Ahead of the Curve

Analysts report that Brown-Forman is one of only a few companies elevating working capital and liquidity management to strategic objective status. By creating more cash flow and less debt, these forward-thinking companies have cash on hand for a rainy day, just in case some nasty litigation surfaces or a new product must be launched with much needed fanfare. They also are able to paint a more compelling picture of financial health if and when they have to borrow. How important is this? "Just simply getting companies to pay their invoices faster by one day could equal millions of dollars in cash coming in, money that can be used as working capital," says Cliff Struhar, senior advisor at The Hackett Group, an Atlanta-based benchmarking and advisory company. "Unfortunately at many companies, working capital management is not the No. 1 priority until crisis time."

The rigidity and rigor of the capital markets over the past couple of years are forcing the issue for most finance executives. While most companies lag the Brown-Formans of the world in practice, there are few companies out there that are not at least beginning to investigate ways to upgrade their cash forecasting capabilities at this point. Treasury typically is leading the crusade to maximize liquidity, guiding finance and accounting departments to standardize and automate practices to become more cash-driven organizations. "The treasury function understands best from a forecasting point of view when a company needs money," explains Tom Gorski, a managing director in accounting firm KPMG LLP's Boston office. "They set the cash policy for the firm–when it pays and is paid. They're the ones who can look at the whole puzzle, maximizing the timing as far as payments, receivables and how fast inventory is turning. They are and should be the tactical leaders in finance driving better working capital management."

The biggest hurdles: hidebound, silo-based treasury infrastructures and the lack of solutions that allow for the collection and reconciliation of data across an organization. Collections in many treasury departments, for example, are handled at the local level manually or with local IT resources, obstructing the ability to obtain a single version of liquidity. "Credit sits in one organization under one owner, billing in another organization with another owner and collections and cash applications in another organization with other owners," explains Joe Lancaster, another Hackett Group senior advisor. "But if there is one process owner–a treasurer with accountability over the entire working capital process–terrific efficiencies and improved quality can result."

Geoff Garden, Deutsche Bank's head of U.S. global cash management for corporates, sees maximizing working capital management as one of the mission-critical activities for a treasurer who is seeking a wider strategic role within his or her company. "As people see the value-added from the information integration, it becomes less of an issue as to whether treasury is moving into areas outside of their traditional role and more of a question of what more treasury can do for them along the same lines," Garden notes.

Jim Dorsey, director of marketing for treasury software provider XRT Inc., agrees: "Working capital management is one of the most important activities that a treasury department can do to truly affect the bottom line of their organization. Treasurers that don't recognize this are destined for the same end as elevator operators."

Aiding treasurers in their quest to sell the concept of sophisticated working capital management is a plethora of products, such as XRT's Enterprise Suite, which are making the job of attaining efficiency and speed easier.

Obviously, the upgrade at Brown-Forman was not an overnight makeover as Shannon, the man who spearheaded the change, would readily admit. It required discarding outmoded systems and attitudes, and in Brown-Forman's case, embracing a new cash management module sold by SAP AG. With the new functionality from its enterprise resource planning systems, treasury has been able to receive daily balance reporting files electronically from banks. "The system would tell us the balances at each account and would create the cash movements between accounts to fund our disbursement accounts and consolidate cash," Shannon explains. Because these movements are system-generated, real-time general ledger entries are made for all cash movements and, using prior-day bank balance files, treasury is able to reconcile its accounts daily and automatically, rather than manually at month-end. "We're able to upload payment files into our banking software automatically rather than re-keying wire transfers," Shannon adds.

Vendors Step Up

SAP is not the only vendor of ERP applications to boost its capability in working capital management. PeopleSoft's new-generation cash management system also provides better cash forecasting and information on customer creditworthiness as well. "As times get tough and companies look to decrease costs, companies swing toward more centralized processes and applications where they can get economies of scale and a return on investment," says Chris Leone, vice president of product strategy at Pleasanton, Calif.-based PeopleSoft. "To get a better handle on cash, treasurers must centralize the working capital function."

Such was the case at Brown-Forman. "Every cash entry we make now goes through one cash system that automatically creates a journal entry to the general ledger," Shannon says. "Every time we move money–either as part of an AP payment going out, cash coming in, a treasury entry for borrowing or repaying debt, or a currency trade–it goes through the system so that when accounting does the bank reconciliation there is a one-for-one match between the bank statement detail and a general ledger entry. And this is no longer at month-end, but daily. We can virtually close cash on any given day because we know the bank balance and ledger balance are reconciled."

Payments that previously had to be keyed in manually are now uploaded directly into the bank systems. "The system has this logic built in to know who the payment is from, and then it goes and looks to the AR ledger and applies cash to the receivables so we don't have to do that manually anymore," Shannon adds.

Brown-Forman just implemented phase two of the new system, which takes the bank reconciliation feature and rolls it out to its 16 subsidiaries. "We now have daily reconciliation and control over all our U.S. accounts and most of our international accounts–roughly 50 to 75 bank accounts covering 95% of our daily cash flow," says the assistant treasurer.

The company is now implementing the final phase of the new system, which embraces a cash value chain management concept. "We're moving to a single payment platform, using payment files extracted from the SAP AP module, for all payment types," Shannon explains. Rather than having to access one desktop banking system for international wires, another for domestic federal wires, another for FX and another for automated clearinghouse (ACH) payments, treasury will utilize its banks' straight-through processing capabilities via SAP for all electronic payment types. "No longer will we have to take one file, translate it into another file, upload it and send it through one of four different bank systems," Shannon boasts. "The module allows central treasury here to act as a house bank for our domestic and international subsidiaries."