Treasury and Corporate Finance Management

This section will cover Treasury and CFM
The objective of SAP TRM is to ensure efficient liquidity, transaction and risk management.
SAP Corporate Finance Management is divided into three areas:
1. Transaction Management (TM) supports the management of financial transactions and positions.
2. The Market Risk and Credit Risk Analyzer components provide methods and procedures for analyzing market risk and default risk and contribute towards controlling and offsetting these risks.
3. In-House Cash allows you to process intra-group payments and external payment transactions.
Financial Instruments in TMFinancial Instruments in TRM are divided into 5 groups:

• Money Market for the short term investments and day to day borrowings
• Foreign Exchange for all the FX deals whether spot or forwards or options.
• Debt management coves both bilateral agreements such as bank loans as well as syndicated agreements such as Debt Issue Programs and facilities
• The derivatives cover many types of OTP derivatives such as Caps and swaps as well as listed futures and options.

- Securities cover both bonds and shares, with many types of Listed is the instruments supported by TM. Transaction and Position Management Process
The transaction and position management process is divided into the following areas:
- In the trading area, you create transactions and exercise rights.
- In the back office, you settle the transactions, that is, you check the entered transactions and carry out position management-related processes such as securities account transfers.
- Accounting covers the accounting treatment of the relevant activities in the sub ledger and the transfer of the posting information to the FI General Ledger.

Overview of Functionality
Ø       Complete management of financial transactions and positions
-          Support of trading and back office functions
-          Functions to track, check and release transactions
-          Data transfer to Financial Accounting
(including accruals/deferrals and valuations)
Ø       Flexible settings to accommodate company specific transactions and position management processes
Ø       Assignment of financial transactions to portfolios or transaction management in securities accounts
Ø       Flexible reporting and portfolio analysis
Integration between TRM and GL in my SAP ERP
Ø       In SAP Treasury and Risk Management you use a separate Valuation Area for each accounting principle
Ø       The results of the valuations are calculated separately for each valuation area using a full approach
Ø       Each Valuation Area is assigned to a GL Accounting Principle
Ø       The valuation area "001" should be assigned to the leading ledger in GL
Ø       When TRM generates postings with payment information it ensures that the payment is only made once
Ø       It is possible to have a valuation area in TRM that does not post to the GL
Ø       The results of the valuations are then only available in TRM and meant for internal treasury reporting

Treasury and Risk Management  explained

What is the role of Treasury in an organization?

Treasury department's main role is to ensure that the organization is able to meet its commitment to external parties like suppiers and to internal parties like employees. Treasury should ensure that they have enough money to pay the supplier and the employees and at the same time ensure that the cost of capital is least by investing any excess available funds profitably or repaying existing loans/borrowings. They should also ensure that the borrowing cost is least by financing the company's operation by a proper mix of short term funds like commercial paper or long term funds like Issue of bonds or raising capital by issuing shares.

How does SAP help a Treasurer or the Treasury department in playing the above role efficiently?

SAP has various modules (listed below) which help the Treasury department in performing the above role efficiently:

1. Bank Accounting - Menu Path - Accounting - Financial Accounting - Banks

  This covers Electronic Bank Statement, Lockbox, Check deposit etc.

2. Financial Supply Chain Management in ECC 6.0 covers the following modules:

a. Cash and Liquiditiy Management covers Cash Managment, Liquidity Forecast and Liquidity Planner

b. In-House cash

c. Treasury and Risk Management which covers the following sub-modules

    i) Transaction Manager -  Money Market, Foreign Exchange, Derivatives, Securities, Debt Management, Hedge Management.

   ii) Market Risk analyzer

  iii) Credit risk analyzer

  iv) Portfolio Analyzer

It will be my endeavour to cover the above topics - one-by-one- over the next 3 months. I invite others  to help me in this endeavour.

I want to make this forum very interactive, so that people who are implementing these modules can post their questions and others can answer them.

SAP Treasury functionality (with ECC 6.0) is best of the breed and is as good as other stand alone products like Sungard and Wallstreet. So in the coming years all the companies who need these functionalities will implement SAP Treasury. So I encourage SAP FI/CO consultants to learn this module and help companies implement them because today there is a huge shortage of people with these skills.

Kalyan - Day 2 - October 18, 2007 

 Cash and Liquidity Management

Scenario:

ABC  is a global company based in USA with operations across the globe. They have 50 legal entities - 10 in North America, 10 in Europe, 5 in South America, 5 in Africa and 10 in Asia Pacific.

The Treasurer of ABC comes to work at 9.00 AM Eastern and looks at his cash position. It looks something like this:

                                           USD (in '000)

Opening Balance in Banks            100,000  

Expected Reciepts for the day          5,000

Expected Payments for the day       85,000

Excess cash available for the day    20,000

Based on the above report the Treasurer decides to invest the excess USD 20 Million in the short term Money Market.

Now in order to get the above report the following SAP modules should be implemented otherwise the information will be incomplete and the Treasurer cannot take his decision:

1. Before the Treasurer come in to his office, the Electronic bank statement for all the Bank accounts (ABC banks with around 15 banks globally and have a total of 300 bank accounts) were recieved and were automatically uploaded into SAP. When they are uploaded they automatically post to the correct GL account and clear the open items in Customer/Vendor/GL accounts.

2. ABC's AP department has run its payment program and the same is reflected in the cash position report. If the payment program has not run already, then the Treasurer should run the Cash position and Liqudity Forecast Reort (CP & LF) together, so that he will get an idea of the open AP items which are likely to be paid today.

3. ABC also uses SAP AR modules and the open AR items can be viewed in the CP & LF.

4. Apart from the above the Treasurer also wants to know how much  is the likely Payroll that will be paid on Friday October 19, 2007. This information is not available in SAP because ABC uses ADP (HR Processing company) for payroll. But one day in advance ADP sends all the information like Net payroll which will be paid to the employees on Oct. 19, the payroll taxes etc. HR then enters this information in SAP as a 'Memo (Planned) record' and this memo record shows up in the CP & LF report. Thus the Treasurer has clear visibility of this and any other planned item which has been entered as 'Memo Record'.

5. Since ABC has recieved only the 'prior' day bank statement (Electronic Bank statement as of the previous working day) the transactions of current day are not reflected in the CP & LF report. The Treasurer would however like to know details of amount likely to be recieved today from LOCKBOX, payments that will be debited to the 'controlled disbursement' accout, the wires recieved from some of ABC's big customers etc.  For this purpose ABC recieves 'current day' bank statement from its major banks. This current day statement is uploaded automatically into SAP which in turn creates Memo Records and it gets reflected in the CP & LF report. The current day bank statements are recieved every hour - starting from 5.00 AM - and they keep updated the CP & LF report by creating Memo records.

 6. Based on all the above inofrmation, the Treasurer is able to take an investment decision. Since all the above information are accruate the Treasurer is able to take an informed decision. Moreover since in SAP all these modules are tightly integrated, the Treasury department need not put together all this information by using excel sheets (which takes hours) for the Treasurer to take a decision. All the Treasurer has to do is run the CP & LF report (Tr.Code FF7A) and he will have up-to-minute information to facilitate his decision making.

7. Once the Treasurer takes the decision to invest the excess USD 20 Million, the treasury staff will take necessary steps. They will call the bank (called Business Partner in SAP Treasury) and execute the transaction. This will also be entered in the Transaction Manager. Now after this transaction is entered and the Treasurer run the CP & LF report he will see that the final balance for the day is Zero.

Thus with the CP & LF report Treasury ensures that all excess money is invested and earns interest. If for the day the Net position was 'negative' the Treasurer would have borrowed from the money market so that the immediately cash needs are met.

Comments: I will build on this scenario  and we will go in detail into the Cash Management and Liquidity forecast module. I will also include configuration documents which will help the reader to learn these modules. Please send your comments/remarks/questions to my email kalyank80@hotmail.com and that will help me in building this document and also in correcting my mistakes.

Aravind 13-12-2007

Challenges in the field of Treasury and Risk Management.

Currently very good products are avialable in the market in the TRM space. Some of the prominent vendors in the TRM space include Murex, Reuters, Sungard and Misys. The complete list of the 2007 Asia Risk Technology Survey can found at the following link:

http://www.murex.com/webdoc/AsiaRiskTechnologyRankings_2007.pdf

Clearly SAP has to bring in a lot of innovations to be be succcessful in this space.

Having personally worked with the Indian product in the TRM space ( Finacle-Treasury by Infosys) and Kondor ( Reuters), I briefly list down the standard functionalities of a standard TRM product.

The Treasury department essentially consists of a front office, middle office and a back office system. The front office is responsible for entering the data( trades). The middle office is resposible for Risk Management. This is essentially to try to reduce the risk or Risk Mitigation. The back office is responsible for settlements. So a standard treasury product in the market today has facilities for these. The front office application id generally termed as Deal-Capture in most of the applications. The middle office application is termed as Postion-Keeping application. The back office functionalities include the integration for sending SWIFT(Society for Worldwide Interbank Financial Telecommunication)  messages. SWIFT is world wide standard for exchange of information. The treasury products also consist of a component for Limits. Limits are a facility to keep a check on the money involved in a trade by a member or counterparty. The VAR( Value at Risk) is also provided by almost all the TRM products in the market.

This is the information based on my experiences in TRM space. Professional reasearch can be obtained by a consulting company called Celent.

More information can be found in the link below:

http://www.celent.com/

I hope SAP will be successful in the coming years in the TRM space.