Creating Single View of Cash Across Global Finance Operations

On May 26th, 2017, the Dow Jones Industrial Average (DJIA) turned 120 years old. The DJIA, however, is not the oldest index in the world. That distinction belongs to Dow Jones Transportation Average, established in 1884. The DJIA began with just twelve (12) public equity stocks. This was increased to twenty (20) public equity stocks by 1916 and in 1928 was increased to and remains today, at thirty (30).

An interesting fact, on DJIA’s birthday, investor confidence is high and according to the March, 2017
Chicago Board Options Exchange (CBOE) Press Release, DJIA Volatility Index (VXD), is the lowest it has been in well over ten years.

This investor confidence is not isolated to the DJIA. The growth rate of real gross domestic product
(GDP) as measured by the United States Bureau of Economic Analysis (BEA), a key metric of the pace of economic activity, is one of the factors contributing to the Federal Reserve Board increasing the prime lending rate for just the third time since the 2008 financial crisis.

The Fed raised its benchmark lending rate in December and again in March of 2017. Clearly the Fed is gradually reducing economic incentives by increasing Fed lending rates to Banks. According to reports, the Fed believes the economy is expanding at what many consider to be a “sustainable pace”. Robert S. Kaplan, president of the Federal Reserve Bank of Dallas, said he “expects the Fed to raise rates twice more this year.”

In addition, the US Central Bank is going to start to reduce some of the bloated $4 trillion in Treasury and Mortgage-Backed Securities (MSB) which they (we taxpayers actually) hold. As you remember, the Federal Reserve Bank of New York directed the Federal Open Market Committee (FOMC), as late as March of 2010, to purchase another $1.25 trillion of MSB’s, for “economic stimulation” and to help bailout financial markets. Beginning to reduce MSB’s is another visible step in Fed policy retreating from a long “economic stimulus campaign”. This bodes well for the US economy.

The good news, we are not alone.

In April of 2017 a “World Economic Outlook”, was provided by the International Monetary Fund (IMF). Their assessment:

“Global economic activity is picking up with a long-awaited cyclical recovery in investment,
manufacturing, and trade. World growth is expected to rise from 3.1 percent in 2016 to 3.5
percent in 2017 and 3.6 percent in 2018. Stronger activity, expectations of more robust global
demand, reduced deflationary pressures, and optimistic financial markets are all upside
developments.

The World Bank recently reported in their Global Economic Prospects, stating “Global growth in 2016 is estimated at a post-crisis low of 2.3 percent and is projected to 2.7 percent in 2017. Growth in emerging market and developing economies (EMDEs) is expected to pick up in 2017, reflecting receding obstacles to activity in commodity exporters and continued solid domestic demand in commodity importers.”

This is consistent with what we are hearing from the US Federal Reserve Board. The last Fed meeting position “…we wanted to see evidence of stronger economic growth before continuing to increase the Fed’s benchmark interest rate.” Under these FOMC’s procedures, each quarter the Committee releases projections of real GDP growth, the civilian unemployment rate, total personal consumption expenditures (PCE) chain-weighted price inflation and core PCE chain-weighted price inflation.

Currently there appear to be all three.

In April of 2017, according to the Bureau of labor Statistics, the US Unemployment rate was 4.4%. US Employment had not been this high since May of 2007, that is a 10 year unemployment low. With a strengthening economy and labor markets looking brighter, we can count on the Federal Open Market Committee (FOMC), of the Federal Reserve Board, to continue to raise the targets for the Fed Funds Lending Rate, potentially in June and again in December. The current target
range is 0.50–0.75 percent.

What effect does rising Fed Interest rates have on the cost of doing business globally?

Since the U.S. dollar essentially serves as the world’s reserve currency, changes in U.S. monetary policy affects global markets. Central Banks around the world tend to react to Fed changes in fairly predictable patterns.

Many countries link their currency to the U.S. dollar, so they typically increase their interest rates in
response to Fed hikes. Among other things this also helps to keep local inflation in check. A few might actually drop their rates, in order to “stimulate growth”, but that tends to be short lived.
And like most Central Banks, most global finance executives are already moving to minimize the impact of the corresponding increases in their weighted cost of capital.

If you have any doubt, just look at the latest “Hackett CFO Agenda – Finance’s Top Four Strategic
Priorities in 2017” The Hackett Group, publishes a “Key Issues Study” every year and this year is no
exception. Nilly Essaides, Hackett Senior Research Director, Tom Willman, Hackett Asst. Principal and Global Practice Leader, Finance Executive Advisory Program and Jim O’Connor, Global Practice Leader, Global Business Services and Finance Advisory Programs, are the authors of this year’s study.

The Hackett conclusion for this year:

“In 2017, companies intend to shift gradually away from the defensive growth strategies of the past few years in favor of more aggressive growth through innovation. Consequently, finance organizations will face two main challenges in the coming year: first, supporting company strategy while working with more constraints on funding and headcount, and second, providing the enterprise with more – and more sophisticated – information and analytics that are essential to achieving its goals.”

“As organizations retool to meet new risks and capitalize on new opportunities, finance must
recreate itself as well so it can help management formulate strategy and provide it with the
information and insight it needs to make better decisions.”

It is very clear, 75% of the Hackett survey companies are planning “major changes in technology in
2017” to “Improve finance data governance and master data management”.

The number one “Critical Importance” focus area for this year: “Achieve and maintain competitive
enterprise Cost structure”.

The number one “Critical Capability” focus area for this year: – “Expand finance work executed in global business services/shared services.”

In fact, 97% of the Hackett Survey respondents see this “Digital transformation will strongly impact finance performance” and 91% said it will “alter the way finance delivers its services.”

One of the highest-ranked changes anticipated for this year is “redeploying capacity” and “developing and implementing finance KPIs and information/reporting strategies.”

Clients are telling us the same things. As the average weighted cost of capital (WCC) increases, corresponding to the increases in the cost of available funds (lending rates), they are more keenly focused on these seven working capital strategies:

  1. Create a Single View of Global Accounts Receivable Working Capital – Across all Operating Units
  2. Demand Cash & Risk Visibility Across Currencies – Countries – Languages & Trading Regions
  3. Consolidate Customer Master Data from Disparate Billing and ERP Systems of Record
  4. Build Parent-Child Hierarchical Roll-Ups for Consolidated A/R Portfolio & Credit Risk Analytics
  5. Utilize Capacity-Driven Worklists for Improving Performance in Credit, Collections, and Dispute Adjudication
  6. Separate Clean-Receivables from Dirty Receivables to Produce More Accurate Aging Reports
  7. Optimize Financial Shared Services Center Performance
Let’s take a look at each of these seven areas. The aggregated impact of these improves command and control of available Working Capital:
Create a Single View of Global Accounts Receivable Working Capital - Across all Operating Units

Just look at the Balance Sheet of any public corporation, depending on the valuation and
quantity of Inventory they carry, you will consistently find that Accounts Receivable will be the
#1 or #2 asset on the books.

One consistent element we see with all top performing multi-national corporations is a cash focused view of their global operation. Their greatest challenge, being able to bring it all
together in one place and easily analyze it, in near real-time, across all operating units, billing
systems, data-bases, languages, currencies, trading regions and resources spread across the
globe.

Think about the Hackett Group 2017 conclusion, “As organizations retool to meet new risks and
capitalize on new opportunities, finance must recreate itself as well so it can help management
formulate strategy and provide it with the information and insight it needs to make better
decisions.” That is the key – making better decisions using accurate and complete information.
In every enterprise implementing working capital best practices, we have seen finance managers
and executives repurposing siloed departmental resources into a shared and executable global
mission of achieving excellence as stewards of their books-of-business, which means corporate
cash.

The U.S. Federal Reserve is on the move again. The weighted average cost of capital is once again on the rise, and this will be occurring in all Central Banks. The artificially low-cost of readily available cash is changing. This means that once again the Accounts Receivable and Credit departments, typically responsible for 60% of a company’s available working capital, are being elevated in status and visibility. If you are not already being challenged to deliver higher levels of productivity with less resources, you are unique. Are you hiring?

The good news about the constraints on ‘cheap cash’, executive management is now more
focused on working capital than they have been in a long time and this gives you a stronger voice to make some of the changes that you have wanted for years. Has this proven to make a difference? Yes. In fact the Hackett/REL study above shows that “As a result of this (working capital) discipline, companies with a cash culture need 52% less working capital”.

That is a startling fact, but completely understandable. Think about all the inefficiencies in your
own global working capital processes, information systems, resources in disconnected
departments and redundant, repetitive manually processed…all managing 60% of your
company’s life-blood: Cash.

Demand Cash & Risk Visibility Across Currencies - Countries - Languages & Trading Regions

Critical working capital information resides in your systems of record, the trick is getting access
to key data in a timely, comprehensive and consistent manner. 

If, like most, you are pulling Client transactional information out of multiple, disparate, disjointed corporate data repositories and then dumping it into spreadsheets and working it with Microsoft Excel Macros and Pivot Tables…are you able to do this every day?

Do you need IT resources to create or alter the data extractions?
Do you need IT to even work the complex data analytics engine?
Is there “dirty data” which you need to clean out, prior to running your analytics?
Do you only have partial data, because your system does not permit keeping proper
data history?
Do you only have partial client transactional data because the three or four acquisitions,
all selling to the same Client-base, have transactional information only on their systems?

One, or more, of these questions are true for most global multi-nationals. Agreed, this
knowledge does not make your job any easier (or make you feel any better) but at the very least,
you realize that you are the ‘rule’, not the ‘exception’. 

More and more finance teams are demanding better cash and risk visibility across currencies,
countries, languages and trading regions. The challenge is that when “cash is cheap”
management focuses on other areas, like supply-chains and expanding the company. Times are
changing and this is good news for finance teams starving for command and control of their
departmental destiny and autonomy from IT. Rising Working Capital costs will make this a
reality.

Consolidate Customer Master Data from Disparate Billing and ERP Systems of Record

Even companies who have spent millions of dollars on SAP, Oracle, PeopleSoft, JD Edwards,
Microsoft, Infor, …etc., trying to consolidate customer master data from disparate billing and
ERP systems of record, have not been able to deliver “Clean”, accurate and timely Master Data
to finance teams.

Why is this? The answer is simple – it is because doing this is extremely complex.

Creating a single view of customer “truth” is the reason Cforia exists and is thriving. The bottom
line, a best-of-bread point-product dedicated to order-to-cash, co-existing with current billing
systems-of-record, aggregating disparate master data from multiple sources, facilitating
optimized process and resource productivity, no matter where they are located in the world, is
what moved the needle for working capital improvement and impacts available cash.

Build Parent-Child Hierarchical Roll-Ups for Consolidated A/R Portfolio & Credit Risk Analytics

One of the biggest challenges we see on a daily basis is companies not being able to see an
entire Accounts Receivable portfolio for a global client, especially those doing business with
multiple divisions or wholly owned subsidiaries.

One would think that companies spending millions of dollars setting up and maintaining ERP
systems like SAP, Oracle and Microsoft, would have this under control by now, but they do not.
The challenge is monolithic software in general, is complex to use and even harder to customize
across operating units.

Without the ability to accurately see, on a daily basis, the entire global exposure from a Client, it
is very difficult to execute replicable order hold/release decisions. Without the ability to see the
payment behavior trending of a parent/child entity, you cannot properly asses the portfolio risk
or change in client volatility. Without the ability to see pending orders and future exposure, it is
very difficult to assess in a timely manner. Without the ability to strip out “dirty receivables”,
Aged Trial Balances are wrong.

Utilize Capacity-Driven Worklists for Improving Performance in Credit, Collections, and Dispute Adjudication

This is a very common challenge, even for companies who have invested large sums of money in the ‘advanced credit and collections’ modules from SAP and Oracle, as well as companies who have invested in aging bolt-on credit/collections point products.

The logic is simple, if you are an order-to-cash resource and come into work after a lively
weekend with the family (or any morning) and your system has analyzed the data and handed
you 300 “suggested activities”, what do you do?

The Collector ignores the guidance and goes back to “oldest / largest balances” off the
aged trial balance spreadsheet, which is pulled out of the system of record…which the
collector/resolver quite often keeps reminder notes in.

Clearly this is not a best practice. It is not scalable, replicable and does nothing to help you
create more predictable order-to-cash outcomes. In short, you need a system which takes “what
is really possible, into consideration. Beyond that, you want a system which helps you balance
activity priorities dynamically, across the entire order-to-cash lifecycle.

Separate Clean-Receivables from Dirty Receivables to Produce More Accurate Aging Reports
Most Collections departments operate off the dollars stated in the Aged Trial Balance for a Client. The challenge is that there are disputed dollars, deductions, Credit-Memos, unresolved Trade-Fund Co-Op dollars, pending payments, payment plan work-outs in progress, promised payments, payments in clearing stages, …etc. All of these conditions cause your collectors and resolvers to “manually account” for the discrepancies, dozens of times each day. Trying to do this without a single-view of global cash, creates a huge amount of inefficiency, manual rework and redundant non-value-add process steps. Now, multiply that across all the systems of record you have globally and the ability to generate “clean A/R” for all global teams is just not possible.
Optimize Financial Shared Services Center Performance

Remember the Hackett Group Survey. The number one “Critical Capability” for 2017-2018 was to “Expand finance work executed in global business services/shared services”. Now that is a very telling statistic.

Shared Services are well suited for back-office operations like order to cash (OTC) – especially
Collections Prioritization and Cash Acceleration, Dispute and Deductions Management, Credit
Management (Provisioning, Decisioning, and Risk Analytics) and Cash Application.

One of the greatest challenges for shared services is the inability to unlock working capital
trapped within multiple disparate order to cash processes and systems. For global Accounts Receivable teams they operate within many operating units, many countries, doing business in
many languages supporting personnel operating on different ERP systems which are incompatible. This causes manual and off-system processes, supported by disconnected spreadsheets and Pivot tables as islands of critical finance data.

The good news is, some technology providers have solved these issues and have successfully implemented in global companies, making financial shared services work for their companies.

Clearly lots to think about as you are weighing options and considering how your finance department “…retools to meet new risks and capitalize on new opportunities” to help your company achieve its 2017-2018 working capital performance objectives.

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