Cash Accounting and Cash Flow Planning with SAP Liquidity Planner

Stephan Kerber, Dirk Warntje

Content Introduction .............................................. 3

Structure of the Book ..................................... Acknowledgments .......................................... 3 4 3.4 Cash Accounting Processes ................... 28 Information Acquisition from Assignment Mechanisms ...................... 28 Information Acquisition from Bank Statement Information ................ 29 Information Acquisition from Financial Accounting ............................ 31 6 7 3.5 8 9 Manual Assignment and Manual Transfer Posting ................................... 36 Analysis Reports ................................... 36 Conclusion ........................................... 37

Business Overview .................................. 5

1.1 1.2 1.3 1.4 1.5 1.6 The Concept of Cash Accounting .......... Tasks of Cash Accounting and Liquidity Planning ................................. Recipients and the Need for Information .......................................... Financial Accounting and Cash Accounting ................................... Differences to Cash Management ......... 5

Conclusion ........................................... 11

SAP Liquidity Planner: Liquidity Planning and Reporting Using SAP BW/SEM ............................... 39
4.1 Modeling in SAP BW/SEM .................... 40 SAP Business Content ......................... 40 Master Data ......................................... 45 Characteristics ..................................... 53 Planning Layout in SAP SEM-BPS/BW-BPS ........................ 54 4.2 4.3 4.4 4.5 The Liquidity Planning Process .............. 63 Extracting Actual Data .......................... 64 Reporting in SAP BW ............................ 67 Conclusion ........................................... 69

Case Scenario: Implementing Cash Accounting and Liquidity Planning .... 13

2.1 Conclusion ........................................... 15

SAP Liquidity Planner: Liquidity Analysis Using SAP Actual Calculation ................................................. 17
3.1 3.2 3.3 Overall Process and System Integration ............................................ 17 Technical Settings in SAP Actual Calculation ........................................... 17 SAP Actual Calculation (Cash Accounting) ................................ 19 Data Model and Master Data ............... 19 FunctionalityOverview ..................... 21 Customizing SAP Actual Calculation ... 21 Tools .................................................... 26 Tables ................................................... 27

Liquidity Planning and Reporting Without SAP BW/SEM .......................... 71

5.1 5.2 5.3 5.4 5.5 5.6 Overview .............................................. 71 Customizing .......................................... 71 Master Data and Actual Data ................ 75 Planning ............................................... 76 Reporting ............................................. 77 Conclusion ........................................... 78

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Content

Outlook ...................................................... 79 Appendix .................................................... 81

Lee Iacocca and Cash Flow ............................. 81 Indirect Cash Flow .......................................... 81 Plug-in ........................................................... 81 Case Scenario ................................................. 82

Bibliography .............................................. 83 Index ........................................................... 85

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Introduction

This book is about money. Where does money come from and where does it go? Because liquidity is one of the critical success factors for a company, it is integral to running a business. The most important aspects of liquidity are the ability to ensure solvency and generate payment surpluses. In this context, companies constantly try to analyze and plan their cash ow. Unfortunately, established applications such as Accounting or Cash Management dont provide the necessary information on cash ow required by companies; however, SAP Liquidity Planner affords you with the much needed relief in this area, as shown by its rst implementations in both nationally and internationally operating companies. The complex requirements placed on a retrograde liquidity analysis, a decentral planning tool, and an efcient reporting were met by the use of SAP Liquidity Planner. SAP Liquidity Planner is a component that consists of two applications: Cash Accounting (SAP R/3) and Liquidity Planning (prior to Release 3.5, it was part of SAP Strategic Enterprise Management (SAP SEM), from SAP Business Information Warehouse (SAP BW) Release 3.5 onwards, it has been included in BW). Cash accounting determines the cash ow either based on an electronic bank statement or data from nancial accounting. Liquidity planning is carried out using the planning functionality in SAP BW. Reporting is performed by SAP BW. In the past, this component was part of Corporate Finance Management (CFM), and since the introduction of mySAP Enterprise Resource Planning (mySAP ERP) in 2004, it has been located in the Cash Management and Liquidity Management area as part of Financial Supply Chain Management (FSCM). This SAP Press Essentials book outlines the concepts of cash accounting and liquidity planning, as well as the resulting requirements that a business software must be able to meet. In this book, the authors demonstrate how

you can meet these requirements using SAP Liquidity Planner and also, how you can implement this product. Readers of this book should have a sound knowledge of the accounting application in SAP R/3 as well as SAP BW and SAP SEM.

Structure of the Book

Chapter 1 outlines the business principles and provides clear denitions of the terms used in the context of cash accounting and liquidity planning. In addition, the concept of cash accounting is introduced, along with a description of its interdependencies with accounting. In the nal sections of this chapter, we clearly distinguish SAP Liquidity Planner from SAP Cash Management. Chapter 2 describes a case study that is referred to and further developed throughout the book. We use this example to help you understand the functionality and the technical concept of SAP Liquidity Planner, but it should also serve as an aide to you in implementing this component. Chapter 3 and Chapter 4 contain a detailed description of SAP Liquidity Planner. They provide an insightful introduction to the two main areas of the product: Chapter 3 describes Cash Accounting (SAP R/3), while Chapter 4 deals with Liquidity Planning (SAP BW). In both chapters, you will also nd detailed information on customizing and the various functions of the application. Wherever necessary, the case scenario is referred to, enhanced, and completed. Chapter 5 describes a workaround for simplied liquidity planning and reporting in SAP R/3 without using SAP BW. Chapter 6 addresses possible developments and future requirements of SAP Liquidity Planner. The Appendix contains additional information.

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Introduction

Acknowledgments
SAP is a registered trademark of SAP AG, Dietmar-HoppAllee 16, D-69190 Walldorf. We would like to thank SAP AG for its permission to use the trademark and the materials provided in this book. Note that SAP AG, however, is not the publisher of this book nor is it responsible for the contents of this book. We would like to express our deepest gratitude to our colleague Robert Bieber who supported us with numerous tips and invaluable information.

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1 Business Overview

In this chapter, we will rst dene and differentiate cash accounting and liquidity planning. This is a rather important step in understanding these concepts as they are often used in a multitude of ways. Next, well describe the tasks performed by cash accounting and liquidity planning. Because cash accounting and general accounting are inherently interrelated, we should point out their interrelationships. Lastly, well describe the differences between cash accounting and SAP Cash Management.

Cash accounting records the changes of cash ows, cash ows being incoming and outgoing payments of liquid funds such as cash in hand and bank savings. In accordance with national and international accounting standards such as FASB and IAS, we will use the term cash ow in this book to describe the changes in the means of payment. Liquidity is therefore referred to as a nancial accounting-related concept. Within a certain period, cash accounting records transactions that have a direct inuence on the stock of liquid funds, regardless of the period the payments refer to (see Geuppert 2003, p. 8). This type of recording and displaying of cash ows can be compared to scal accounting, which is used in the public sector. Therefore, cash accounting distinguishes itself from accrual accounting and cost accounting. Figure 1.1 illustrates

1.1

The Concept of Cash Accounting

In business literature, youll nd countless discussions about the concept of cash accounting and its denition. In these discussions, youll also encounter the following terms: cash budget management, ow-of-funds analysis, and cash ow statement, as well as cash ow accounting.

Incoming/Outgoing Payments
Expenditure/Revenue Expense/Profit Costs/Benefits
Cash Accounting
Profit and Loss Statement

Data Source (SAP) Cash Accounting Accounting

Controlling

Cash Basis Accounting

Cost and Activity Accounting

Figure 1.1 Cash Accounting in the Context of General Accounting (according to Baetge 1992, pp. 3)

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Business Overview

the basic differences between the various types of accounting. In addition, it is now apparent that in business theory, cash accounting always refers to several periods. This concept is generally adopted by SAP Liquidity Planner. Because the SAP Liquidity Planner component consists of two applications (see Section 3.1), the rst application, SAP Actual Calculation, refers to past and current periods, while the other application, SAP Liquidity Planning (SAP BW/SEM), considers future periods.

up until one year before its insolvency, it wasnt able to meet its payment obligations. However, cash ow had already been negative in earlier years.

Cash Accounting

Liquidity Planning

t past current period future

Figure 1.3 Comparison of Prot and Cash Flow at W. T. Grant (Source: Largay/Stickney 1980, pp. 15)

The reason for such a discrepancy can be found in the different ways in which information is analyzed by accounting. For example, discrepancies can occur due to an in-

Retrograde Determination

Reciprocal Determination

creased stocking up of a warehouse, an expansion strategy that requires high investments, or by a bad overall economic situation during which extended terms of payment are granted. A classic example that personies this state of affairs, and is therefore frequently cited, is the situation at Chrysler Corporation at the end of the 1970s when Lee Iacocca assumed the position of CEO. At that time, Chrysler had a high stock of automobiles, compounded by a low demand for these vehicles. The cash ow situation was very critical (see also the section in the Appendix, Lee Iacocca and Cash Flow, or Iacocca 1984, pp. 200). These two examples (i.e., W. T. Grant and Chrysler) clearly show that in order to evaluate the degree of solvency, cash ow is a far better indicator than the prot of a company. Usually a companys external nancing potential, for example, by acquiring external capital, is rather limited. Due to the size of the company or its current situation (for example, high debt-equity ratio), external nancing can become increasingly difcult. For this reason, the internal nancing potential plays an increasingly important role within the range of different nancing possibilities for a company (dynamic aspect) (Amen 1999, p. 4). Internal nancing potential means that a company can

Figure 1.2 Time-Based Delimitation of Cash Accounting and Liquidity Planning

1.2

Tasks of Cash Accounting and Liquidity Planning

The primary task of cash accounting is to provide information on a companys solvency and internal nancing potential. Apart from that, it serves as a basis for the creation of ow-of-funds analyses and plannings. Compared to the balance sheet and the prot and loss statement, cash accounting enables you to better assess the nancial situation of a company. The ability to generate sufcient liquid funds from its business activities and to secure these funds in future periods is one of the prerequisites for a company to survive (static aspect) (Amen 1999, p. 4). Cash accounting supports a company in evaluating its solvency status as well as its insolvency risk. The comparison of prot and cash ow of the W. T. Grant company, as shown in Figure 1.3, demonstrates the importance of analyzing and determining the cash ow situation. Even though the Grant company was protable

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1.3 Recipients and the Need for Information

generate more revenue than expenditures from its activities. This potential is also referred to as internal nancing strength. If a company can continuously build up liquidity, in addition to conducting its regular business activity, this surplus is called strategic liquidity. To obtain universally valid and comparable information on the degree of solvency of a company, the internal nancing potential and the overall nancial situation, national and international accounting principles require ow-of-funds analyses or cash ow statements as procedures and display formats. Here a distinction is made between indirect and direct procedures. In this book we will only describe the direct procedure since cash accounting doesnt support the indirect procedure. Therefore, direct procedure will be a critical part of this book. You can nd an example of the indirect procedure, which is supported by accounting (SAP FI), in the Indirect Cash Flow section in the Appendix of this book. According to national and international regulations, the ow-of-funds analysis can be divided into three areas:

The total of the three areas represents the total cash ow of the company. The cash ow statement is an essential part of quarterly and annual reports since it meets the information needs of various recipients (see Section 1.3).

1.3

Recipients and the Need for Information

According to the Financial Accounting Standards Board (FASB), the major recipients of cash accounting information that is contained in a cash ow statement are the following groups (FASB 1978, para. 25):

Investors, lenders, suppliers, employees To investors, lenders, suppliers, and employees, a business enterprise is a source of cash in the form of dividends or interests , repayment of borrowing, payment for goods or services, or salaries or wages. They invest cash, goods, or services expect to obtain sufcient cash in return

Customers To customers, a business enterprise is a source of goods or service, but only by obtaining sufcient cash to pay for the resources it usesand to meet its other obligations can the enterprise provide those goods or services.

Cash ow from operating activities Cash ow from investing activities Cash ow from nancing activities

Management To managers, the cash ows of a business enterprise are a signicant part of their management responsibilities, including their accountability to directors and owners.

According to IAS 7, the basic structure of a ow-of-funds analysis could look as follows (Ktting/Weber 2001, pp. 467):

Cash ow from operating activities + Incoming payments from customers Outgoing payments to suppliers = Cash ow from operating activities (1)

Figure 1.4 illustrates the major important relationships between a company and its business partners in terms of activities and liquidity. Due to the different kinds of business relationships, each of the involved parties has a specic need for information with regard to cash accounting. The following list contains the most important items (Geuppert 2003, pp. 10, and FASB 1978, para. 24):

Cash ow from investing activities + Incoming payments from asset retirements Outgoing payments for asset acquisitions + Incoming payments from nancial asset retirements Outgoing payments for investments in nancial assets = Cash ow from investing activities (2)

For management

Ensuring solvency by optimizing cash ow based on short-term and long-term liquidity planning Determining the internal nancing potential, building up strategic liquidity, and determining requirements for external nancing

Cash ow from nancing activities + Incoming payments from equity allocations Outgoing payments to company shareholders + Incoming payments from borrowings Outgoing payments for loans = Cash ow from nancing activities (3)

Determining nancing requirements for planned investments and integration in cash accounting and liquidity planning

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Business Overview

Investors
Investment Loan Dividends and Withdrawals

Lenders

Suppliers

Amortization and Interest Payments

Company

Payment of Activity

Payment of Activity

Payment of Activity

Employees

Customers

Activity

Cash Flow

Figure 1.4 Cash Inow and Cash Outow from a Companys Perspective (according to Geuppert 2003, p. 10)

Ensuring creditworthiness, particularly with regard to the requirements of rating agencies

1.4

Financial Accounting and Cash Accounting

The data source (see Figure 1.1) for cash accounting is the posting material in nancial accounting. In nancial accounting, cash accounts, balance sheet accounts, and prot and loss accounts (P&L accounts) are interrelated; therefore, we can also speak of a threefold accounting system. This account-based integration1, as shown in Table 1.1, enables you to determine the cash ow required in cash accounting.
Chart of accounts Cash accounts Balance sheet accounts P&L accounts

For investors and lenders (equity providers and providers of external capital) Assessing the ability to pay dividends, interest, and amortization

For suppliers Evaluating the creditworthiness and solvency and forecasting the payment behavior based on these evaluations

For employees Evaluating the creditworthiness, solvency, and future existence of the company

For customers Assessing the delivery reliability and the consistency of conditions

Cash accounting

Balance sheet Assets (without liquid funds)

Prot and loss statement

The different recipientsand therefore varying information needsdemonstrate the importance of cash accounting and liquidity planning.

Revenues

Expenditures

Liabilities

Expense

Prot

Cash balance

P&L account

Table 1.1 The Three Parts of Accounting

1 Accounting and consequently ERP systems are structured according to the principle of double-entry accounting. A triple-entry accounting system hasnt been implemented yet.

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1.5 Differences to Cash Management

In addition, business transactions related to accounting can be classied as affecting net income and not affecting net income, and as having an effect on liquidity and having no effect on liquidity (Gebhardt 1999, pp. 21). The payment of a dividend, for instance, is a transaction that affects the net income and the liquidity; therefore, it is relevant for both cash accounting and the prot and loss statement. The depreciation of an asset merely affects the net income, but not the liquidity. This distinction makes it easier to determine the source of funds and their application. Figure 1.5 illustrates the relationships between the individual accounts in nancial accounting. Here you can see that there are 14 different account assignment types available to post business transactions in accounting. For each account assignment type, we have provided an example (the following numbers correspond to the posting example used in Figure 1.5): 1. 2. 3. 4. 5. 6. 7. 8. 9. Cash payment for ofce equipment Revenue from cash sales Depreciation of tangible assets Posting of supplier invoice Invoicing of an activity Dissolving of provisions Revenues from invoices Borrowing Payment of supplier invoices

It is apparent that the connection between two account assignment types demonstrates the source or application of funds. This is because the central task of cash accounting is the What for search: What have funds been received or paid for? Lets try to clarify this with another example. In the accounting department of a company, a supplier invoice (1) is posted. The posting displayed in Figure 1.5 affects the net income, but has no effect on liquidity. This is further claried by the posting example in Table 1.2.
Bank $ 100 Vendor (2) (2) $ 100 $ 100 Ofce equipment (1) (1) $ 100

Table 1.2 Vendor Payment

Then the open item is paid (2). According to Figure 1.6, this transaction has an effect on the liquidity, but not on the net income. Only when these two postings haven been linked with each other can you determine the cash ow according to its application. One hundred dollars ($ 100) was used for ofce equipment. This posting is a simple example of the direct determination of a cash ow.

10. Cash payment for material purchases 11. Accounting exchange on the assets side 12. Contribution in kind from shareholders 13. Clearing of receivables and payables 14. Accounting exchange on the liabilities side

1.5

Differences to Cash Management

In this section, well describe the primary differences between Cash Management and Liquidity Planner. SAP Cash Management is focused on short-term cash manage-

Figure 1.5 Accounting-Relevant Linking of Cash Accounts, Balance Sheet Accounts, and P&L Accounts

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Business Overview

Cash Management
Cash Management and Forecast Revenues

Cash Accounting
Opening Balance Revenues

Customer Group X Customer Group Y

Expenditures

Revenue Liquid Tangible Assets Other

Expenditures

Vendor Group X Vendor Group Y

Closing Balance
Figure 1.6 Distinction Between Cash Management and Cash Accounting

Material Personnel Taxes

Closing Balance

ment, whereas SAP Liquidity Planner considers medium to long-term liquidity planning. Cash Management provides information on the current bank account status and it contains a liquidity forecast regarding incoming and outgoing payments from the perspective of payments for accounts receivables and for accounts payables (or write: payments to customer and to vendor). The bank accounts in the general ledger constitute the data basis for the bank account status. If a bank account shows a current status of $ 500, this status is displayed in the bank account status in Cash Management. The liquidity forecast uses accounts receivable and accounts payable as a basis. It evaluates the open items of suppliers and customers, and the terms of payment stored with the respective documents, and displays this information in the liquidity forecast. A cash ow is not determined, because only the open items are evaluated and displayed. In addition, the cash ows to be expected can be displayed only with regard to specic customers and customer groups, or suppliers and supplier groups respectively. The only information that can be deter-

mined is From whom and For whom. What the funds are paid for cannot be identied. Conversely, cash accounting refers to real cash ow and the source and application of funds can be identied. Unlike Cash Management, cash accounting requires all general ledger accounts that have an effect on liquidity, as described in Section 1.4. Moreover, cash accounting is part of an overall process that consists of cash accounting and liquidity planning, which will be described in further detail in Chapters 3 and 4. Table 1.3 contains a list of the most important differences:
Cash Management No consideration of cash ow No identication of source and application of funds Cash Accounting Real cash ow consideration Identication of source and application of funds

Table 1.3 Differences Between Cash Management and Cash Accounting

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1.6 Conclusion

Cash Management Accounting as the data source, but only bank accounts and subledgers Liquidity forecast (based on open items) View: Vendors and customers (groups) and bank account status No integration in planning process

Cash Accounting All relevant accounts of cash accounting chart of accounts as data source Forecast of revenues and expenditures possible (based on open items) View: Revenue and expenditure items Integrated planning process (SAP BW/SEM)

Table 1.3 Differences Between Cash Management and Cash Accounting (cont.)

1.6

Conclusion

In the following chapters, we dene the concepts of cash accounting and liquidity planning and introduce them in the context of different accounting types. Moreover, we describe the group of recipients and their need for information regarding cash accounting, and we highlight the interdependencies with accounting by clarifying how you can use the information from accounting to determine your cash ow situation. Finally, we describe the differences between SAP Liquidity Planner and SAP Cash Management to outline the tasks performed by SAP Liquidity Planner within the FSCM product portfolio.

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2 Case Scenario: Implementing Cash Accounting and Liquidity Planning

Based on a specic real-life situation that weve encountered several times, we will build up a scenario for implementing SAP Liquidity Planner. In the subsequent chapters, this case scenario will be further developed in parts. This example is used to support your understanding of the functionality and the technical concept of SAP Liquidity Planner, but it will also serve as an aide in helping you to implement this component. The initial situation looks as follows: Well consider an international corporation, the IDES Group, which is structured as follows:

or three years. However, the company expects a decrease in prices in the long run. This means that the revenues from its core business will go down (cash inow reduction). At the same time, the company forecasts a strong increase in raw material prices and rising labor costs at the production sites. This will lead to a situation in which the expenditures in production will increase dramatically (increase in cash outow). Consequently, net cash ow will be strongly reduced in the coming years. Furthermore, company management expects product imitations to enter the market in two or three years, which could lead to price wars and further aggravate the situation. For this scenario, corporate management expects an even stronger reduction of net cash ow.

The corporate headquarters is in Germany. The central departments of corporate accounting and global treasury are also located in Germany.

Legally independent production sites exist in Germany and Eastern Europe. The sales and distribution network stretches across Europe and the US, with legally independent sales companies in the respective countries.

In the preceding year, the company acquired a USbased competitor in order to strengthen its market position abroad. This acquisition was nanced with a large bank loan that will be amortized within the next 10 years. So, for a period of 10 years, there will be payments for amortization and interest (increasing cash outow).

Research and development is located at corporate headquarters in Germany. IDES uses SAP as its standard business software with the currently implemented applications:

SAP FI for accounting SAP CO for controlling SAP SD for sales and distribution SAP MM for materials management SAP PP for production Corporate management realizes that a continued pursuit of its existing strategy can quickly lead to a negative cash ow situation; however, since the company is expected to remain sound, the management decides to develop a comprehensive strategy that should include the factors mentioned above:

Concerning ofce applications, IDES uses a standard off-the-shelf ofce software.

Future competitors will be met with a product offensive at an early stage. For this reason, investments should be made for the research and development of new products. At IDES, the development of a product takes two years. To cover R&D for this period, the

The current business situation of the IDES group can be described as follows:

Existing products have been introduced and distributed throughout the markets and will continue to be distributed at the same high level for the next two

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