Cash & Liquidity Management

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Consumer Brands, Retail and Healthcare: The Receivables Opportunity While the opportunity to automate receivables offers very substantial rewards in terms of cost savings and efficiencies, there are a number of key factors critical to success that must be overcome first.

Consumer Brands, Retail and Healthcare:
The Receivables Opportunity

by Hans van den Bosch, Global Sector Head Consumer Brands, Retail and Healthcare, Global Liquidity and Cash Management, HSBC


An increasing number of corporate treasuries in the Consumer Brands, Retail and Healthcare (CBRH) sector have already centralised and automated their liquidity management and payables. Now they are considering taking the next logical step: doing the same for receivables. As Hans van den Bosch, Global Sector Head CBRH at HSBC explains, while the opportunity in terms of cost savings and efficiencies is very substantial, there are a number of key factors critical to success.

Companies in the CBRH sector have typically placed a heavy emphasis on liquidity management and working capital, with many of them implementing a variety of cash pool and other structures in order to optimise their cash. Once they have that in place, many of them then move on to focus on their supply chain. Since companies in CBRH typically have significant leverage over their suppliers, they have been able to improve working capital (DPO) and streamline payments to suppliers with the aid of suitable technology and finance solutions. When seeking payment term extensions, CBRH corporates have often sought to ameliorate the impact on their suppliers through the use of supply chain financing solutions provided by their partner banks.

Another motivation for CBRH companies to tackle payables has been the number of market infrastructure initiatives that facilitate the process. The emergence of standardised formats such as ISO20222 and the evolution of SWIFT into a platform that corporates could access were key to the emergence of payment factories and payments on behalf of structures. (POBO).

Receivables: why now?

Until recently, the same sort of supportive nfrastructure has been less readily available for the centralisation/automation of receivables. For instance, collection processes and infrastructure in many countries are often locally organised, which makes it difficult to achieve synergies.

This has been a significant factor in CBRH companies deferring projects in this area. Another mportant consideration has been that in the case of receivables customer relationships are involved, which are usually regarded as having considerably greater commercial sensitivity than supplier relationships. This has engendered a more cautious approach, as the risk of damaging relationships by introducing new solutions to receive payment has often been deemed too high.

Nevertheless, a large amount of manual activity, human resource and unnecessary cost is currently absorbed by order to cash processes in general, with the processing and reconciliation of accounts receivable (AR) responsible for a considerable proportion of these overheads.

Therefore, the centralisation/automation of receivables potentially represents a very considerable cost saving and efficiency opportunity. The magnitude of this opportunity, in conjunction with recent infrastructure developments in certain important markets, is prompting CBRH treasuries to re-evaluate their approach to collections and receivables.

Differing business models, differing challenges

In terms of these infrastructure developments, it is important to differentiate between more developed and emerging markets. For example, SEPA has already created the potential for more harmonised collection processes, platforms and solutions in Europe. This also fits well with the business model that CBRH companies typically apply to European and North American markets, namely concentrating on fewer and larger customers, such as major retailers. For some consumer brand companies, these customers may represent a significant part of their total business.

However, distribution models in emerging markets such as India, Indonesia etc. are often very different, in that CBRH companies may be dealing with a large number distributors, possibly all the way down to very small family-run shops. This inevitably results in collection processes in these markets that are more fragmented, complex and manually based. Nevertheless, taken as a whole, the sheer size of markets such as India for CBRH companies make them extremely important.

A supportive combination: new infrastructure and solutions

The potential game changer here is a combination of infrastructure improvement and solution availability. Next generation payment systems are starting to appear in emerging markets that provide real time electronic settlement execution and instantaneous debit/credit, thus enabling the effi cient harmonised exchange of payment instructions.

An important driver of this innovation and its ongoing persistence is the changing online population demographic. As today’s (relatively youthful) primary online transacting population ages, they will continue to execute transactions online. However, they will also be joined by a new younger generation also transacting online, thus increasing the overall percentage of users looking for effi cient electronic payment mechanisms. Coupling this growth in the total online transacting demographic and the innovative new payment systems being introduced around the world would suggest a signifi cant increase in electronic payment traffic is likely.

A classic example of this new breed of payment system is India’s Unified Payment Interface (UPI). This combines multiple bank accounts into a single mobile application, merging several banking features, plus fund routing and merchant payments under one umbrella, as well as catering for peer to peer collection requests [1]. In some respects, this overtakes the payment capabilities of several developed markets. Other similar innovations include the Philippines’ E-Peso e-payment system that covers B2C, B2B and C2C [2] and the second phase of China’s CIPS.

 

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