Aims and Uses of SAP Chapter Treasury 2 Aims and Uses of SAP Treasury For more and more companies, efficient management of short-, medium- and longterm payment flows and the corresponding risks is growing into a significant competitive advantage. Tasks such as short-term monitoring and aggregation of the various bank account balances, medium-term planning and forecasting of incoming and outgoing payments in accounts receivable and payable through to a longer-term view of areas such as purchasing and sales underline the importance of integrating information from various company divisions. Linking these operational divisions to realized and planned investment and borrowing activities in Treasury has a significant impact on the success of a company in today s world. Fig. 2-1: Main Aims of Treasury (Source: Price Waterhouse, 1994) Management of Liquidity, Portfolios and Risks SAP Treasury s aim is to provide companies with a business package for efficient liquidity, portfolio and risk management. A prerequisite for the effective support of analysis, trading, and processing activities is that revenue and risk targets are established in the company. Specifications as to which accounts are used for aggregating funds or rules about minimum balances for accounts specific to certain banks are examples of the form this might take. In addition to this, legal requirements must be met. These general conditions provide the base upon which the investment and risk guidelines are specified. 2-1
2 Aims and Uses of SAP Treasury The guidelines have an impact on the following basic Treasury functions: The product types relevant for the company are determined from the investment guidelines. These might incorporate general specifications such as that investment and borrowing transactions are only possible on the basis of time deposits. In Treasury Management you can also specify that individual traders or business partners are only allowed to deal with certain product types. The SAP Treasury system includes an interactive reporting tool. With this tool you can generate a subset of overview data (e.g. all money market transactions from the last two weeks), gradually pick out those single transactions which seem particularly interesting and proceed to generate, print, modify, and interactively analyze all the relevant evaluations online. You can also transfer the data to PC applications such as Microsoft Excel. The Treasury Management component provides you with a limit system to help you keep to your risk guidelines. You can set up the limit system by defining limits for various characteristics such as transactions, contracts, traders or business partners. The option of comparing open items from the operational areas with hedging transactions plays an important part in ensuring your risk guidelines are adhered to. Risk positions are displayed and evaluated via the direct link to Market Risk Management. The risk/opportunity profile is either symmetrical or asymmetrical, depending on the instrument implemented. By selecting the appropriate instruments, each company can determine its own individual risk/ opportunity ratio. Treasury processes and functions Treasury Processes and Components If we take a closer look at the tasks assigned to the Treasury department in various companies, the first thing we notice is their diversity. To aggregate and plan bank account balances as well as plan and forecast liquidity, the financial data from the operational company divisions must be integrated. The Treasury department is only in a position to undertake revenue and risk-oriented investment and borrowing activities if all the factors which influence payments are taken account of. Based on this, various Treasury processes can be identified. 2-2
Aims and Uses of SAP Treasury 2 From a strategic point of view, the analysis and trading process provides a starting point for identifying and analyzing liquidity and risk positions on the basis of the specified revenue and risk targets. In line with this, SAP Treasury provides special methods and tools for the integrated analysis of your company s financial and risk positions. The transaction and position management process begins when transactions are concluded. This process embraces entry by the trading department, settlement and control activities in the back office, and data transfer to financial accounting. Analysis and trading process Fig. 2-2: Treasury processes These main areas of focus are reflected in the various components of the SAP Treasury system: Cash Management provides functions for efficient liquidity analysis. Market Risk Management provides methods and procedures for assessing risk positions. Treasury Management supports the administration of financial transactions and positions. Loans management provides for managing your lending business 2-3
2 Aims and Uses of SAP Treasury Fig. 2-3: Components and interfaces in SAP Treasury Funds origin Bank account management Cash Management The Cash Management (TR-CM) component allows you to analyze financial transactions in closed review periods. TR-CM also helps you identify and record future developments for the purposes of financial budgeting. Alongside the traditional financing rules and statistical ratios, dynamic liquidity analysis methods such as cash flow analysis and flow-of-funds analysis are increasingly gaining in importance. Flow-of-funds analysis in particular, is increasingly used to acquire information about the origin and use of funds. In R/3, flow-of-funds analysis is located in the Financial Information System. TR-CM uses the criteria cash holdings, funds inflow and funds outflow to categorize your company s payment transactions, providing you with information about the origin and use of funds. It also supports the following objectives: Securing of liquidity to fulfill due payment commitments. Monitoring and control of incoming and outgoing payment flows. Provision of information for control of short-term financial investments and borrowings. Depending on the time period under review, a distinction is made between cash position, liquidity forecast and medium- and long-term financial budgeting. Although the review periods merge into one another (a short-term view leads into a long-term view), different objectives play a role in the different planning forms. TR-CM therefore ensures that all relevant liquidity information is available and can be evaluated, both fulfilling market requirements and providing a basis for cash management and forecast decisions. Its bank account management tool com- 2-4
Aims and Uses of SAP Treasury 2 prises electronic banking and control functions for running evaluations and making preparations for cash management and forecasting. The cash position provides you with information about your current financial situation in bank account terms. You can run the related evaluations at different aggregation levels and vary the level of detail. The cash position therefore serves as the starting point for account clearing. In account clearing, the system concentrates the balances of various bank accounts into a target account while referring to defined minimum balances. The liquidity forecast additionally integrates anticipated funds inflows and outflows from financial accounting and purchasing and sales to show the mid- to long-term liquidity trend. Within the liquidity forecast you can gain relevant information about debit- and credit-side payment flows from sub-ledger accounting. Payment flows generated by financial transactions in Treasury Management enter both the liquidity forecast and the cash position. The cash position and the liquidity forecast contain both foreign currency balances and anticipated foreign currency items. You can also add manual planning information such as payment advice notes or target data to the evaluations. Depending on the organizational structure of your company, analyses are possible both on group level and on individual enterprise level. Market Risk Management Within Treasury, Market Risk Management plays a vital role in ensuring your company s competitiveness. The process involves a complex feedback loop encompassing data collection, risk measurement, analysis, and simulation as well as active planning of financial instruments. This process interlinks with other treasury and corporate functions. The complexity of this management process and its interaction underline the need for a powerful toolset. SAP Market Risk Management (TR-MRM) acts as an integrated, central risk control station with monitoring and management functions. Access to information on current and future cash flows and on financial deals already processed is an absolute must. As a result, Cash Management, which pools all cash flows from your business sectors, forms the basis. Consequently, all cash flows from the company s operational business can be accessed for the purposes of risk management. Furthermore, all financial transactions managed in Treasury Management can be evaluated together with the cash flows generated by the various operational divisions. TR-MRM provides various measurements for analyzing and assessing interest rate and currency risks. Mark-to-market, effective rate and effective yield calculations are based on up-to-the-minute market data, uploaded via datafeed, and financial transactions or positions. Numerous simulation options provide an indepth insight into your existing risk profile or the change potential of the current market value. By simulating market data, you can determine the risk structure using what-if analyses (such as crash or worst case scenarios). You can base your analyses either on randomly chosen market data changes or on changes which are statistically probable (value at risk). Cash position and account clearing Liquidity forecast Interest and currency risks Simulation 2-5
2 Aims and Uses of SAP Treasury Support for decision-making You can actively manage and control your risk positions by simulating the effect of transactions (such as forex or derivative transactions) on your risk profile. You can also represent hedging positions by linking financial instruments with transactions from financial accounting or logistics. In brief, TR-MRM provides the following methods and evaluations: Position valuation: Mark-to-market valuation of all commonly used financial instruments Future values for any give horizon Performance indicators: Effective rate Internal Rate of Return Risk indicators: Value at Risk Currency exposure (market values or delta equivalents) Interest exposure (measured in basis point values) Sensitivities (interest rate, volatility and exchange rate changes) Liquidity indicators: Cash flows of variable and optional instruments One outstanding characteristic of the SAP Treasury system is that it provides components which support the decision-making process as well as components which support trading and processing activities. Treasury components designed to support the decision-making process help you retain an overview of your company s liquidity and risk positions. The components are: Cash and liquidity management Financial budgeting and budget monitoring Portfolio and risk management These components provide evaluations at different aggregation levels which you can define yourself. Integrated links to other SAP modules (in particular Financial Accounting and Logistics) as well as to external information systems (such as a realtime datafeed providing current financial market data) enable you to quickly recognize and respond to even the most dynamic changes on the financial markets. Loans Management The SAP Loans Management (TR-LO) component allows you to efficiently enter loans given and manage your loans positions. In a later release, loans taken will be integrated into Loans Management as well. The component is designed to rationalize loans management by automating typical processes. From the creation of a loans offer for an interested party, through drawing up the contract when the decision is made and complex collateral management to passing on the information to financial accounting numerous functions support you at all stages and 2-6
Aims and Uses of SAP Treasury 2 help to streamline processing activities. Because Loans Management is integrated in the SAP Treasury system, you can immediately measure the effects of loans on your liquidity or interest rate risk. Basic functions such as central business partner management or the Treasury Information System additionally provide you with a comprehensive overview of the relationships maintained with your business partner. The design of the transaction and position management process through which a loan passes from transaction initiation through to the signing of the contract, relates to a standard basic structure which you can adjust to match the type of loan in question. In TR-LO there are four basic loans categories for which special processing functions are provided: Mortgage loans Borrower s note loans Policy loans General loans (such as employee loans) When an interested party asks about taking out a loan, you can initially enter rudimentary data in the system in order to create a corresponding offer. You add the missing information when the contract is concluded after checking the credit standing of the interested party. At this point you have the option of creating a file in order to efficiently administer the necessary documents. You complete the contract data by assigning the contract collateral and objects, based on which the system can determine the collateral value, and can then proceed to pay out the loan, either in full, or in installments. By entering release stipulations you can integrate further demands on process security. When it comes to processing purchases and sales of traded borrower s notes, a specially designed order administration system is at hand. You can flexibly configure the features and conditions of each loan. Because condition items are assigned individually, you can represent even the most complex interest and repayment terms in the system. The task of drawing up standard contracts is supported with predefined condition templates and reference loans. The position management tool contains functions for processing current contracts and unscheduled transactions and for automatically generating rollover offers once fixed interest rate periods have come to an end, together with the relevant correspondence. Support is also provided for loans accounting with tools for manual and automatic debit entries, transfer postings, closing work - such as the accrual of interest or discounts and position valuations. In addition to subledger management, the loans component facilitates open item management for customer accounts, providing an interface to Financial Accounting to ensure that the relevant posting information is passed on. You can also post-edit payments received, entered into the system via the payment program in Financial Accounting, directly in Loans Management based on user-defined criteria. The Loans Management information system helps you monitor deadlines and evaluate positions and returns. Business partner information provides you with a detailed overview of your loan partner s total commitment. With the drilldown reporting tool you can generate and edit your own reports in addition to making use of predefined standard reports. Transaction administration Flexible definition of conditions Position management Integrated financial accounting Reporting 2-7
2 Aims and Uses of SAP Treasury Transaction and position management process Function areas Central functions Realtime datafeed Documentation and monitoring functions Treasury Management Using information gained from current liquidity and risk analyses, you consider the conditions prevailing on the money and capital markets before making a concrete decision about your company s future investments and borrowings. You implement this decision in the form of financial transactions in SAP Treasury Management (TR-TM). Treasury Management s objective is to: Manage financial transactions and positions from trading through to transferring data to financial accounting. Provide flexible reporting and evaluation structures for analyzing financial transactions, positions, and portfolios. For short-term liquidity and risk management, you can use money market or foreign exchange transactions to smooth out liquidity squeezes and gluts or to hedge against currency risks. In the medium and long-term area, securities and loans instruments additionally come into play. Active management of interest rate and currency risks is facilitated by the derivative financial instruments provided. To record the corresponding financial transactions and simultaneously meet organizational requirements ensuring process security (such as separation of trading and back office functions or releases before posting), Treasury Management provides adjustable processes for transaction and position management. These processes, together with the direct transfer of relevant information to Financial Accounting, help you efficiently manage your business transactions. All financial instruments have standardized basic structures or flows which you can pre-adjust to suit your company. The trading area contains functions for recording financial deals, exercising rights, performing evaluations, and calculating prices (e.g. option price calculator). In the back office area, you enter additional data required for processing transactions (such as account assignment and payment details) and generate automatic confirmations. Position management functions, such as securities account transfers or corporate actions relating to securities, are also supported in the back office. The accounting area features automatic posting functions for transferring data to financial accounting, a realtime general ledger update, flexible functions for processing payment transactions as well as valuation and accrual/deferral procedures. Central functions and tools ensure that business partner and address management, financial mathematics, the flexible instrument generator, status-controlled transaction processing and realtime reporting are available throughout. In addition to this, common organizational elements allow different organizational structures such as a group-wide treasury department or in-house banks to be represented in the system. The common elements also ensure full integration of Treasury with other SAP R/3 applications. The realtime datafeed interface enables you to quickly recognize and respond to changes on the financial markets by providing you with constant access to current market data. Running umbrella evaluations for all activities in Treasury is no problem due to extensive documentation and monitoring functions. These functions, which support documentation and monitoring tasks in Financial Accounting and Treasury, 2-8
Aims and Uses of SAP Treasury 2 facilitate evaluations for specific instruments, as well as evaluations covering all instruments, at any stage of the Treasury processes. The reporting tool allows you to trace financial transactions, the origins of cash flows and the impact on Financial Accounting at any given time. Direct access allows you to keep yourself up-to-date on current cash flows, their calculation conditions and the status of individual transactions. You can also monitor the current status of the financial transactions and trace their history (for example: order, contract, exercise, termination, reversal or rollover). Use the flexible reporting tool to monitor your financial transactions and positions. The tool displays all transactions together with their history and their status at a level of detail which you yourself define. Moreover, you can monitor not only your transactions and positions but also the corresponding posting documents - another example of how interfacing to other SAP applications is used. Flexible reporting 2-9