Channel financing using soa customer ppt ver 2.0

Channel Financing
by: Partho H. Chakraborty

Introduction
 SAP has an integrated suite of products catering to various domains such as
Manufacturing, Logistics, Discreet Manufacturing, Banking, Insurance, etc.

 In banking one of the requirements of banks are to finance the Supply Chain called as
Channel Financing. Channel Financing covers both the legs of financing. The first leg
covers payments to vendors and the second leg covers the payments to the dealers.

 Channel Financing covers the end-to-end financing in this supply chain factoring a lot of
components such as limits, regulations, crystallization of bills, documents, net banking, etc.

 Channel Financing is an innovative option for extending working capital finance to dealers
who have business relationships with large companies.

 Channel Financing is the mechanism through which a Bank / Financial Institution meets the
various funds related requirements along the Supply Chain at the Company’s end.

 This thereby helps the Company in sustaining a seamless business flow and avoiding
Working Capital related difficulties.

 By providing short term lending to clients utilizing qualified receivables as collateral, value is
added to the client by way of working capital support, reduced accounts receivables and
improved control of the sales/distribution channels. In addition, payables discounting serves
to add value by improving supply relationships and enhancing cash-flow management

Author: Partho H. Chakraborty Confidential and proprietary

Objective & Commercial Aim

 Channel Financing comes with two different flavors. These flavors are broadly
categorized based on the financed party – Company / Dealer. For a particular
instrument (invoice) at one point of time, only one party can be financed.
However, for the same invoice at different timings, two different entities can be
financed.
 If both the Company as well as the Dealer is a Customer to the bank, both can
avail the financing facility from the Bank at different timings. Once the Company
avails the financing option, the exposure is transferred from the Company to the
Dealer while the Bank settles the debit balance against the Company and marks
a new Debit balance against the Dealer.
 The core objective of Channel Finance is to provide integrated commercial and
financial solutions to the supply and distribution channels of a given industry.
Channel Finance gives support to the commercial relationship between clients
and their customers.
 The commercial aim of Channel Finance is to add value to supply and
distribution channels by providing unique solutions that meet customers'
demands.


Benefits of Channel Financing

Benefits to Dealers/Distributors
 Steady and cheaper source of Working Capital financing.
 Channel partners can increase Sales through higher purchasing power.
 Clean facility up to certain limits.
 Simplicity of documentation and approval procedures.
 High service and delivery standards compared to current neighborhood Banker
/ Moneylender.
 Channel partners may be able to increase profitability by availing of cash
discounts from Corporate.

Benefits to Supplier
 This involves the liquidity position by availing finance at cheaper rate based on
the credit assessment of manufacturer.
 There is no risk of non-payment by the buyer (manufacturer).
 No documentation or formality.
 Cost effective due to finer rate of interest.
 Supplier saves time & human resources for receivable management.



Benefits to Manufacturer / Principal customer
 Pre sale working capital requirement shall come down.
 Assured availability of Working Capital finance to their channel partners at
lower than current cost of credit.
 Corporate can use Channel Finance as a marketing tool and strengthen their
relationship / reward loyalty of their Channel Partners.
 Release of funds from the Balance Sheet resulting in improvement in financial
Ratios.
 Conversion of Balance Sheet into an Off Balance Sheet liability.
 Greater efficiencies in the Corporate’ receivable management and cash
management process.
 Ability to introduce payment discipline with their Channel Partners.
 Firm can concentrate more on their core competence i.e., area of production &
marketing their products besides saving time & cost involved in arranging
creditors.



Benefits to Bank
 Bank will have increased data & customer base.
 Bank can understand purchaser profile and payment history of
borrower.
 Simple monitoring of end use.
 Risk is diversified & credit exposure norms are better observed.
 In case of liquidity crisis these bills can be rediscounted with RBI.


Players

 The Raw Material Supplier – Could be one or many
 The Company: Buys the products from the raw material
supplier and processes it to finished products
 The Dealer(s): Could be one or many.
 The Bank(s): Could be one bank or different banks


Role

 The Raw Material Supplier – Supplies Raw Material or partly finished
products or completely finished products.
 The Company: Buys the products from the raw material supplier and
processes it to finished products
 Dealers: They purchase the finished product directly from the Company
and sell it to end users.
 Bank: It could be the same bank of the Company and the dealer or could
be different banks. They finance both the Company and The Dealers.
The Company is financed by:
Finance to Purchase Raw Materials in order to process it to finished
goods
Credit Extended to Dealers after Supply of Goods
 The Company and the Dealers get financed after receipt of goods or
acceptance of documents.


Commodity & Tenor

Commodity
 Any type of Goods, Merchandise or Services, as long as it is not
prohibited. If restricted then the all the players must have requisite
licenses allowing them to deal in the same.

Tenor
 15 Days to 3 Years. Could be extended or reduced as per banks
convenience. Tenor would normally be calculated from the Bill of
Lading Date or at the discretion of the bank


Collaterals
 Collateral Object Management / Asset Mgmt.
 Object description
 Calculation of safety discounts & lending ranges
 Collateral Management
 Declaration of purpose
 Calculations, e.g. collateral cover, lending discount,
loan-to-value ratios, free collateral, shortfalls,
distribution according to declaration of purpose
 Customer specific calculations
 Central source system for front- and back-end applications
 Process support for centralized collateral mgmt.
 Support of Basel II credit risk mitigation
 Globally applicable standard product
 Business support for retail and wholesale by mass processing capability as well as
collateralization support for complex projects

Note: The bank at its discretion can waive or increase the collaterals


Documents
Bank has the flexibility to define documents as per it’s requirements such as:
 Memorandum & Articles of Association in case of private companies and
partnership deeds and registration details (wherever applicable) for
partnerships.
 Board resolution
 Purchase bill discounting agreement
 DPN/DPN delivery letter
 Sales Tax registration certificate
 Letter of waiver from dealer waiving the notice of dishonor, noting and
protesting
 PAN & TAN
 SSI certificate, if Applicable
 Title documents for the outlet
 Last 3 Years Audited Balance Sheets, with Profit and Los Account
 Current Half Yearly Reports, if Applicable
 Licenses if dealing with Restricted or Hazardous Goods

Transactions

 Various transactions can be configured such as:
 Both Raw Material Supplier and Dealer, bank with the same bank
 Either Raw Material Supplier or the Dealer, banks with some other bank
 Both Raw Material Supplier and the Dealer, banks with some other bank
 The dealer requests for more credit beyond the stipulated time as per
transaction
 Configures Payments and Receipts


Transactions: Both Raw Material Supplier and Dealer, bank with the same bank

Process Flow, Events & Credit Exposure

Note:
 The tenor in step 9
is taken from Bill
of Lading, which is
Day 30. So we get
effective Credit
Period of
30+180=210 Days.


Transactions: Either Raw Material Supplier or the Dealer, banks with some other bank


Note:
 The tenor in step 11 is taken
from Bill of Lading, which is
Day 30. So we get effective
Credit Period of 30+180=210
Days.


Transactions: Both Raw Material Supplier or the Dealer, banks with some other bank


Note:
 By giving 30 days credit given to BAW, Pepsi
ensures that MSC pays it before paying BAW.
Here Banks discount the invoices and pay Pepsi
 The tenor in step 22 is taken from Bill of Lading,
which is Day 50. So we get effective Credit
Period of 50+180=230 Days


Transactions: Dealer Gets Additional Credit

Note:
 The tenor in step 7 is taken from Bill of Lading, which is Day 30. So we get effective Credit
Period of 30+180=210 Days. Also the Dealer gets credit of 60 days from the due date; i.e.
210+60=270 Days


Modules involved in Channel Financing process


Abbreviations

 BCA : Customer Account Management
 FS- CML : Financials - Loans Management
 FS-CMS : Financials - Collateral Management
 FSCM : Financial Supply Chain management
 FSCM-DM : Dispute Management
 FSCM-CLM : Cash and Liquidity Management
 FSCM – CR : Credit Management
 RBD : Reserve for Doubtful Debts
 GRC : Governance, Risk and Compliance


Consumer Loans – Business Process Overview

Business Operations


Electronic Bill Presentment and Payment

 Supplement traditional billing procedures:

 Electronic invoicing for businesses
 Electronic payment for customers
 Integrate customer service with finance


Electronic Forms

 The entire application can be done through the net where the customer can
fill up the forms and send it electronically.
 This helps the customer to properly fill up the form as the system will not
accept errors in the form and will point out the mistakes and at the same
time prompt the customer to fill ion the form.
 It can also accept other documents, such as List of Creditors, Debtors, etc.
A provision can be made to send all documents electronically such as
Balance Sheets, Profit & Loss Accounts, etc.
 Thus the process of Channel Finance is Paperless.
 A sample form is given below where The Application Form & Documents to
be submitted by the Applicant for Factoring


Sample Electronic Form


Electronic Bill Presentment and Payment
• Supplement traditional billing procedures:
• Electronic invoicing for businesses
• Electronic payment for customers
• Integrate customer service with finance

Customers can
see all of their
bills and credit
notes in the
Internet.
They can display
the documents
as PDF or XML
They can
download bill
data as PDF or
CSV
They can select
various payment
methods


Corporate Governance / SOX Framework

 Management of Internal Controls
 Process and internal controls
document repository
 Testing structure including workflow
 Compliance Calibrator
 Real-time security risk assessment
including
segregation of duties (SOD)
 Detective assessment for clean-up
and audits
 Preventive control through simulations
 Audit Information System


Corporate Governance / IFRS and Basel II

 IFRS/IAS – Accounting for Financial Instruments
 Hedge Accounting and Management
 GL Integration
 Basel II
 Credit Risk Exposure / RWA calculation
 Time Series Management and Analysis
 Disclosure and Reporting
 Integration with SAP Collateral Management
 Financial Database
 Common Data Model, Methods and Services


Regulations

 Banned items, restricted items, hazardous items, special items can
be defined with appropriate licenses, clearances and permissions
 Limits would be blocked automatically for any Prohibited Items or in
such cases where the appropriate license/permissions are not
produced
 Payment of government duties also can be monitored such as excise,
VAT, etc.


Limits

Limits can be defined by the bank as they want to such as:
 Transaction Limit
 Revolving Limit
Limits would be configured by the system automatically such as:

 Formula: Limits Sanctioned – Limits Utilised + Limits Replenished = Limits
Available for Appropriation
 The limits to Company would cover:
 Credit to purchase raw materials and process to finished goods
 Credit to dealers who would pay after a fixed tenor


Limits

The limits would be
sanctioned as per the
authority level such
as the tree structure
in a bank

Limit Burst would be taken care of by the RM on a case to case basis
The system would check defaults in payments and can be configured to
send notices followed by blocking of limits


Charges

The charges would be in the form of:
 Interest
 This would be calculated from the date the facility is utilized. If the limits
are used in parts then the charges would be calculated on the utilized
portion of the limits.
 The interest would be computed on a minimum cutoff percentage such as
it could be a minimum of 15% or more, whichever is higher.
 There would also be a provision to utilize the limits sanctioned or a
minimum part of it by a certain date say 30 days if not the unutilized part
would attract a penalty which could be a percentage say 2% of the
unutilized part or a flat rate of 2% on the entire limit at the bank’s
discretion.
 Penalty
 In case of delayed payments in part or full or non-utlilisation of limits
there would be a penalty, which would be levied at bank’s discretion. This
could be a percentage of the unpaid/unutilized amount or a flat rate on the
whole amount.


Other Charges

This would be in the form of
 Processing Fees
 Limit Set up Fees
 Document Handling Fees
 Opening Guarantees/Letter of Credit: This could be for the Company to
purchase raw materials

System is very flexible in configuring charges, which could be at
the discretion of the bank


Crystallisation of Bills

 Bills get crystallized when they get unpaid either in part or full for 30
days after due date. The banks would of course take recourse to the
collaterals pledged to them. But if for some reason or the other if the
bill remains unpaid for 6 months then it becomes a Non Performing
Asset (NPA).


Dispute Management
Reduce Days Sales Outstanding and increase customer profitability
Identify issues and disputes earlier in the payment cycle
Track and monitor reasons that drive DSO
Streamline process of dispute resolution

A dispute case
summarizes and
structures all dispute-
related data and
contains various
attributes
A case can be
accessed and
processed by all
authorized employees
Processors can create
notes, view an action
log or link business
objects to the case
They can also create
correspondence


Non Performing Assets/Bad Debts

 Categorized separately
 Classified as
 Substandard
 Doubtful
D1, D2 & D3
 Loss
 Collaterals earmarked can be liquidated and value settled against it.
 Can waive or write-off outstanding amount
 Has provision for Dunning with active monitoring the payment


Liquidity

 Pooling

 Netting

 Sweep

 Reverse Sweep

Zero balance account can be maintained with the surplus being invested
for profit.

Also minimum balance account can be maintained to have just that much
funds so that no cheques get bounced


Accounting Entries
 General Ledger
 Legal, Segment and Management Reporting
 Parallel Accounting
 Fast Close, Closing Cockpit
 Cost Controlling
 Cost Center Accounting, Activity based Costing
 Profit Center Accounting
 One version of the truth – same valuation, no inconsistency, no reconciliation
 Fast Close - Online Processing, real-time posting to CO
 Extensibility / Flexibility to add user-defined fields
 Leveraging ERP Platform Integration
 Consolidating people, financial, and operational
process data
 Cross-functional business processes and workflows

Note: All entries would leave an audit trail


Reports

Apart from the standard reports given below, SAP BI can generate any
type of report as per bank’s requirement
 G/L Entries
 Limits
 Payments
 Interest Calculation
 Delayed Payments
 Amount Outstanding and so on


Manual Overriding

 The system is designed to do all functions automatically. But still
there would be a provision where manual intervention could waive
or alter the interest, penalty, etc.
 Specific permissions and hierarchy with default password
protection can be pit in place


Process Flow by Customer to Open Letter of Credit


Sample Process Flow


Functional Architecture


SAP Enterprise Service Oriented Architecture (SOA)

 Enterprise SOA revolutionizes the design of business applications, enabling the
rapid composition of business solutions.
 With enterprise SOA, you can encapsulate business logic and expose it as
enterprise services -- smaller functionality components that can be reassembled
quickly to form new innovative business solutions that meet changing business
requirements.
 Based on SAP Net Weaver’s SOA platform, enterprise SOA provides you with
business and industry-specific context views through enterprise services and
safeguards scalability, robustness, and governance for your IT.
 Enterprise SOA is therefore your blueprint for an adaptable, flexible, and open
IT architecture for developing services-based, enterprise-scale business
solutions.


Role of SOA in Channel Financing Process
 To create new applications on top of existing enterprise solutions.
 To automate new or existing business processes
 To increase the value of your current systems.
 To achieve greater flexibility while controlling technology costs.
 To deploy innovative solutions to extend our business partner networks.
 To improve our ability to link other applications to SAP solutions through
SOA.
 The Main Use of SOA is “Enterprise service bus”, where it will work as a
communication channel like spoke and hub as shown in below diagram:


Integrating Cash, Trade, Supply Chain and Treasury through SOA


SOA – Architecture


Thank you

Partho H. Chakraborty
A - 305, DSR Spring Beauty Apts., 124/1, ITPL Main Road,
Brookefields, Kundalahalli, Bangalore - 560 037, India

Tel: +91 80 420 50293, Cell: +91 99863 22504
email: parthohc@airtelmail.in parthohc@rediffmail.com
Skype: parthohc01

Channel financing using soa customer ppt ver 2.0

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