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Rapid Returns in Receivables Those who remember the late 1980s and who also grew up in the United States (I can feel my audience diminishing as I write!) may remember Ken Hakuta, better known as ‘Dr Fad’, TV personality and inventor - for those who missed out, he’s featured on the old VHS ‘I Love the ‘80’s: 1983’. I bet you never expected to pick up that sort of trivia in a treasury publication. I haven’t seen it, in case you were wondering. Anyway, amongst (I’m sure) very many sensible comments made by ‘Mr Fad’, one struck me as actually being quite relevant: “Lack of money is no obstacle. Lack of an idea is an obstacle.” While I am not suggesting that we all send our banknotes fluttering from a top storey window (after all, many of us might feel that this is already the effect of much of the current economic uncertainty) there are significant ways in which treasurers can substantially improve their liquidity and working capital with rapid return on investment. The key is not just to throw more money and more resources at a problem, but to think creatively about addressing challenges.

Rapid Returns in Receivables

by Helen Sanders, Editor

Those who remember the late 1980s and who also grew up in the United States (I can feel my audience diminishing as I write!) may remember Ken Hakuta, better known as ‘Dr Fad’, TV personality and inventor - for those who missed out, he’s featured on the old VHS ‘I Love the ‘80’s: 1983’. I bet you never expected to pick up that sort of trivia in a treasury publication. I haven’t seen it, in case you were wondering. Anyway, amongst (I’m sure) very many sensible comments made by ‘Mr Fad’, one struck me as actually being quite relevant:

“Lack of money is no obstacle. Lack of an idea is an obstacle.”

While I am not suggesting that we all send our banknotes fluttering from a top storey window (after all, many of us might feel that this is already the effect of much of the current economic uncertainty) there are significant ways in which treasurers can substantially improve their liquidity and working capital with rapid return on investment. The key is not just to throw more money and more resources at a problem, but to think creatively about addressing challenges. In doing so, treasurers can achieve a return on investment which contributes directly to the company’s bottom line. Focusing on receivables is a prime example of where treasurers can act creatively to enhance liquidity and add economic value to the company. The watchwords here are Centralisation, Optimisation, Leverage and Protection. But what does these mean in practice?

Centralisation

According to a recent survey conducted by GTNews in association with SEB (‘Is Corporate Cash Management Changing?’ 19 July 2007) 43% of companies have a decentralised approach to receivables. The survey included a high proportion of SMEs and domestic companies, and according to research such as the Treasurers’ Benchmark of companies with a turnover above $1bn the percentage of companies which have not fully centralised their collections is far higher. Approximately 65% of larger multinational companies still have partially decentralised collections and only 5% have fully centralised (source: Treasurers’ Benchmark). However, there is a significant drive to centralise collections amongst companies of all sizes, either globally or regionally, depending on the structure of the organisation. While short-term priorities differ amongst firms, it appears that only 15% of those with decentralised collections ultimately intend to maintain this arrangement in the future.

Focusing on receivables is a prime example of where treasurers can act creatively to enhance liquidity and add economic value to the company.

Although many treasurers say they are planning to focus on collections, there are always other priorities, and like cashflow forecasting, which has appeared on treasurers’ list of top priorities for a number of years, it does not seem likely that all those who ideally want to centralise collections will end up doing so in the short to medium term. However, why should receivables be a priority now when they have not been in the past?

Bank & industry support

Firstly, the banks are now in a better position to support centralised collections, and indeed financial shared services more generally, with services such as automated pan-European collection services to repatriate funds. Wider industry initiatives also better support centralisation of financial functions, such as payables and receivables. For example, with SWIFT access becoming more prevalent amongst corporates, information from multiple banks can be exchanged through a single channel which is particularly suited to centralised financial functions. This allows infrastructure costs to be reduced, such as bank interface costs, typically estimated to cost $15,000 - $35,000 each per year. SEPA too is a catalyst for centralising receivables. In the past, this has not always been easy as companies have had to support local payment methods in each country and therefore have had in-country collection functions (or even more fragmented). With the transition to harmonised payment methods across Europe, it is easier to establish a centralised function with common business processes across countries.

Technology availability

The technology for centralising and optimising receivables has been available and proven from suppliers such as Atradius and SunGard, not only as a standalone tool but in the latter case, as part of an overall solution with treasury and other parts of the working capital chain such as payables.

Working capital

But this technology has been available and has delivered tangible benefits to many companies over a number of years, so why haven’t treasurers focused on this area before? In the past, receivables have been outside many treasurers’ remit. While treasurers have typically focused on high value, low value transactions, collections (and commercial payments) are more intense operational processes with high volumes and potentially lower value transactions. However, with the credit crisis as a catalyst in many cases, treasurers are appreciating (and in some cases, it is demanded of them) the importance of focusing on working capital on a broader basis - not just ensuring that cash is available in the right place at a right time, but working out how much cash the company actually needs and taking steps to minimise this. After all, the less cash which is tied up in working capital, the more there is available for research & development, mergers & acquisition, share buybacks and paying down debt.

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