SAP Case Study

mySAP ERP FINANCIALS

AT BROWN-FORMAN
Standardizing Treasury Processes to Support
Compliance and Global Growth

Brown-Forman enhanced its

treasury, risk, and cash management processes, enabling it to
better fund growth, be positioned
to participate in new marketing
and distribution arrangements,
and comply with Sarbanes-Oxley
regulations. The company
streamlined processes including
vendor payment, general ledger
reconciliation, foreign exchange

CONTENTS
Abstract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Origins
Industry Consolidation
Global Growth

Challenges and Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cash Management Inefficiencies
Nonintegrated Foreign Exchange Processes
High Costs for Funds Transfers
Month-End Closing and Account Reconciliation Inefficiencies

Implementation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Phase 1 Cash, Debt, and Investment Management
Phase 2 Global Cash Visibility
Phase 3 Straight-Through Processing
Phase 4 Hedging of Foreign Exchange and Commodities
Auditing Review and Sarbanes-Oxley Compliance
Change Management

derivative contract management,

and many others. Brown-Forman
is using the mySAP ERP
Financials solution to enable
these processes and is realizing
goals for productivity improvements, lower costs, and regulatory
compliance.

Outcome . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Measurable Results and Related Benefits
Confidence in Sarbanes-Oxley Compliance
Next Steps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Lessons Learned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

ABSTRACT
AT A GLANCE
Strategic Goals

Build brands in global markets

Comply with the Sarbanes-Oxley Act
Reduce cash management costs, including transaction expenses

and workforce, and implement cash management best practices

Manage debt capacity to maximize financing available for new
investments

Brown-Forman Corporation, headquartered in Louisville, Ky.,

is one of the largest American-based companies in the wine and
spirits business, and the company has succeeded by focusing on
building its brands. To help improve the worldwide presence
and growth of its brands, the company has established business
processes that are highly efficient and can be replicated across
its subsidiaries. In particular, Brown-Forman is focusing on
enhancing its treasury, risk, and cash management processes,

Approach
Brown-Forman proceeded with a phased approach to develop
best-in-class treasury processes, provide global visibility into cash
positions, and improve the efficiency of cash management. The
company established a single system through which all vendor payment, cash receipt, debt repayment, foreign exchange derivative
contracts, and other entries flow; reduced the number of bank
accounts; and reconciled general ledger and bank accounts every
day. Brown-Forman instated straight-through processing, in which
payments are transmitted directly to a bank from its electronic files.
The company established segregation of duties through workflowenabled processes and removed stale data from its vendor files.
This approach was enabled by the treasury, risk, and cash management capabilities of the mySAP ERP Financials solution.
Results
Results achieved over the period from the fourth quarter of 2002
to the third quarter of 2004:
Improved productivity
Reduced total workforce associated with cash management
processes by 60%
Lowered resources required to manage daily cash application
and payments by 81%
Reduced average subsidiary cash balances by 50%
Lowered transaction costs by 10%
Came into compliance with Sarbanes-Oxley
Ensured compliance through better controls
Reduced the workforce required for annual compliance verification, documentation of IT integration and system configuration,
and regular financial audits

As we grow our global operations,

efficient working capital management
based on the best industry practices
is recognized as key to execution of
our business strategy.
Robert Waddell, Global Treasury Manager, Brown-Forman

since efficient management of working capital is essential to

fund growth and investment behind the brands. Moreover, the
Sarbanes-Oxley Act of 2002 strongly encourages standardized
cash management as a means to strengthen internal controls.
Brown-Forman deployed the treasury, risk, and cash management capabilities of the mySAP ERP Financials solution to
enable new processes and achieve productivity improvements,
lower costs, and greater confidence in its compliance with
Sarbanes-Oxley.

BUSINESS
Brown-Formans intention is to be the best brand builder in
the industry, period. If the strength of Jack Daniels the
worlds best-selling American whiskey is any indication, the
company is moving solidly toward that goal. The whiskey is
regarded by marketing consultants as one of the most valuable
brands in the world, which is rare for a distilled spirit. The Jack
Daniels brand is in the company of household names identifying leading soft drinks, credit cards, and restaurants.

The company he started trundled along until 1920, when the

U.S. Congress outlawed the leisure consumption of beer, wine,
and spirits. Prohibition could have dealt a deadly blow to
Brown-Forman, which by this time had expanded beyond the
medical market. But the company was saved when Owsley
Brown, son of the founder, secured 1 of only 10 government
licenses to make medicinal whiskey.

In 1933 Brown-Forman toasted the end of the teetotaler era.

Brown-Forman is working to grow its other beverage brands,
In the years that followed, the companys growing sales gave it
including Southern Comfort, Finlandia vodkas, and Fetzer and
the heft to pursue acquisitions. The deal that shaped the firm
Bolla wines. Brand development also extends to the companys
more than any other came in 1956 when Brown-Forman
consumer durables business, which
bought the Jack Daniel Distillery
includes the Lenox family of china,
in Lynchburg, Tenn., from the
The people we talked to described the
crystal and giftware, and HartMotlow family.
value of integration within the SAP
mann luggage.
solution. The benefits they described
Brown-Forman continued to
Brown-Formans brands have transbroaden
its beverage portfolio
were what we were seeking time
lated into the sort of financial perover time. The distribution
savings, productivity, accuracy, and
formance that could intoxicate an
rights to Korbel California
control.
investor. In fiscal 2004, the compaChampagnes and Brandies were
Bob Walker, Senior Financial Analyst and Project Team Lead,
ny had a profit of US$258 million
acquired in 1965, and in 1967
Brown-Forman
on sales of US$2.6 billion, and
the company made its first foray
reached record levels of sales, gross
abroad, adding Pepe Lopez
profit, and operating income. Its earnings per share also at
Tequila to the Brown-Forman product line. The following year,
record levels increased by 16% from the previous year, to
Brown-Forman scooped up Bolla Italian wines and in 1971
US$2.11. Based in Louisville, Ky., Brown-Forman has sales in
acquired Canadian Mist. The company purchased Southern
more than 130 countries.
Comfort in 1979, Fetzer Vineyards in the early 1990s, and Sonoma
Cutrer Vineyards in 1999. In 1996 it entered into an agreement
to be the exclusive U.S. marketer of Finlandia vodkas. BrownOrigins
Forman gradually increased its ownership position in Finlandia
Chances are George Garvin Brown wouldnt recognize the
and now controls 100% of the Finlandia brand and is the global
international company that his creation has become. Back in
distributor of the brand. Since 2000, Brown-Forman has rounded
1870 when he started Brown-Forman, he aimed to sell bourbon
out its portfolio by purchasing Tuaca Liqueur and acquiring the
to physicians who prescribed it as a tonic. To guarantee quality,
U.S. distribution rights to Appleton Estate Jamaican Rums and
he bottled the bourbon instead of selling it in the thenAmarula Cream Liqueur.
ubiquitous barrels.

Industry Consolidation

The trend toward consolidation exists throughout the wine and

spirits industry and has accelerated in recent years as companies
seek to achieve economies of scale and establish global positions
in premium brands. In the late 1990s and early 2000s, there were
several multibillion dollar deals involving acquisitions, distribution ventures, and divestitures, which substantially improved
the strategic focus of key players.
Brown-Forman remains in a strong position to make acquisitions and to enter into agency and distribution agreements.
The company handles its finances conservatively, keeping debt
levels low. At the end of fiscal 2004 it had about US$630 million
in long-term borrowings. Its long-term debt-to-equity ratio
was 0.58, far lower than the industry average. Its cash flow from
operations is strong and growing a result of earnings growth
and superb resource allocation (see Figure 1).
Global Growth

A challenge ahead for Brown-Forman is to continue growing its

brands in the United States and international markets. Although
consumption of premium distilled spirits is increasing in the
United States and Jack Daniels is growing strongly in both the
domestic market and established international markets, global
emerging markets hold significant potential. Likewise, BrownForman is working to build its other premium brands both at
home and overseas.
To strengthen its brands, Brown-Forman is working to ensure
that its marketing efforts are grounded in a deep understanding
of consumers in various countries and that consumers are
able to find the companys brands where they shop, drink, eat,
and entertain. Whats more, the company has a stated objective
to allocate resources efficiently across brands and geographies,
and develop efficient and effective business processes that can

($ millions)
450
400
350
300
250
200
150
100
50
0

2002

2003

Cash from Operating Activities

2004
Operating Income

Figure 1: Operating Income and Cash Flow Increase During 2002 to 2004

support its worldwide expansion. The company can then move

as nimbly in its emerging markets as it does in the United States
and established international markets.
To this end, Brown-Forman strives to manage every part of the
business, including treasury functions, as deftly as it handles
branding. Brand-building and acquisition strategies will require
that the company operate consistently and cost-efficiently.
To achieve its goals, Brown-Forman must strategically manage
brand building and distribution in markets around the world,
says Robert Waddell, global treasury manager. That means
that we have to develop business processes that are efficient and
replicable globally, so that we can be positioned to quickly establish the brands where new opportunities emerge.

CHALLENGES AND OBJECTIVES

To support its brand building and growth, Brown-Forman
established best-practice processes covering material procurement, manufacturing, distribution, customer service, and
others. Many of these processes are enabled by Brown-Formans
implementation of SAP solutions, which began in 1999, and
includes supply chain management, customer relationship
management, and basic accounting capabilities.
Treasury, risk, and cash management processes were not
enabled by the initial implementation. But management of its
working capital which includes receiving revenue and paying
for goods and services is integral to operations. As we grow
our global operations, efficient working capital management
based on the best industry practices is recognized as key to
execution of our business strategy, says Waddell.
The company faced the following specific challenges in 2001:
Cash management inefficiencies
Nonintegrated foreign exchange processes
High costs for funds transfers
Month-end closing and account reconciliation inefficiencies
Each is discussed below.
Cash Management Inefficiencies

Cash management includes daily management of working

capital, investments, and transactions with domestic and foreign
subsidiaries. Specific issues are as follows.
Managing daily cash position: Brown-Forman had inefficient
processes for establishing its cash position each day. The company does business with four primary banks and several other
regional banks, holding multiple accounts in each. Every day,
each bank would be polled to obtain cash balances, and the
balances would be keyed into spreadsheets. Target balances
were then determined based on polling information, and funds
transferred among accounts and from commercial paper
markets to meet targets.

The manual process took much of the day and was susceptible
to keying errors. We would start each morning by polling the
banks and getting previous day balances, current day balances,
incoming wires, outgoing wires, and related information. We
would determine our cash position at about 11 a.m. and then
borrow or pay down commercial paper, depending on our cash
position. The rest of the day was spent following up on open
items, sending wire transfers, and so forth, says Jana Ladd,
global cash manager.
Missed opportunities in the commercial paper market:
Commercial paper consists of short-term unsecured promissory notes. Companies often find that commercial paper
borrowing is less expensive than bank loans for raising cash
for current transactions. Brown-Forman has a commercial
paper program authorized for US$500 million, though the
amount outstanding is normally much smaller than that.
Since Brown-Forman couldnt finalize its daily cash position
until late morning, precise needs could not be determined until
then, resulting in missed chances to borrow in the commercial
paper market earlier in the morning when the market is most
liquid. By 11 a.m., commercial paper rates may have risen due
to less liquidity, and Brown-Forman could lose the opportunity
to save significant interest expense on balances that might reach
several million dollars.
Handling cash transactions: Electronic payments to fund a
bank account, pay a supplier, trade foreign exchange, fund an
intercompany loan, and so forth, were manually entered into
banking systems in the companys treasury department for
review and release. This information was also captured in spreadsheets in summary form in the treasury and accounts payable
departments. Likewise, the treasury department recorded
incoming cash in spreadsheets. Treasury personnel then would
e-mail relevant bank statements to the accounts receivable
department, where data was also entered into spreadsheets.
Additionally, the treasury department manually managed
foreign exchange payments and receivables using a PC database.

These cash transactions werent directly integrated with the

accounts payable or accounts receivable capabilities in the existing
SAP system. The spreadsheet entries were input into the SAP
system only as summarized batch journal entries at monthend, which made bank account reconciliation more difficult.
Managing investments and loans: Brown-Forman also used
spreadsheets to manage the cost basis, accrued interest, and
other items associated with investments and to monitor principal, interest, and payment due dates for loans. Managing this
information and the interface to daily cash requirements were
manual processes thus very time-consuming and subject to
keying errors.
Cash forecasting: Brown-Forman has a relatively predictable,
cyclical cash flow. The company receives a significant amount
of cash during August and September, as distributors and retailers prepare for the end-of-year seasons and then sees a larger
cash flow from November through the end of January because of
purchases during the holidays. Debt service is limited, and the
company knows of specific incoming cash flows about two weeks
in advance because customer bank accounts are directly debited.
The company used historical information as a basis for forecasting and spreadsheets to manage forecast data. An estimated
forecast of cash was established with a time horizon of about
two weeks, and the treasury department monitored this cash
flow forecast using accounting capabilities in the existing SAP
software. This method met the companys basic needs; but a
large transaction, which increases debt or changes incoming
cash flow predictability, could motivate the company to pursue
a more robust cash forecasting solution.
Unproductive cash in foreign countries: Brown-Forman
had pockets of cash in countries around the world that were not
as productive as possible. These funds, for example, could not
be withdrawn easily to reduce debt in the United States. At the
same time, tax laws sometimes made it undesirable to transfer
funds out of some countries.

These global pockets of cash had to be managed manually until

the company found a suitable investment or decided to bring
the cash to the United States in the form of a dividend or other
cash repatriation mechanism. We did a good job of managing
cash in the United States and safeguarding the cash globally,
says Waddell. But efficient international cash management was
virtually impossible with our existing processes.
Credit rating and debt capacity: Brown-Forman has a solid
balance sheet and strong margins, resulting in strong cash
flow and relatively low debt levels. Nonetheless, management
believed that it could better understand the companys cash
position, manage cash flow, sustain a high credit rating, and
have working capital to use for brand building, debt service, and
other purposes. Moreover, in the future, the company would
likely increase the number of foreign subsidiaries with which it
would work directly, thereby increasing operational complexity
as well as the importance of good cash management processes.
What we do in treasury is not so much manage a lot of debt but
rather manage debt capacity, says Roger Shannon, assistant treasurer. We need to be prepared on a moments notice to secure
financing and possibly a material amount of financing to
undertake an acquisition. So its in our best interest to minimize
one-off local borrowings, have faster access to our cash flow, and
be able to deploy our cash for value enhancers such as investments,
advertising, and promotion or for debt service. We dont want to
spend money on interest charges or unproductive processes.
Nonintegrated Foreign Exchange Processes

Since many of Brown-Formans payables and receivables are

denominated in foreign currencies, its profitability is influenced
by foreign exchange rates. Thus management of exchange rates
is important, and many stakeholders closely watch these rates.
The treasury department centrally manages global foreign
exchange exposures and is the source and distributor of exchange

rates for Brown-Formans general ledger and information databases. The treasury department developed a process to ensure
that the foreign exchange rates that were imported into the
SAP financial software were the same as the ones being used in
management reporting and analysis.
To reduce the risk to profitability of exchange rate fluctuations,
Brown-Forman hedges significant portions of its foreign exchange
exposures using financial derivative instruments, principally
foreign exchange options1 and forward2 contracts. The company
managed its foreign exchange contracts about 100 at any time
using a third-party software solution, which collected statistics,
performed trade analyses, determined valuations, and provided
other functions. Brown-Forman spent around US$50,000 per
year on license fees for this software. More significantly, since the
third-party solution for managing derivative contracts was not
integrated with the SAP solution, the accounting and cash movement for these derivative contracts had to be entered manually.
High Costs for Funds Transfers

Brown-Forman moved funds domestically and internationally

primarily via wire transfer. International transfers about 30
per week were initiated through proprietary banking systems
and ranged in cost from US$12 to US$18 per transfer. The company also used desktop banking systems to initiate Automated
Clearing House (ACH)3 transfers for many domestic payments
as well as low-value clearing systems for some international
payments. These systems didnt have the controls of proprietary
banking systems supporting wire transfers. Brown-Forman also
issued some wire transfers domestically in addition to ACH;
these transfers cost about US$7 each.

1) Options contract: An options contract provides the right, but not the
obligation, to buy or sell a commodity, currency, or other item at a
predetermined price for a specific date or time period. An options contract
allows Brown-Forman to take advantage of favorable market conditions,
while protecting itself against unfavorable price movements. A premium is
payable on the trade date, and if the option is not exercised, the premium
is forfeited.

Month-End Closing and Account Reconciliation

Inefficiencies

To close the books each month, Brown-Forman manually

reconciled month-end general ledger batch entries for all cash
movements that did not initiate through the accounts payable
system against daily transactions in the bank statements. This
process, which involved treasury payments, controlled disbursement funding, and cash concentration, was difficult and very
labor-intensive. Month-end summary general ledger entries
lacked detail, and the companys numerous bank accounts made
month-end bank reconciliations very time-consuming. Often,
a large number of items required reconciliation occasionally
consuming as much as two months to research and clear. Two
full-time employees managed this process, and month-end closing for cash transactions took about 2.5 person-days each month.
At the end of the month, the accounting group would come
up with a large spreadsheet of reconciling items, says Ladd.
The issues were spread among different people to reconcile
one person for U.S. dollar accounts, one for a specific set of
international currencies, and so forth. Then all of these spreadsheets would come to treasury, which would assist with reconciliation. Treasury would contact the bank for required details,
and the bank would have to provide details for transactions that
had taken place weeks before.
Brown-Forman had inefficient cash concentration processes,
which consumed excessive workforce hours and cash. Therefore,
the companys primary objectives were to streamline and standardize cash management processes, addressing the lack of efficiency.
Moreover, by establishing standard processes that could support
global operations, the company would be better positioned to
pursue growth opportunities.

2) Forward contract: A forward contract is a privately negotiated market

transaction in which a seller agrees to deliver a specific commodity,
currency, or other item to a buyer at some time in the future. There is
typically no secondary market for forward contracts.
3) ACH is based on a private electronic payment transfer system.

IMPLEMENTATION
Brown-Forman considered several possible software solutions in
late 2001 to enable its working capital management processes
and found that the treasury, risk, and cash management application of the mySAP ERP Financials solution (SAP Treasury and
Risk Management) would best meet its needs. During its investigation, people at Brown-Forman spoke with other companies
that had implemented these SAP solutions. Early adopters
e5 told us everything SAP could do
to address our requirements . . . and
helped us decide to proceed with the
SAP solution for these capabilities.
Jana Ladd, Global Cash Manager, Brown-Forman

explained the benefits to us, says Bob Walker, senior financial

analyst in the treasury department and project team lead for
the implementation. The people we talked to described the
value of integration within the SAP solution of cash management, automated bank statements, accounts receivable, and
accounts payable capabilities. The benefits they described were
what we were seeking time savings, productivity, accuracy,
and control.
Brown-Forman also considered many consulting organizations
to assist with decision making and implementation. In early
2002, after a thorough analysis, the company selected e5 Solutions Group as its partner (see insert). We discussed the issues
with our existing cash management processes with e5, says
Ladd. e5 told us everything SAP could do to address our requirements this was all brand new to us and helped us decide
to proceed with the SAP solution for these capabilities. The
information provided helped us promote this solution to others
in the organization.

4) Though ASAP doesnt have provision for development of a proof of

concept, e5 Solutions supported development of two proofs of concept.
First was the design, which users and other stakeholders could review and
respond to. The second was a prototype providing specific screens and
8

Brown-Forman was an excellent candidate for an SAP Treasury

and Risk Management implementation, says Jaime Ryan, principal consultant with e5 Solutions. The company had already
implemented the core components of mySAP ERP, they had an
experienced IT organization, and most important, they had full
buy-in from the treasury department. Moreover, treasury management looked beyond the benefits to their own organization
and was able to see the enterprise-wide benefits of an integrated
solution.
Brown-Forman management decided that the implementation
would best be conducted in phases learning at each step and
avoiding exposure to the risks of a big bang approach (an allat-once implementation). We proceeded with a rolling phasein to develop the cornerstone of our cash management strategy
throughout the company, says Shannon. This is a centralized,
highly efficient cash management process that we refer to as the
cash value chain.
The four phases of the implementation, which adhered
substantially to the ASAP methodology, were strongly supported by e5 Solutions.4 These phases proceeded as follows:
Phase 1 Cash, Debt, and Investment Management

In this phase, implemented from February to June 2002, BrownForman established new processes to manage working capital.
The goals of this phase were to reconcile bank accounts daily,
concentrate cash, determine a final number to borrow or invest
each day, improve control, enhance accuracy, and reduce
the workforce.
In phase 1 every cash entry vendor payment, cash receipt,
borrowing, repayment of debt, or currency trade would flow
through a single system that automatically created journal
entries in the general ledger. This approach allowed single entry

workflows again allowing feedback and laying the foundation for the
actual implementation. This iterative approach allowed for deeper understanding of requirements and ultimately a better design and implementation.

of financial values into the system and eliminated or substantially reduced rekeying of data into spreadsheets. There would
be a one-to-one match between the bank statement and the
general ledger entries, and reconciliation would be performed
daily. Cash account closing could take place on virtually any
day, because the bank and ledger balances would be reconciled.
All stakeholders could view the same bank statement information in mySAP ERP Financials, and e-mailing this information
internally was no longer necessary.
The first phase was the largest, says Shannon. It took significant resources to implement the system, switch over things like
cash concentration and bank account reconciliation and
complete the link in the cash cycle between accounts payable
and accounts receivable that didnt exist before.
The company implemented the following integrated treasury,
risk, and cash management capabilities within mySAP ERP
Financials.

Contributions of e5 Solutions Group

e5 Solutions Group is the leading provider of SAP
treasury solutions and consulting implementation services in North America. The firm was founded by former
SAP America platinum-level consultants who specialize
in the treasury modules. Offering business and configuration consulting as well as custom development, e5 is
recognized as the leader in implementing SAP treasury
solutions. Brown-Forman employed the services of e5
for phases 1, 3, and 4.
A tenet underlying e5s approach is that it is important to
focus up front on designing a good solution and properly
transferring knowledge. By doing this, the customer
doesnt need to rely on full-time external consultants to
continue the rollout. For example, Implementing foreign

Vendor payments: Global vendor payment details were

uploaded directly into bank payment systems, eliminating the
rekeying of wire transfers and related data, automatically
updating the general ledger, and eliminating manual accounts
payable postings in mySAP ERP. The payment file, which is an
SAP data interchange file, informally known as an iDoc file,
was translated using an electronic data interchange (EDI)
translator so that it could be read by banking systems, and the
banks could in turn release payments.
Customer receipts: Customer payments were directly uploaded
into the SAP solution from bank systems. Postings of customer
receipts to customer records in the accounts receivable module,
and to the general ledger in mySAP ERP Financials, were automated. The system has logic built in to know which customer
the payment is from and what invoice it pertains to, says
Shannon. It applies cash to the receivables account in the
general ledger so we dont have to do that manually anymore.

exchange, hedge management, and market risk management at Brown-Forman was straightforward, says Jaime
Ryan, principal consultant, e5 Solutions. After working
with the system for a couple of years, Brown-Forman
really understood the principles of SAP treasury capabilities. Extending the solution only required part-time consulting over the course of a few months. Also, after e5s
assignment was completed, Brown-Forman was able to
continue the rollout of the SAP solution independently.
Brown-Forman management recognized the essential
value that e5 provided. The treasury, risk, and cash
management implementation was a highly visible and
strategic project, says Roger Shannon, assistant treasurer at Brown-Forman. Selecting e5 was one of the
best moves we made their contributions were critical
to smooth execution and success.

Global bank account information management: Brownother money market investments. Longer-term instruments
Forman automated the collection and processing of global bank
were medium-term note borrowings, bank credit facilities, and
account information and reconciled bank account information
corporate bonds.
for U.S. and most international accounts every day. The company also enhanced cash concentration, centralizing domestic
Contracts in mySAP ERP Financials were linked to daily cash
cash balances into a single account to ensure that the highest
positions, providing performance reporting and investment
overnight rate of interest was received (or lowest paid, if there
tracking. The system automatically calculates debt and investwas a negative balance). Brown-Forman receives reports coverment interest and/or fees and prepares settlements with the
ing current and prior-day detailed balances, which populate
treasury department's banking and financial institution busithe cash position work sheet and
ness partners, based on previously
facilitate decisions regarding fundapproved agreements and settle. . . treasury management looked
ing disbursement accounts. Bank
ment instructions. Brownbeyond the benefits to their own
accounts were reconciled daily
Forman's treasury department
organization and was able to see
using the detail file from the prior
first used SAP workflow capabilithe enterprise-wide benefits of an
day.
ties to facilitate the setup, entry
and confirmation of financial
integrated solution.
Reduction in the number of
business partner details within
Jaime Ryan, Principal Consultant, e5 Solutions
bank accounts: As noted, Brownthe SAP solution.
Forman maintained numerous
bank accounts for wire transfers, ACH transfers, settlement
Accounting: All details covering wire, check, and ACH cash
of intercompany accounts, and so forth to ensure efficient
movements were entered automatically into the general ledger
account reconciliation. Following implementation of phase 1,
within mySAP ERP Financials. With electronic bank statements
this requirement was reduced, thanks to a capability allowing
imported on a daily basis, all information was reconciled every
postprocessing of bank statements to resolve discrepancies. This
day. At month-end the system automatically calculates and
postprocessing capability allows Brown-Forman to manage the
posts accruals and foreign currency revaluations for investments
complexity of multiple types of transactions in a single account,
and debt.
rather than maintaining separate accounts by transaction type.
Also, consolidation of bank accounts allows Brown-Forman to
Integration with banking systems was key to completion of
negotiate fee reductions with banks.
phase 1 and presented a significant challenge. One of the most
time-consuming aspects of any cash management implemenTreasury management for debt and investments: Traders
tation is the automated integration with the banks, say Ryan
of financial instruments within Brown-Forman (in the treasury
of e5 Solutions. Companies tend to underestimate the time
departments front office) entered contracts associated with
and dedication required from their banking partners. Brownborrowing and investing activities into the SAP solution. These
Forman planned properly and was able to get the banks engaged
contracts were confirmed by the treasury departments back
prior to our project kickoff.
office, allowing the payments and accounting to be processed
automatically. The primary short-term instruments used by
Brown-Forman were commercial paper, time deposits, and

10

Phase 2 Global Cash Visibility

During this phase, from June 2002 to March 2003, BrownForman brought six major foreign subsidiaries into the reconciliation process. The bank information for these subsidiaries is
uploaded to mySAP ERP Financials so that the treasury department has visibility into the cash positions around the world
where cash is not concentrated. Account reconciliation is
handled centrally, and investments may be handled from headquarters or at the subsidiary. Brown-Forman also closed several
bank accounts and eliminated some lockboxes.5

In the new environment, for subsidiaries that are using SAP

technology, were able to pull their payables files, combine them
with ours, and send them out through the STP process, says
Shannon. So its really an in-house banking pay-on-behalf-of
concept. In the past we would have funded an account and
recorded general ledger activity for cash movement. Today,
well make the payment centrally, and it will be recorded as an
intercompany entry with the subsidiary via a journal entry. So
we found a great deal of netting and offsetting opportunities,
which allow us to hang on to our cash longer and thus lower
costs.

Phase 3 Straight-Through Processing

This phase, from April to November 2003, established a payment

process called straight-through processing (STP). Payments
were no longer uploaded into and processed through proprietary banking software but instead transmitted directly to
the bank from payment data in mySAP ERP Financials. Once
payables invoices have been approved for payment, and the
vendor and other data are verified, a single payment file is transmitted directly to the bank, regardless of whether it is a wire,
ACH, foreign exchange draft, or low-value clearing payment,
says Shannon. The payment data is encrypted and only needs
to be entered once.
Brown-Forman is moving to a single payment platform using
payment files extracted from the SAP accounts payable and
treasury applications for all electronic payment types. Instead of
having to access one desktop banking system for international
wires, another for domestic federal wires, another for foreign
exchange, and another for ACH payments, the company is using
its banks straight-through processing capabilities. The company
no longer has to translate SAP payment files and send them
through multiple banking systems. In effect, the central treasury department acts as a house bank for domestic and international subsidiaries.

Straight-through processing allows Brown-Forman to reduce

administrative tasks and potential errors associated with the
need to process different payment types. Also, the company has
established better controls because confirmed banking information in the mySAP ERP Financials accounts payable vendor
master file is used for payment.
For receivables, Brown-Forman is also using a straight-through
process. About 80% of the domestic collections are done using
ACH debits of customer accounts. The company sends a payment file directly to the bank (a mirror image of a collection
file), eliminating the internal processing step in the accounts
receivable department. Weve been moving from checks to
ACH for a long time well before our implementation of SAP
treasury, risk, and cash management capabilities, says Ladd.
Customers trust Brown-Forman to accurately initiate an
electronic drawing of funds.

5) The need for lockboxes to handle checks was reduced because an

increasing number of payments were being made electronically
11

Vendor file accuracy: Brown-Forman needed to ascertain that

vendor files were accurate before distributing funds electronically using straight-through processing. But many vendor
files had not been used for many months and thus may have
contained outdated or incorrect banking information. Also,
approved vendor information had been maintained in thirdparty wire transfer systems as well as in the treasury departments PC database, resulting in redundant confirmations and
risk of errors. Cleansing vendor files became a prerequisite for
moving to straight-through processing.
In February 2003 even before moving forward with straightthrough processing Brown-Forman began to clean up its
vendor master files, deleting banking details that were more
than 18 months old. For remaining bank details that had been
recently used, the company sent letters to other vendors asking
them to confirm banking details, and appropriate action was
taken depending on the response. We effectively relocated the
controls from a back-end process of reviewing wires before they
go out to the front-end of the process, ensuring that we were
wiring funds only to approved vendors, says Shannon.
Segregation of duties: During phase 3, the company established segregation of duties, enabled by mySAP ERP workflow,
for vendor master file management. This action eliminated
duplicate activity, including a bank details database previously
maintained by the treasury department, and ensured better
control by limiting access to the vendor master file. The companys strategic sourcing department continues to be responsible for creating the vendor file in mySAP ERP Financials and
entering the associated payment methods, but it no longer is
permitted to enter vendor banking information. If bank details
were required, a workflow message would flow to a specified
individual within the accounts payable department who is
responsible for entering banking details from the original

6) The Sarbanes-Oxley Act of 2002 is intended to protect investors by

improving the accuracy and reliability of corporate disclosures and internal
controls. The acts requirements, including those governing disclosure
12

Strategic Sourcing Department

Create vendor
Enter payment
methods

Accounts Payable
Department
Enter banking
details

Treasury
Department
Obtain letterhead
documents from
vendor
Confirm banking
and other data
entered in SAP
software
Approve vendor

Figure 2: Segregation of Duties for Vendor File Management

payment instruction data provided by the vendor. A workflow

message would then flow to the treasury department, indicating that the vendor is awaiting approval. The treasury department would obtain the original confirmation documents from
the vendor and verify that what had been entered in mySAP
ERP Financials matched what the vendor sent (see Figure 2).
Brown-Forman management also recognized that segregation
of duties was necessary for payment processes. Sarbanes-Oxley6
required this, and eliminating conflicts of interest inherent in
some payment processes was essential.
For example, although there were controls over wire transfers,
ACH payments had been sent directly to a bank from a file
generated in the accounts payable department. But that departments access to change vendor information meant that the
process did not satisfy segregation requirements. After the
straight-through processing implementation, the treasury
department initiates all ACH payments, along with other
wires and other electronic payments, via straight-through
processing using mySAP ERP.

of quarterly financial reports and those requiring annual certification of

internal controls, affect how public companies such as Brown-Forman
deal with corporate governance and financial disclosure.

From a Sarbanes-Oxley perspective, theres been of lot of effort

to identify and close the gaps, says Waddell. And through our
initial efforts, we did close the gaps. We felt comfortable with
the vendor details, and we had established good controls.
Implementation with Bank of America: From April to June
of 2003, Brown-Forman considered options for handling
straight-through processing, and in June the company decided
to initially work with Bank of America. As a first step, BrownForman and Bank of America agreed to use an iDoc. The payment
iDoc contains all information necessary to make various forms
of domestic and international payments. This iDoc contains
about 200 fields, including beneficiary name, address, bank
details, senders addresses, and related information. It took
about six to eight weeks to create and refine the iDoc details,
which we thought was very rapid, says Walker.

Brown-Forman
mySAP
mySAP ERP
ERP Financials
Financials
(General ledger
Ledgerentry
entrycreated
ceated when iDoc generated)

iDoc file with payment information

Testing was conducted from October to November 2003,

and Brown-Forman went live in November with six foreign
currency accounts and some domestic accounts at its bank (see
Figure 3). The straight-through process established in Finland
(the first non-U.S. location) enabled a treasury, risk, and cash
management solution for the companys Finlandia Vodka
Worldwide subsidiary. Thanks to integration with mySAP ERP
Financials, all bank transactions were automatically reconciled
with the general ledger. This process is being rolled out to other
international subsidiaries.
Phase 4 Hedging of Foreign Exchange
and Commodities

This phase was implemented from July to October 2004. As

noted, Brown-Forman faces risk with its exposure to foreign
exchange fluctuations. Today all foreign exchange derivative
contracts are recorded in mySAP ERP Financials. Each foreign
exchange trade generates a trade ticket, and confirmations
of trades flow back to the system and are accounted for
automatically.
In phase 4, Brown-Forman entered details covering all foreign
exchange and commodities hedging contracts, fully integrating
their accounting with mySAP ERP Financials. The company
thus eliminated the use of its third-party foreign exchange
management system.

Bank of America
Domestic
Wire
Payee 1

ACH

Payee 2

International
Wire
Payee 3

Brown-Forman is a U.S. dollar entity, and most subsidiaries

are as well, so the headquarters may hedge foreign exchange
on behalf of foreign subsidiaries at the parent-company level
(according to FAS 1337 regulations). Some subsidiaries, such as
those in Korea and Italy, have local functional currencies and
must record foreign exchange hedge contracts at the subsidiary.

Figure 3: Straight-Through Processing

7) In 2001 the Financial Accounting Standards Board (FASB) put into effect a
new regulation known as FAS 133, Accounting for Derivative Instruments
and Hedging Activities, affecting most U.S. companies. FAS 133 was
adopted to resolve reporting inconsistencies and lack of accounting for

large liabilities and assets. The regulation requires companies to record

derivative contracts on the balance sheet and base valuations on a standard
analysis derived from current market conditions. FAS 133 also requires that
gains or losses be realized in the current periods income.
13

But mySAP ERP Financials enables the use of intercompany

contracts, so the hedging accounts are still integrated with the
companys core SAP data.
We really proved ourselves with phases 1, 2, and 3, says Waddell,
so there was confidence that we could execute when it came
to hedging foreign exchange and commodities in phase 4. We
eliminated the manual interface between the third-party system
and the SAP solution in accounting for derivative contracts
under FAS 133, greatly improved visibility for operational staff
and auditors, reduced costs, and established an audit trail within
the system.
Auditing Review and Sarbanes-Oxley Compliance

Brown-Forman audited this implementation carefully because

it addresses processes for handling liquid assets which have
more risk exposure than other asset classes. The companys
internal auditing group played two roles. The first was to work
with the treasury department to review established processes
and to make recommendations for improvements for example,
those relating to the SAP software configuration, segregation
of duties, and operational efficiency. The second was to ensure
that the processes met the requirements of Sarbanes-Oxley; the
auditors determined high-level objectives for compliance and
established and documented necessary controls. The auditors
reviewed every process that had a material impact on financial
statements, including those relating to foreign exchange, bank
accounts, debt, investments, and derivatives.
As an implementation of SAP software, auditing tasks were
simplified and Brown-Forman management could be confident
that the right controls were in place. With mySAP ERP, we
were able to establish controls that are put in place up front, so
we didnt need a gatekeeper at the back end, says Todd Werner,

14

IT audit manager. For example, workflow processes were established so that the vendors need to be approved before a payment
is made. Its always better to have this type of preventative control in a process, and thats what SAP solutions enable.
With mySAP ERP, we were able to
establish controls that are put in place
up front, so we didnt need a gatekeeper at the back end.
Todd Werner, IT Audit Manager, Brown-Forman

In addition to auditing processes, Brown-Forman also audited

systems. From the IT side, we had to complete only basic compliance tests of integrated applications, interfaces, the operating
system, and the database, because these were certified to work
properly with the SAP solution, says Werner. Once we completed our basic review of controls, we could rely on independent
opinions confirming that new third-party systems are compliant with our requirements.
SAP solutions are widely implemented in many industries,
says Kevin Zoeller, audit consultant with Brown-Formans
internal audit services. The processes and systems have been
thoroughly reviewed and tested. We thus had high confidence
that the processes were well controlled and compliant with
Sarbanes-Oxley.

Change Management

As a result of this implementation, many cash management

processes changed at Brown-Forman. The company shifted
from handling data in many large spreadsheets to handling
single data entry in mySAP ERP, from monthly to daily reconciliation, and from individuals handling end-to-end cash
processes to methods of operation involving segregation of
duties. The accounts receivable, accounts payable, general
ledger, and treasury departments substantially changed longestablished ways of working. We had to substantially change
the companys approach regarding how best to manage cash
and the payments process in the new environment, says
Shannon. We were shifting to a daily, real-time approach.
In particular, the role of the treasury department changed.
Before the implementation of mySAP ERP, cash management
was manual and wire transfers were being reviewed by treasury.
We were getting copies of all documents, including the invoices, says Ladd. When we went to straight-through processing,
we realized that we had to let go of the second review we had in
treasury or actually, the control we just seemed to have. We
had to trust the controls in the SAP software and gain comfort
that the straight-through process would work properly.
Although there had been some resistance and doubts about
whether the new processes would work, the implementation
had senior-level support. The project management team
reported to a steering committee, which included business
owners responsible for making key decisions and communicating project status to executive management. The treasury
department project sponsor and IT project manager ensured
that there was clear communication to the stakeholders about
project objectives and progress.

The plan now as we roll out the SAP solution around the
world is to look carefully at how these treasury, risk, and cash
management processes can support the business, says Waddell.
It took a bit of persuading over the last year, but we were able
to prove it with straight-through processing initially in Finland.
Now, the people who are in charge of rolling out the SAP
solution to global subsidiaries have embraced it. They see the
benefits of the SAP cash management capabilities and how they
tie together accounts payable, accounts receivable, and overall
cash management processes. We can execute the same straightthrough payment and bank reconciliation processes almost
anywhere in the world, and this lowers our cost of operations,
says Shannon.

15

OUTCOME
Brown-Forman streamlined its cash management processes,
reducing workforce and transaction costs, improving visibility
into its working capital position, and freeing staff for activities
that add more value. The company is better positioned to
replicate these processes to support global operations and has
We were shifting to a daily, real-time
approach.
Roger Shannon, Assistant Treasurer, Brown-Forman

reduced risk by ensuring compliance with Sarbanes-Oxley regulations. And Brown-Forman has earmarked its improving cash
flow (see Figure 1) for debt repayment, global brand building,
and capital expenditures to support production requirements.
Measurable Results and Related Benefits

Brown-Forman achieved the following measurable results

over the period from the fourth quarter of 2002 to the second
quarter of 2004:
Improved productivity:
Reduced total workforce associated with cash management processes by 60% and positioned the company to save
0.25 to 0.50 person-year per location as new international
subsidiaries are added
Reduced resources required to manage daily cash
application and payments by 81%, including the
following:
Reductions in the time necessary to track debt,
investments, and interest accruals
Automation of the concentration of cash and initiation
of wire transfers to move money, eliminating processes
that had taken five to eight hours per day
Reduction of person-hours required in other departments
involved in the cash cycle, including accounts receivable
and accounts payable

16

Lowered person-hours required for month-end closing

from 48 hours to 1 hour:
Reduced elapsed time from three days to one day
Improved confidence in and accuracy of financial data;
the data is no longer keyed multiple times into different
systems
Enhanced ability to make timely cash investment
decisions based on concentrated cash value
Centralized bank account reconciliation and lowered
number of average outstanding items requiring reconciliation during a month from 200 to less than 10:
At the end of the month, the number of unreconciled
items were effectively reduced to zero so the balance
sheet is clean
Bank accounts are reconciled daily by a single person
versus multiple people at the end of each month
Lowered total workforce and substantially reduced the
need for research to reconcile items; all of the information is available immediately in mySAP ERP, and there is
no waiting for month-end reports
Lowered person-hours required in other departments
Reduced
average subsidiary cash balances by an average

of 50% due to straight-through processing and more efficient

cash management:
Held onto funds for longer periods as a result of pay on
behalf of subsidiary payments using straight-through
processing versus prefunding subsidiary bank accounts
Reduced need to fund subsidiaries (with euros, pounds,
and so forth) and stage cash in local entities, based on local
cash flow projections
More efficiently concentrated funds for investment and
debt reduction
Reduced interest expense and increased investment income

 Lowered transaction costs by 10%: Used methods of

payment that are less expensive than wire fund transfers,
including increased use of ACH. The reduction for specific
transactions was on the order of US$12 to US$18 for wire
transfers, versus US$0.40 for payments managed through
straight-through processing (using the European Low-Value
Clearing System). Also:
Reduced the cost and complexity of intercompany
payments between Brown-Forman entities; previously, cash
flowed through three banks, and now cash payments take
place within a single bank
Reduced the number of payment processing banks
Negotiated volume discounts with primary banks
Ensured compliance with Sarbanes-Oxley and related
regulations:
Reduced workforce requirements because the implementation is based on the SAP solution:
Reduced the workforce required for annual compliance
verification, documentation of IT integration and system
configuration, and regular financial audits
Lowered the time required for remediation and reduced
the need for annually recurring audits
Enhanced vendor payment process:
Reviewed and cleaned up 5,000 vendor files; removed
inactive vendors
Confirmed payment instructions and proper payment
authorization per vendor
Established segregation of duties
Reduced the risk of borrowing or investing inappropriately
based on inaccurate data

Lowered possibility of noncompliance with FAS 133:

Ensured that derivative contracts are presented in the
daily cash position in the SAP solution (this previously
had not been the case, since the contracts were available
in the nonintegrated third-party system)
Eliminated manual journal entries and rekeying of
month-end accounting for derivative contracts
Eliminated
maintenance of third-party system for

handling foreign exchange contracts saving approximately

US$50,000 per year
If this system hadnt been eliminated, foreign subsidiaries
would have had to acquire payment systems for local use,
thus increasing software expenditures and annual maintenance fees
Confidence in Sarbanes-Oxley Compliance

As a result of the implementation, the Brown-Forman internal

auditing group has more confidence that Sarbanes-Oxley compliance will be sustainable following an audit. The company has
reduced the need for control and review of manual procedures
by shifting to working with processes enabled by systems over
which there is change control. We have gained significant
efficiencies covering compliance through the mySAP ERP
implementation, says Werner. But beyond the efficiency
gains, an even more important benefit is our confidence that
compliance is sustainable.

17

NEXT STEPS
In the future, Brown-Forman plans to further streamline
procedures and extend its processes around the globe. Specific
improvements include the following.

Shared financial services centers: Establishing shared financial services centers allows a company to more efficiently
handle financial transactions. Although the treasury department is now akin to a shared services center for some payments
Cash management: Brown-Forman is planning to continue
and other cash-related transactions, Brown-Forman has not yet
rolling out the standard cash management processes enabled
established a shared services center for a broad range of financial
by mySAP ERP to subsidiaries around the world. This rollout
and accounting services, including general ledger, payroll, fixed
will improve the efficiency of existing subsidiaries, facilitate
assets, and so forth. These activities are typically handled in
market entry and establishment of
satellite locations around the
new subsidiaries, enable greatly
world, sometimes without the
We can execute the same straightimproved financial controls for
benefit of an implementation of
through payment and bank reconliquid assets, and provide flexibiliSAP software. Brown-Forman
ciliation processes almost anywhere
ty. We can view and manage interintends to investigate the feasibilnational account balances, and we
ity and benefit of shared financial
in the world, and this lowers our cost
can make decisions in Louisville
services centers on a regional
of operations.
or we can support decisions made
basis, particularly in Europe and
Roger Shannon, Assistant Treasurer, Brown-Forman
at the subsidiary, says Waddell.
Asia, and this will require that
SAP solutions be implemented at
Straight-through processing: Brown-Forman plans to extend
a critical mass of new locations. Any new processes established
straight-through processing to other banks and other countries.
will interface as appropriate with Brown-Formans evolving
Going forward, our strategy is to roll out that process to every
cash management processes.
location thats using SAP software, says Shannon. Were now
looking at opportunities in China, Korea, the Czech Republic,
Cash flow forecasting: Brown-Forman is now able to precisely
Poland, and Taiwan. In any particular country, the first question
forecast cash positions for a two-week horizon. The company is
is whether pay on behalf of through in-house banking is even
investigating using SAP solutions to extend this horizon, which
permitted. In countries where its more problematic, we may
would better position the company to manage cash in the event
still pull the SAP payment file in, but the payment will come
of future changes in financial position or cash flow stability.
out of that subsidiarys account. Then, through the daily cash
concentration process, well fund that account if necessary,
or they can use locally generated cash.

18

LESSONS LEARNED
As the implementation progressed, the company found the
following to be key to success.
Take Control of the Vendor Master File
Brown-Forman ensured that its vendor files were accurate and up to date before
distributing funds electronically using straight-through processing. The company
also established workflow processes to ensure segregation of duties when
establishing new vendors. These actions were essential for controlling payments. One of the best decisions we made was taking control of the vendor
master file, says Shannon. We spoke to people at many companies that
didnt do this up front, and they wished that they had. Because we did clean
up our vendor files first, wed greatly strengthened our controls and facilitated
compliance with Sarbanes-Oxley.

Implement in Phases
Brown-Forman chose to implement the treasury, risk, and cash management
processes in phases. This approach is not appropriate for every type of
implementation in fact in many cases, a big bang works better. But in this
case, the company used a phased approach to get buy-in from stakeholders
and then moved forward with the next phase encompassing broader and
deeper capabilities and more locations.

The company also learned about capabilities in earlier phases that were
essential to supporting later phases. For example, We definitely wouldnt
have wanted to implement straight-through processing without having
solid experience with the postprocessing of bank statements to resolve
discrepancies, says Ladd. Otherwise, we would have had to deal with
numerous returned wires and other payment problems as we implemented
straight-through processing.

19

Manage Scope
As with most implementations of SAP solutions, Brown-Forman had to decide
where to draw the line. We wanted to have better cash forecasts, handle intercompany loans, issue better reports covering investments and debt, and so
forth, says Walker. But we really had to focus at first on what was important
to get done. We did manage scope correctly, and we even got a bit more than
just the basics and can now focus on the enhancements.

Invest in the Design Phase Up Front

The treasury department worked with several other departments to make sure
that processes were properly designed and that the proper controls were in
place. Brown-Forman management believed that investing in up-front process
design would save time and reduce the cost of audits.

Build on Experience of Other Companies

Brown-Forman management recognized that SAP has a large number of users
and that there are many companies experienced with the treasury, risk, and cash
management capabilities of mySAP ERP whose insights could be very useful.
Participation in user groups enabled the company to contribute to common
knowledge and benefit from the experiences of others. Brown-Forman found
that this was particularly beneficial in new areas such as straight-through processing; there was no point in reinventing processes that others had already
established.

CONCLUSION
If Brown-Forman is little known outside the investor community, its main product is an icon. Jack Daniels is the worlds
best-selling American whiskey by far, and its one of the largest
. . . beyond the efficiency gains, an
even more important benefit is our confidence that compliance is sustainable.
Todd Werner, IT Audit Manager, Brown-Forman

Brown-Forman will continue to invest globally in Jack Daniels

and its other brands through advertising, promotions, sponsorships, innovative packaging, and new marketing and distribution arrangements. Success is not assured industry consolidation can hinder brand growth, consumer tastes can change, and
exchange rate fluctuations can eliminate profits.
And brand development is never done. It depends on a companys creativity, patience, and focused investment and
increasingly on establishing sound processes to manage vital
resources such as cash.

premium spirits brands in the world. Musicians have written

songs about it. Historians have written books about it. In bars
and restaurants, customers order it by saying simply, Ill have
a Jack.

21

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