In today’s market, cash manager responsibilities are more important than ever. A corporation’s liquidity is important to the overall health of a company and requires deep insight into liquidity and cash positions.
Before liquidity planning and forecasting, a cash manager would be required to compile data from many different sources, including non-SAP applications, and pull the data together to get a view of liquidity for the company. This would often take days to compile and would be out of date by the time it was completed.
The purpose of liquidity planning and forecasting in SAP S/4HANA Finance is to provide the business with the ability to forecast cash transactions and events that have an impact on the cash liquidity for the business.
Liquidity planning and forecasting in SAP S/4HANA now provides the ability to analyze cash as it moves through the cash management lifecycle. This lifecycle includes the actual cash flow, current day cash position, short-term liquidity forecast, and annual liquidity planning.
Liquidity planning and forecasting refers to the process of planning and forecasting future cash flows based on liquidity trends. This includes leveraging rolling plans and using forecast to actual comparisons on historical years as well as current periods to determine liquidity forecasts.
Let's look at the liquidity planning and forecasting process. The liquidity planning process begins by obtaining current accounts payable and accounts receivable balances to determine the expected cash outflows (payables) and inflows (receivables). Without SAP S/4HANA, this may require manual pulling and consolidation of receivables and payables balances offline from different SAP and non-SAP systems. With SAP S/4HANA, it provides a real-time integration with the One Exposure from Operations center to pull balances for receivables and payables from SAP S/4HANA, non-SAP applications, and SAP Analytics Cloud.
The One Exposure from Operations center is a real-time collection of information and storage location for operational data that’s relevant for managing cash and liquidity. The provision of the data in the One Exposure from Operations hub facilitates funds planning and risk management across multiple companies. The One Exposure from Operations hub can receive operational data from sources within the system as well as from external sources. At the time of writing this post, it’s integrated with the following sources to receive data:
- Accounts receivable/accounts payable to receive invoices, payments, and bank statements
- Collections management to receive promise to pay
- Bank statement applications
- Treasury management to receive financial instruments
- Consumer and mortgage loans
- Contract accounts receivable and payable
- Sales and distribution to receive sales order items and scheduling agreement items
- Materials management to receive purchase requisitions, purchase orders, or scheduling agreements with classic cash management
- Liquidity planning information from the Liquidity Planning app
Next, the mid-term liquidity forecast is analyzed based on which receivables and payables are committed or expected. Without SAP S/4HANA, this process may be a manual and offline, transaction-level analysis. With SAP S/4HANA's One Exposure from Operations center, the system has the commitments tracked and available as an input to forecasting in real time.
After analyzing the mid-term liquidity forecast, the next step is often to ensure additional funding to cover liquidity shortfalls. This requires an understanding of where liquidity shortfalls exist at a customer/supplier level. Without SAP S/4HANA, determining liquidity shortfalls at a business partner level may again require manual, offline analysis to transaction-level detail, then rolling up to determine trends. SAP S/4HANA provides real-time management dashboards that include graphical, analytical, and drilldown reporting that can be used to quickly identify shortfalls and focus on developing a borrowing strategy.
Last in the liquidity planning and forecasting process is the simulation of long-term liquidity scenarios. Without SAP S/4HANA, recommending long-term investment strategies is challenging without real-time liquidity data on the corporation, as well as external market data. With SAP S/4HANA Finance for cash management, internal trends and external market conditions can be used in simulations. The system also offers predictive capabilities and identification of potential risk factors.
In liquidity planning, you can also develop a workflow process that allows cash management specialists to enter planning data and cash managers to approve and consolidate planning data. It also supports creating rolling plans to enable continuous development. In addition, liquidity planning also helps to track the status and trace liquidity planning cycle to get an early warning indicator of liquidity shortages or a steering tool for medium- and long-term investment or borrowing.
Given the challenges with traditional liquidity planning and forecasting that we've discussed, SAP S/4HANA enables different insights and views into the financial health of the company.
Liquidity Planning Objects
There are several configuration items now available in SAP S/4HANA to provide a streamlined process of viewing liquidity within the organization.
Planning Units and Planning Hierarchy
The planning units are equal to the organizational units for the company. They can be defined based on how liquidity planning is structured for a company. For example, the planning unit could equal a company code, business area, or profit center, depending on the organizational elements used within the company. Hierarchies are built on the planning units for the ease of reporting and analysis.
Liquidity Planning Types
Liquidity planning types are used to define the types of liquidity plans the organization requires to perform liquidity plans. SAP S/4HANA provides predefined liquidity planning types for a monthly rolling plan as well as a non-rolling plan. For more robust planning, it’s possible to define additional liquidity planning types such as a rolling 18-month or year planning.5
Liquidity Items and Liquidity Items Hierarchies
Liquidity items are used to define types of cash flows, items used in cash flows, and liquidity forecasting and planning. Cash flows such as accounts receivable and accounts payable can be either liquidity items or liquidity item hierarchy nodes. Hierarchies on the liquidity items also provide valuable insights. For example, accounts receivable can be segregated into accounts receivable trade, accounts receivable intercompany, or accounts receivable non-trade, and the hierarchy can be designed to roll the lower-level details into overall accounts receivable. You can use the Manage Global Accounting Hierarchies for Liquidity Items app to define and manage liquidity item hierarchies for use in the Cash Flow Analyzer app.
Also, you can plan your future liquidity using the liquidity planning feature of SAP Analytics Cloud. After setting up the connection between SAP S/4HANA and SAP Analytics Cloud, you can develop liquidity plans in SAP Analytics Cloud based on the integrated data sources from SAP S/4HANA.
The memo record is used to identify cash-related items that aren’t included in SAP S/4HANA. They’re entered into the cash flow to record a cash-related transaction prior to that transaction being recorded into the SAP S/4HANA system. The memo is created with a validity date that can be used to expire the memo when the actual transactions are recorded. Not only that, but you can also create multiple memo records in a recurring pattern by copying or distributing a memo record. In addition, you can also specify an offsetting bank account for memo records when necessary
Liquidity Planning Data
In SAP’s classic cash management solution prior to SAP S/4HANA, planning data was stored separately from actual data and brought together through SAP Business Warehouse (SAP BW). This required the implementation of SAP BW or SAP Business Planning and Consolidation (SAP BPC) to perform liquidity management. In SAP S/4HANA, relevant cash liquidity data from operations, and data from forecasts, are available to the user via the Cash Flow Analyzer app, enabling a single dashboard to manage cash position, liquidity, cash flow, and payment details.
Liquidity Planning and Forecasting Reporting
Liquidity planning and forecasting reporting is yet another tool that helps treasurers and cash managers to plan and review medium- and long-term liquidity trends to access working capital needs and decide on funding and investment options. Based on the estimated future cash flows, they can clearly visualize the upcoming payment obligations and decide whether there’s a need for the funding or investment plan.
There are few SAP Fiori apps available to support liquidity planning and forecasting reporting. These liquidity apps provide the ability to create an annual liquidity plan with references to the liquidity forecast, previous years’ actuals, or with reference to another plan. This functionality provides the long-term view of liquidity through the organization. Some of the key applications are highlighted in the following sections.
You can now view and manage short-term liquidity by using the SAP S/4HANA preconfigured Liquidity Forecast app, which provides the current day’s liquidity and forecasts 89 additional days, giving a total 90-day liquidity view. The forecast is based on open accounts receivable and accounts payable, scheduled due date, scheduled payments, loans receivable, and payables. In addition to system-forecasted data, memo records can be created to forecast cash impacts that haven’t been recorded yet in the system. Memo records are often used in this process to capture items such as loans that haven’t closed or stock purchases that haven’t yet cleared.
The figure below shows the liquidity forecast for the current day’s liquidity and forecasts 89 additional days, giving a total 90-day liquidity view. It allows you to further drill down on various dimensions like company code, transaction currency, liquidity items, and so on.
Cash Flow – Detailed Analysis
SAP S/4HANA has provided new SAP Fiori apps for executing cash position and liquidity forecasts. The Cash Flow – Detailed Analysis analytical app displays the cash position key performance indicator (KPI) (see below). With cash position, you can check forecasted cash positions by location, company, and currency. Cash position data is calculated based on transactional data from memo records and the One Exposure from Operations hub.
The Cash Flow – Detailed Analysis app displays the liquidity forecast KPI. Using the liquidity forecast, you can forecast the liquidity trend for the following 90 days with various dimensions and filter conditions.
Adjust Assigned Liquidity Item
The Adjust Assigned Liquidity Item app uses machine learning techniques to review the predicted liquidity items by leveraging machine learning capabilities. With this app, you can compare the liquidity items based on the actual cash flow with the proposed predicated liquidity items based on the automated predictive machine learning model. You can also accept the system-proposed predicted liquidity item, which will then adjust and replace the actual liquidity item.
Editor’s note: This post has been adapted from a section of the book SAP S/4HANA Finance
An Introduction by Maunil Mehta, Usman Aijaz, Sam Parikh, and Sanjib Chattopadhyay.