Accounting, Financial, Taxation

Accounting and finance departments have always strived to improve the management of cash flows, reduce working capital and financing costs, track long-term indicators of solvency and contain transaction-processing costs. However, the centralized accounting function, due to intra- and inter-enterprise collaboration and integration, is no longer centralized in many organizations. Accounting processes are handled by different pieces of software, costs are not only internal but also spread across the supply chain and accounting information is contained not only in the general ledger but also is scattered in data, information and knowledge warehouses. These changes pose new challenges in dealing with old problems and offer new solutions for the same problems.

The financial supply chain, also referred to as financial value chain, is the new area emerging to deal with the new financial processes. This term has been around for at least a decade, though consultants and software vendors have put a new spin on it. Now, the area of financial supply chain, similar to SCM, has multiple interpretations, multiple perspectives and no single departmental owner.

Aberdeen Group defines financial value chain as follows:

A range of B2B, trade-related, intra- and inter-enterprise, financial transaction-based functions and processes” (Best practices in streamlining the financial value chain, 2002, www.aberdeen.com). Killen & Associates Inc. categorizes all the services provided by financial supply chain into three categories: “performance measurement and control, decision support and transaction processing (Optimizing the financial supply chain, 2002, www.killen.com).

 

SAP, on the other hand, includes: order-to-cash, purchase-to-pay, bank processes and relationship management, and cash management (mySAP Financials: Next generation integration, 2003, www.sap.com) as four processes in the financial supply chain management.

These definitions evidently cover all aspects of accounting and finance. Functionalities explored, from the revenue cycle to treasury functions seen in the last section, fall under the gamut of financial supply chain. Problems encountered by accounting departments in identifying costs, let alone controlling those costs, are formidable. Illustrative internal problems include disparate ERP systems, lack of consolidation and budgeting software, patchwork of add-on modules and absence of an organizational strategy. External problems may include establishing relationships with suppliers and customers, banking relationships, lack of access to real-time data and managing funds in an uncertain external environment. A number of these problems were reviewed earlier in the book. Financial supply chain management tools are available, though a concerted strategy to employ those tools for optimizing financial supply chain is missing in most organizations.

Aberdeen Group forecasts that optimization of financial supply chain can result in substantial savings. The savings forecasts for a billion-dollar company are as follows:

1. Reduction in working capital by 20% to 25%
2. Reduction in financing costs by $4 million per year
3. Proactive warnings for delayed receivables and reduction in Days Sales Outstanding (DSOs)
4. Approximately $13 million savings from transaction processing costs

According to another estimate, the cost to finance products moving through the supply chain is approximately $360 billion, or 4% GDP. If these forecasts are correct, then major corporations can achieve billions of dollars in savings by optimizing financial supply chain. But, how does a corporation optimize the financial supply chain?

Solutions offered by consultants and software vendors primarily revolve around the new tools seen so far. Suggested tools can be classified into three categories: ERP systems to integrate internal functions, Web-based tools to facilitate free flow of information with trading partners, and hybrid tools that use functionalities of ERP and the Internet.

Due to the convergence of software tools, no distinction in these categories was made in this post. However, most of the tools and software that we have seen is from the second and third category. A summary of these tools for each cycle is provided:

(a). Revenue Cycle

1. CRM
2. Online credit check
3. Web-enabled WMS for order fulfillment
4. Web-based tracking of shipments
5. Electronic invoice (bill) presentment and payment
6. Online management of receivables
7. Web-based cash collection and payment methods

(2). Expenditure Cycle

1. SRM tools
2. Procurement cards
3. Employee self-service features
4. Online management of expenses
5. Online management of assets

(3). Conversion Cycle

1. Supply chain planning tools
2. Supply chain execution tools
3. Supply chain collaboration tools
4. Supply chain coordination tools

(4). General Ledger Cycle

1. Technical and managerial requirements for virtual close
2. BI tools
3. Planning and budgeting solutions
4. Enterprise portals

(5). Treasury Functions

1. Cash and liquidity management tools
2. Debt and investment management tools
3. Risk evaluation tools

Financial supply chain management aims to reduce costs in financial management, transaction processing and financial reporting. Financial supply chain is optimized by automating, outsourcing Web enabling and rationalizing financial workflows and business processes. The tools to achieve these objectives are available. However, the cost effectiveness and efficacy of these tools is not proven. The optimal investment in information technology for financial supply chain management is a difficult question to answer, and the answers are probably unique for each organization. It seems that consultants and software vendors will thrive in this area for a while!

Traditionally, the credit approval process is reactive; that is, a sales order arrives and the credit department evaluates credit worthiness of the customer. The credit process can be classified in three phases:

1. Assessing quantum of and collecting information about the customer
2. Evaluating the information
3. Deciding credit worthiness of the customer

Credit approval decisions encompass trade credit, consumer credit or equipment financing. The time and expense involved in credit decisions depends on whether the customer is new or established, availability of current information, whether an order is above or below the credit limit, algorithms applied to evaluate the credit worthiness of the customer, and other factors deemed important by the credit manager. This approach has worked fairly well in established traditional commerce.

However, in the new e-environment, this approach can be costly, delay credit approval and cause inconsistency in decision-making, and result in lost sales or un-collectibles. Now, incoming orders are automated, 24/7 and customers are geographically scattered. This environment forces corporations to respond to routine and non-routine credit approvals in real time. The traditional credit approval process may become a bottleneck in the revenue-generation process, since alternate suppliers are only a click away.

Historically, corporations have attempted a variety of techniques to accelerate the credit approval process; for example, reengineering, automation and artificial intelligence techniques. Internet resources provide other options to manage the credit approval process. Internet-based resources and services can be used to collect information on the customer, can provide standard and customized decision mechanisms, or can be used to automate the entire credit approval process.

The Internet has numerous resources to collect general information regarding new or prospective customers. The illustrative list of resources is provided in below exhibit.

Note: The above lists merely give some examples, but are not meant to be an exhaustive list of either resources or services. Additionally, nature of the services provided changes rapidly.

The resources listed provide the following types of information:

1. Financials, standard filings.
2. Address of the company, incorporation information, product lines and top management information
3. Current and historical stock quotes and movements
4. News and current events such as mergers, acquisitions, new products and new personnel
5. Industry and sector news

These services provide a good starting point in the credit approval process. Costs vary based on the brand name of the service, depth of the information desired and extent of the required information. However, information concerning small businesses or international businesses can be hard to obtain.

Specific information regarding the customer can also be obtained using the resources listed in below. These Web-based companies collect information from various sources and compile a comprehensive information portfolio. Available information is as follows:

1. Name, address and contact information
2. History of the business
3. Financials, financial summary, key financial indicators and graphics
4. Credit lines
5. Credit score based on proprietary models
6. Telephone, fax and Web address
7. Names and information of the top managers
8. Lines of business, product lines and Standard Industry Codes (SIC)
9. Public filings concerning tax liens, judgments and liens, and UCC filings
10. Competitors
11. Country risk analysis

The information provided is quite comprehensive and, according to vendors, updated constantly. These services are cost effective even for ad-hoc queries and accessible by a browser; search and retrieval of this information is available in real time.

For example: prices can vary from $X per query to thousands of dollars for an annual contract. Information on small businesses, privately held businesses and international businesses is also available. The disadvantages of these services are difficulty in verifying accuracy and integrity of the information, continuing need for cost-benefit analysis and stability of the service.

Internet-based services also provide tools to aggregate the information to derive credit rankings. Illustrative sites that provide these tools are shown in below exhibit.

The risk assessment tools use proprietary algorithms but also allow customization based on criteria specified by the customer.

For example: a vendor can tailor the program to a specific company’s needs, design rules and criteria based on that company’s input, offer standardized decision engines, interpret results and push the results to the credit manager’s desktop. The decision engines employ a variety of algorithms; for example, advanced statistical methods, expert systems and artificial intelligence techniques. The users need not understand technical intricacies of the program, but should have a general understanding of the strengths and weaknesses of various algorithms. The outputs of the system can include a credit risk score, comparison of risk level of the business with other businesses, background information regarding the business and other items specified by the user. These services can be tailored to small businesses, international businesses or large businesses.

The primary advantages of these decision tools are: minimized manual intervention, reduced cycle time for decisions, consistency in credit policy enforcement and reduced operating costs. However, the tool needs to be chosen carefully, and there are upfront and recurring costs, such as software and hardware investment, programming and validating the tool, continuing maintenance or monthly payments to Web-based services.

The traditional, off-line credit grantors will benefit from the resources listed so far. However, in the case of Web orders, the credit decision must be delivered in minutes or seconds. This calls for automation of the entire credit approval process. The credit approval decision can be completed in a matter of minutes. Web-based services that provide such support are listed in blow exhibit.

The process flow can be described as follows:

1. Business installs the automated credit decision-making system. The system needs to be integrated with a legacy accounting or ERP system, connected with approved credit bureaus, able to access designated public information sources and be embedded with the required decision expertise.
2. Customer information is forwarded to the credit system once the sales order arrives. The credit system pools data from the accounting system, credit bureaus and public information sources.
3. The collected information is filtered through the decision engine to arrive at a credit score and the consequent decision. The decision engine is provided by the vendor and is generally customized by the business.
4. If the decision is yes, then the system can generate the necessary documentation or can forward the decision to the approved personnel or machine.
5. Exceptions are handled on basis of the rules programmed in the system.

The costs and successes of such services are based on a variety of factors; for example, transaction volume; difficulty in integrating a credit system with accounting systems; types and number of credit bureaus used; and intangible costs, such as process redesign or reengineering, and resistance from the credit personnel, among other things.

A number of factors should be considered before using the Internet. An illustrative list follows:

1. The speed with which credit needs to be approved.
2. The frequency of routine vs. non-routine (such as exceptions, high-dollar value items or risky customers) credit approval decisions. The higher the frequency of non-routine decisions, the lesser the use of the credit approval system.
3. Accuracy and integrity of the information available on the vendor’s Web site.
4. The decision tool should be evaluated for accuracy, customization capabilities, expertise and training required for using the tool, updating routines and data import/export capabilities.
5. Ability of the automated service to integrate with existing legacy or ERP systems.
6. Relative costs involved in in-house vs. outsourced credit approval decision. For example, costs saved — such as redeployment of credit personnel, no investment in software and hardware, no recurring maintenance expense; against costs incurred — such as lost expertise, treatment of exceptional cases, monthly payments, cost of dedicated connections and stability of the service provider.

The Internet has opened new ways to approach credit approvals. The Internet-based resources can speed up the credit approval process and support various degrees of automation. Various levels of services are offered by such Internet-based companies. Acquiring information about the customers from proprietary and public databases, feeding customer information into decision tools available on the Web or customizing the entire credit approval process; whatever the requirement, the Internet can be profitably leveraged to improve the credit approval process.

Following on my previous post (Understanding The SAP CRM Tools ), This post takes a detailed look at the e-selling functionality, which provides information regarding how SAP CRM tools deal with incoming sales orders on the Web. The e-selling functionality can be used to create Web-based storefronts. The Web sites required to transact business in the B2B, Business-to-Market (B2M) and B2C environment are different. The B2B environment involves long-term contractual and pricing arrangements, multiple buyers from a single customer and elaborate shipping requirements.

The B2M environment is often characterized by connections with online exchanges and dealing with customers from around the world. Pricing information, inventory availability and product configuration capabilities often are expected by B2M customers. In the B2C environment, the Web site needs to be easy to navigate; electronic catalogs with multimedia content are often required; and shopping carts and credit card payment facilities are an absolute must.

The e-selling functionality in the SAP CRM can be used to create these different types of Web storefronts. These Web sites that serve different clientele need many supporting features to be effective. The first and foremost requirement is catalog or content management. The electronic purchasing process depends on the availability of products in the electronic format, referred to as electronic catalogs. The electronic catalogs provide information via text, graphics, pictures, audio and video, among other things. If product descriptions and selling terms and conditions are not electronic, then the buying process cannot be automated. The more detailed and searchable the product database, the easier is the job of the customers. Managing these electronic catalogs is called content or catalog management, in e-commerce jargon.

Content management is a complex and costly process. The e-selling authoring tools can be used to create product catalogs. The electronic catalogs can be developed in different formats, such as XML, spreadsheet and Comma Separated Value (CSV); and automatically uploaded to the Web site. The content can be changed, updated or modified. Additionally, these catalogs can also be imported from online exchanges and third-party content providers. The electronic catalogs are of no use unless they can be efficiently searched. The CRM tools also provide a search facility for users. The search tools are similar to the ones you may have encountered on the Internet — for example, Google.

The SAP CRM tools can offer self-service functionality for customers. Customers may be able to conduct a variety of activities, such as entering orders, tracking orders, issuing special instructions and viewing their accounts. A new customer can establish an account online and conduct business. Sometimes the software allows the customer to set up a customized screen available every time that customer logs in. These features relieve company departments from routine queries and paperwork while empowering customers to seek information in a timely fashion.

The customer can also see a personalized page based on his or her profile, preferences and purchasing history. The customer will see product recommendations, related product categories, and cross-selling and up-selling suggestions that facilitate one-toone marketing. The CRM tools can also be used to create online product configurators. Customers can design products or customize products. Calculators can provide feedback on the prices for designed or customized products; knowledge bases can be used to provide relevant suggestions; and incompatible configurations are flagged and rejected. Such product configurators need to be connected to the back-end systems to ensure accuracy and product availability. The shopping carts, secure connections, and ability to handle credit card and procurement card payments can also be added to the Web site.

As the customer orders a product — self-designed, customized or off the shelf —availability and delivery dates need to be calculated. Factors such as current inventory, production capacity, shipping routes, shipping costs and time are considered in making available-to-promise check. The integration may extend all the way up to the supply chain, discussed in the Conversion Cycle. The SAP CRM and SAP SCM tools can be used to provide such integration. Once the order is in place and prices and delivery dates are confirmed, the customer should be capable of tracking orders, viewing invoices and querying appropriate personnel in case of problems. The SAP CRM tools, apart from these features, also provide hyperlinks to carriers’ tracking systems.

The e-selling tools can be used to conduct online auctions to get rid of surplus goods and excess inventory. Bids can be solicited, the auction process can be monitored in real time and bids can be evaluated using multiple criteria with in-built algorithms. The Web storefront can also be connected with the customer interaction center. The customer can talk with service agents via phone, chat facilities or voice-over-IP options. Customers can also track service requests, connect and explore company knowledge bases, establish online user forums and access online technical support. Routing of customer requests and inquiries is based on automated workflows. These customer interactions and customer activities data are stored in a data warehouse. This data can be used to generate reports concerning customer behavior, retention reports, conversion reports, site metrics and sales analytics. Accounting processes can become part of the CRM process. The customers can establish their own accounts, change contact information and periodically view those accounts. Credit approvals can be automated or performed online. The invoices can be automatically generated and electronically presented to the customers. In the B2B environment, invoices can be altogether dispensed with to support the ERS process.

Payments can be made via credit cards or procurement cards and can be executed in the Web store. These developments are discussed in the next sections; however, at this stage please realize that some accounting processes can be handled by CRM software.