Cash & Liquidity Management

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The Role of COBO as Part of a Centralisation Strategy There is growing recognition amongst senior treasury and finance professionals of the operational and working capital advantages of collection factories, including COBO.

The Role of COBO as Part of a Centralisation Strategy

by Guillaume Flies, Head of Collections, BNP Paribas

Guillaume FliesBy delegating the power to collect incoming customer payments to a single entity through a single bank account for each currency, ‘collections on behalf of’ (COBO) potentially offers considerable value to corporates aiming to centralise their collections. COBO, and collections centralisation generally, is still too often perceived as a complex process, and its benefits may not initially appear sufficiently compelling for some treasurers and finance managers to develop a strong business case. As the CMU workshop on COBO explored, however, while there are inevitably challenges to overcome, whether legal, operational or organisational, the opportunities, and solutions to support COBO are growing rapidly.

The workshop was moderated by Graham Buck, formerly managing editor of treasury website gtnews, with a panel comprising Guillaume Flies, head of collections, virtual accounts, BNP Paribas Cash Management, Aliette Leleux, finance and risk managing director, Accenture and Marek Chruściel, head of treasury at Play, a Polish-based telecoms group.

Centralisation and COBO

A collection factory acts as a centralised processing centre for accounts receivable (A/R), usually including activities such as account reporting, reconciliation, account posting, credit management and collections administration. The advantages of centralising financial functions are well-documented, including: cost savings through economies of scale and better use of automated technology; standardised processes and controls, and consistent reporting and metrics. Collections on behalf of (COBO) models (i.e., the ability for a single entity to collect cash ‘on behalf of’ group companies, often through a single account per currency) develop these benefits further, with streamlined processes and bank communications, fewer bank relationships, simplified liquidity structures and lower bank charges.

Figure 1
 
   Click image to enlarge (opens in new window)

COBO structures have grown in popularity in recent years,helped by the implementation of the Single Euro Payments Area (SEPA) and the Payment Services Directive (PSD). Companies no longer need to maintain separate euro accounts in each country, and payment instruments have been harmonised across the Eurozone. This makes it far easier to rationalise collections through a single entity and account, automate collections processes, and rationalise bank account structures.

Figure 2 - Typical Collection Factory with CoBo architecture
 
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The value of COBO is not restricted to Europe, however. Ongoing pressure on treasurers and finance managers to reduce costs and increase efficiency and scalability is prompting companies in all regions to centralise collections, including COBO, to maximise operational efficiency and optimise working capital. Given that collections are a major balance-sheet item for all corporations, improvements in collections processing can bring substantial benefits.

Overcoming challenges

Despite the potential advantages, however, there are some common challenges that companies implementing a COBO model need to overcome. Firstly, there may be tax and implications of COBO, which differ across markets. Secondly, there are operational considerations, such as the need to identify, reconcile and post items efficiently on both the beneficiary’s current account and the customer account. Thirdly, there may be organisational issues, particularly if the company does not have a culture of centralisation. For example, given the proximity of collections to sales and customer service teams, and potential sensitivity over the way that customer relationships are managed, ‘people’ issues are often the most complex to overcome to convince other business functions of the value.

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