. Companies purchase inventory—either raw materials that will be converted into finished goods or merchandise—that will be sold to customers. Service companies face similar challenges in that they hire staff to provide services to their customers and assign them to projects. In both instances, cash is disbursed (either as a payment for inbound goods or the salaries, benefits and expenses of the service employees) well before the company receives payment from the sale of goods and services. The time between when a company pays its suppliers or employees and receives payments from its customers is called its cash conversion cycle. It is this period that financial supply chain management seeks to optimize to improve cash flow. The key to shortening the cash conversion cycle is establishing integrated workflows along with reporting and analytic technologies that provide insights into why and where in the process errors are occurring throughout the financial supply chain. Most companies don’t have the luxury of delaying payments to suppliers as a way of bolstering cash flow. Accordingly, they should focus on the inventory and order-to-cash cycle. Is the company accumulating too much inventory due to inaccurate demand planning or sales forecasting? Are customer invoices being sent out in a timely manner? Are billing errors—such as incorrect amounts, unclear goods descriptions or invoices sent to the wrong address delaying cash collections?

Technology plays a critical role in streamlining financial supply chain processes by providing increased visibility into key metrics, improving process efficiency and cash flow. Companies increasingly use integrated systems to manage these processes across functional and departmental silos—for example, across sales, shipping and accounting. Often the key to receiving customer payments faster is as simple as eliminating errors on invoices. When companies have disparate order management and billing systems, issues such as incorrect billing addresses can delay payments because the invoice takes a circuitous route to the customer. More complex issues such as incorrect invoice amounts, unclear descriptions of delivered goods or missing PO numbers can cause delays in the customer’s accounts payable department as accountants scramble to match PO numbers and verify goods receipts before they can authorize a payment.

Integrated order management, billing and accounting systems  eliminate this problem by sharing data and ensuring that items from a customer order are transferred to the invoice—along with the PO number and any other detail to help the customer with AP matching. End-to-end processes help streamline the financial supply chain by reducing delays with workflow and analytics. For example, integrated sales forecasting and demand management capabilities can help companies reduce excess inventory, leading to lower costs and free up cash that can be better used to finance the business. In addition, integrated order-to-cash processes with automated workflow helps to ensure faster billing and lead to timelier customer payments. These systems can also provide integrated analytics that deliver critical insights into overdue invoices and use case management and workflow to help drive faster collections. SAP provides several solutions to help companies solve their working capital issues and improve cash flow. Whether cloud-based or on premise, these solutions help optimize working capital, improve cash flow and reduce the risk of running out of liquidity. In today’s uncertain economy, these are critical capabilities that companies need to survive tough business conditions.

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