Also, below is a transcript of the podcast episode:
Jim Hunt: Hello, this is Jim Hunt for Bramasol’s Insights to Action podcast series. Today. We’ve got John Froelich back and we’re going to talk about optimizing cash management processes for the Digital Solutions Economy. Welcome back, John.
John Froelich: I am excited to be here, Jim, all the way from New Jersey. It’s great to be with you and I’m looking forward to talking about a mouthful here with optimizing cash management.
Jim Hunt: We’ve done a number of podcasts on Digital Solutions Economy, and this one’s going to focus on that cash piece. So maybe you can start out by giving us kind of a, a brief description of how cash management itself fits into DSE?
John Froelich: I think this is one of the most under observed or under noted areas of the Digital Solutions Economy. And I think everybody gets the whole thing or the issues and challenges regarding ordering and fulfillment and revenue accounting. But I don’t think people really understand the impacts for treasury and cash. Really, it has to do with the smoothing out of the revenue and the cash that comes into your business. And we think of it in four basic concepts in revenue accounting of Volume, Velocity, Density, and Complexity, and it’s this Volume and Velocity that really has an impact on cash. And what do I mean by that? In the traditional economy, where you are buying something and you pay for it all at once, you get these lump patterns. If you have large purchases in the subscription economy, those purchases are spread out over time. And of course it smooths out the cash, and smooths out the collection of that cash. So, you begin to have to think about your cash management and your cash forecasting a little bit differently.
Jim Hunt: That’s a great overview. One of the big things we’ve talked about before is how the Digital Solutions Economy puts the customers in charge. So they get to make decisions about a whole lot of things. And I’m assuming that things like their decisions on payments and terms and bundling can really have some big impacts on managing cash on the back end.
John Froelich: It does. Jim. That’s a great point. You know, there are really four, maybe five specific areas really that we think about in this case. You hit the nail on the head with the flexibility of payment options. It’s not just the payment options as in the types, but it’s also the payment options as in how, and when do I want to pay and we’ll talk about terms. Many people want to pay with credit cards. Or they may want to use PayPal or other types of payment options. Some people are actually trying to use cryptocurrency. So, you know, you have to have a treasury infrastructure and a banking infrastructure that allows for that flexibility and certainly for a B2B. So this applies not just to B2C you know, business to consumer, but also business to business, right?
John Froelich: Because businesses may want to use debit cards of their own. They may use credit cards or use a great tool like Concur to manage those expenses, right. Or they’ll do ACH for auto payments. So it impacts both of those spaces in the case of terms. What we’re talking about is the traditional accounts receivable where I send you a bill, you have whatever your terms are, 30 to 90 days, and you can take a discount. In the DSE case, you’re allowing the customer to set the terms and really the terms are pay immediately, right? Because you send a bill, you collect the money. So there’s really none of that terms setting going on. And of course, the ability to allow customers to bundle different services solutions, and other aspects together has an impact on that.
John Froelich: You know, the benefits related to that of course are predictable revenue, and of course the banks love that – and wall street loves that. So you see this fairly predictable revenue, you have a smoothing of that revenue, and you can help manage all your in and out payments a little bit more easily in some ways, and it smooths out those lumps. But, you have to look at the flip side, you know, the more transactions you have, the more fees you have. So you want to manage that process and make sure you’re dealing with that. And then of course, depending upon where transactions take place, if you’re a global company, you’re going to have to deal with foreign exchange and manage a lot of those issues and challenges. Also, it’s got positive effects on working capital where days sales outstanding (DSO) shrink because you basically collect the bill right away.
John Froelich: But one thing that you really need to understand is as you’re moving towards these forms of payment, you also have to deal with security. If I’m going to give you my credit card, or I’m going to give you personal banking information, or even business banking information that you store in the form of an IBAN, international banking information, I don’t want hackers to have access to that. So how are you securing those transactions? Overall with the customer in charge, you’re smoothing out and you’re allowing them to pick the date, so instead of everybody collecting on the first and the 15th of the month, all of a sudden you’re collecting cash throughout the entire month. So you have to look at your banking, look at your balances, make sure you’re sweeping that money to get the best return, and that you’re doing it securely.
Jim Hunt: Great overview. Let’s switch a bit and talk about the SAP ecosystem. Maybe you can drill down on the suite of products that are appropriate and helpful for managing cash in DSE.
John Froelich: Sure. Jim, you know, there are a number of them and we had a great opportunity of course, last week to speak with Haresh Chhaya, the manager of those products for SAP. Really, the main products that you need to look at, of course, is the suite of cash and cash management, treasury and banking solutions. And those can include, how do you automatically and better manage your banking relationships and all that activity. And of course you want to do that online real time. So tools like multi-bank connectivity (MBC) allows you to have access to this network of automatic banking activity instead of using SWIFT or something like that. You can use the MBC network for bank account management, which is the inherent way that SAP now manages banking in S/4HANA allows you the flexibility to set banks up and set up bank accounts.
John Froelich: Other aspects of different banking tools, you know treasury management, your cash positions, your cash forecasting, your liquidity forecasts, all of those are important tools to allow you to have insights into those important cash flows, because as we know, cash is king, if you don’t have cash, you can’t pay your bills. So, it’s crucial for you to have that relationship and understand all of that. Interestingly enough, also obviously, to secure other products and secure everything, you’ll have a whole suite of SAP, GRC governance, risk and compliance and inherent security But we also talked about in-house cash and in house banking, and how that relates what you collect on behalf of if you have all of these different foreign exchanges. For example, how much you have in a subsidiary in Belgium that is collecting, or in Germany that’s collecting on behalf of all of your EU countries and collecting all those Euro deposits, or you might collect on behalf of Poland or some of the other countries that may not be using EU or the Euro. So, in-house banking and in-house cash become even more important to think about.
John Froelich: So, there are a whole suite of those products and certainly key to that is the idea of integration, and we’ll talk about that. But you also have the SAP BRIM portfolio that allows you to manage all of the aspects of creating your subscriptions, managing those contracts, integrating your invoicing, integrating all of your charging, and then bringing data together in a related way. So, you know, all of that together ties with the revenue accounting, RAR, or Automated Revenue Management that allows you to report accurately according to GAAP, that you have to do. So, that’s important as well.
Jim Hunt: Yeah. Maybe we could expand on that. You anticipated my next question about integrating revenue accounting. You know, we like to say that, with these new DSE business models, you still have to comply and sometimes integrating that on the backend can become problematic given the volumes velocity, density and complexity, et cetera. So maybe talk a little bit about how to integrate revenue accounting.
John Froelich: That’s a great point. The beauty to the SAP revenue accounting tool is, is multiple fold. Of course, the first one is it’s integrated into, and it’s part of the SAP core. So it works natively with all of the functionality and accesses the same information that any of the other applications would have. What do I mean by that? Well, you have vendor relationships, you have customer relationships, bank relationships, FX, foreign exchange, and interest rates, all of those play into your revenue accounting. As you look at, how do I recognize revenue and what are the triggers for that? So you want to make sure that you have the foreign exchange information clear so that you’re not constantly reconciling. You want to use the same foreign exchange rates, whether they’re real time rates or monthly rates, or however you decide to do that.
John Froelich: Of course, there’s the integration in the back-end with the GL, allowing you to see and know when and where your revenue is coming from. Then on the front end, RAR is really built to allow you to use the take advantage of the tools to feed just about anything in. Tools like BRIM Billing, Revenue Innovation Management from SAP are all designed to feed that data automatically into a RAR so that you can look at all of the information around those bundles and subscriptions, and really begin to understand how they play a part in terms of what composes them, or what are they composed of, and you integrate that into the revenue accounting.
John Froelich: So all of the things we see as deep experts on revenue accounting are also the things you see on BRIM. Also on collections, an interesting implication that came up in several conversations was around more of our customers, like Discovery that are offering their products through alternate channels. For example, Google, Apple, and Amazon Prime, they offer Discovery Plus, and they collect money, but they collect it in a lump sum from that large company, like Amazon Prime, and then they have to apply it across the different aspects of what’s appropriate to apply to customer accounts and understand which customers did they collect from and not collect from. So there’s a lot of complications. And of course, without an integrated solution to help you do that, it becomes even more difficult.
Jim Hunt: And if I’m an Amazon Prime and I’ve got Discovery Plus bundled in, I somehow need to be able to dis-aggregate all that bundling and track the transactions and put my revenue accounting in the appropriate buckets.
John Froelich: Absolutely, absolutely. And you have to be able to put it in the right buckets, according to the right customers, recognize the right amount of money. Maybe you’re doing financing or lots of different aspects of that. Absolutely.
Jim Hunt: Yeah. It certainly has a lot of complexity and the trick is to keep it simple for the customers where they’re in charge. On the back-end, you and I have talked about how it’s like a duck paddling that looks serene on the surface, but the feet are going really fast underneath. That’s what has to happen in the back-end?
John Froelich: It does. And I think people underestimate, not just handling the complexity, but how the complexity also allows you to have insights. You know, why did we call this Insight to Action podcast? Because a lot of what we’re doing is talking less about the compliance piece. Everybody has moved on from compliance, whether it’s ASC 606 or ASC 842, or all of those. Now it becomes about optimization. And how do you use the information that’s now available to you through all of these different tools to impact and optimize your business. And it changes kind of your perspective. And, and that’s why that idea of the duck paddling makes sense. I send you a bill, you pay your bill, but you know, maybe you have 10 different services that are associated with that bill and which ones are making money, which ones are not, which ones are you turning on? Are you behind with turning on different licenses? So all of that becomes a way for companies to really gain insight into their customers.
Jim Hunt: That’s a perfect segue to my wrap up question. What should our listeners be doing now to integrate and to make sure that their DSE programs are present ready and future proof?
John Froelich: Well, you know, Jim, I think the first step is to talk to somebody who understands new business models, think about your business models and think about how your customers want to work with you – really the DSE end of the Digital Solutions Economy with all of the different SAP solutions. And by the way, Bramasol has expertise in integrating not just SAP solutions, but you can integrate other tools and solutions that you have. Many customers of ours, like again, Apple, Google, Amazon, and others, that’s part of the magic of what they do is their front end that they’ve built themselves. And so a lot of that has to integrate into the other solutions and we do that.
John Froelich: But it’s really sitting down and thinking about where you want your business to be tomorrow looking at a holistic infrastructure, that can support you in the long-term using this DSE circle model, that we have, or another model, and then saying, well, how do I get there from here? And first steps of course are how do I want to deal with my customer? And what do I call my customer? And how do I want to do all of that? So I think, you know, my first step is call Bramasol. Reach out, we offer workshops and we are offering a lot of different programs that help you really think differently about your business.
Jim Hunt: That’s perfect. And, John, by the way, you mentioned the webinar from last week with Haresh, I will make sure that there’s a link to download that webinar video in the transcript of this podcast. Excellent, great overview. I really appreciate your time today. Once again, I learned a lot and I hope our listeners did too. Thanks.
John Froelich: Too. Thank you very much. And everybody thank you for listening and make it a great day. Thanks.