Supercharging Receivables Management
The global economy can be characterised by one word – volatile. Barely a day goes by without conflicting news stories emerging of tremendous growth or anticipating disaster ahead. Considering these global cues, the IMF has reduced its 2020 forecast for global GDP growth by 6%. When this volatility is combined with the lingering effects of the global financial crisis it is little wonder that regulators are seeking to enhance resilience among banks, embracing risk buffers with stricter banking regulations such as maintaining appropriate leverage ratios and increasing capital requirements.
Basel III has resulted in banks having less funds available to lend to their customers. For corporate customers external sources of funding have become more difficult and costly to secure. Consequently corporates are looking inwards to fund their operations. Optimizing working capital is proving to be one of the best ways to do this. While working capital optimization can be achieved by centralising cash previously held in local business units through some form of liquidity structures (Inventory Management, Cash Management, and Accounts Payable Management), harmonizing the financial supply chain and enhancing the interest income can be best achieved by optimizing the cash conversion cycle. Put more simply corporates can achieve their aims by Supercharging their “Accounts Receivable”.
Receivables Management- the Achilles heel for effective internal funding?
Efficiently managing receivables or lowering DSO (Days sales outstanding) is a serious challenge for corporates. Getting it wrong can have tremendous effects on their whole cash conversion cycle. Though the ultimate goal of all businesses is to create a win-win solution for all by finding a balance where suppliers can decrease DSO and buyers can increase Days Payable Outstanding (DPO), the obvious challenge remains on the Receivables side. Among the many challenges are the following:
A. Uncertainty over collections: While the corporates have control over accounts payable, they lack the same level of control over when, or if their customers pay. While electronic payments is gaining traction on the retail side i.e. consumer to business (C2B) payments, there is still a significant amount of paper-based transactions in B2B payments. Paper is costly, inefficient and risky. For example processing paper cheques, even via an efficient lockbox operation, inevitably raises costs and introduces delays. According to McKinsey’s report Global Payments 2015, about 60 % of B2B payments require manual intervention and that each intervention requires at least 15 to 20 minutes.
Moreover, in situations where interest rates rise, “float” comes under even greater scrutiny. For example, if a business has a large percentage of their payments via paper and if their average customer makes payments on day 30, the business will lose a considerable amount of income due to the lost float.
B. Trapped cash: A recent report by HSBC found that U.S. companies are holding circa $2 trillion in cash. Corporate treasurers are determined to avoid falling into the cash-shortage trap since they have been long battling events which lead to their cash being trapped in their financial supply chain. Corporates sometimes face the issue of lost checks and missing or insufficient remittance detail. In some cases, the corporates provide discounts to their customers on purchase of goods but the discounts don’t get factored in the invoices. These events would ultimately lead to delay in payment from the customer, thereby affecting DSO. Among the reasons for trapped cash are:
• Invoicing inefficiencies
• Invoice receipt & accounting inefficiencies
• Collections process follow up inefficiencies
C. Lack of a centralized receivables model: Corporates with multi-country operations and subsidiaries find it increasingly difficult to manage their fragmented network of businesses. This complex situation is made more complex when mergers, acquisitions, takeovers and divestments are taken into account. Historically, receivables have been harder to centralise than payables for a variety of reasons including:
• Regulatory and taxation issues across different territories and jurisdictions
• Localized invoice details resulting in key collection information residing with customers.
• Clearing standards differ between countries
• Corporates have less control over the payment methods used by their customers
How do corporates supercharge their receivables management operations?
Companies can improve their account receivables management performance by adopting best practices such as:
• Centralizing their operations to accelerate the application of cash
• Making the debtor selection and management processes more effective
• Eliminating barriers to payment; offer electronic payment options.
• Using new technology to automate the collections function or to improve existing automated processes
Banking providers have a major role to play in helping their customers supercharge their receivables management operations. Technology can help banks in not only enabling corporates to achieve their current payable and receivable goals but also in centralizing information to ensure that corporates make more informed decisions going forward. Solutions like Electronic Invoice Presentment and Payment (EIPP), Dynamic Discounting, Accounts receivables matching, and Receivables/Collections-on-behalf-of structures can help. The usage of Virtual accounts to enable all the receivables/collections hit a single physical account, can also be used to accelerate reconciliation. The bottom line is that the tools and technologies exist to help corporates supercharge receivables management.
One of the leading technologies is FinnAxia Global Receivables. The solution helps banks to provide comprehensive accounts receivable products and services to corporate customers, across currencies, transaction types and jurisdictions. It allows the corporate to find and unlock trapped cash, reduce transaction and operating costs and improve sales and revenue along with deepening customer relationships. It also enhances the corporate’s overall business performance by freeing up resources and time that can be devoted to a company’s more mission-critical business activities.