Published: January 01, 2000
The value that treasury delivers to their organisations has been accentuated since the global financial crisis, allowing treasurers to expand their sphere of influence into a wider range of issues that impact the financial performance of the company, of which working capital is a major example. One of the biggest hurdles in optimising working capital is that responsibility for the various elements in the working capital cycle, such as purchasing, treasury, sales, accounts payable and accounts receivable are separate functions with different management structures, objectives and key performance indicators (KPIs). This can inherently result in a ‘siloed’ approach, leading to potential complications when trying to implement end-to-end efficiencies and coherent objectives that benefit the organisation as a whole as opposed to individual departments. Furthermore, this issue is not restricted to corporations - banks also can have separate business functions managing different elements of their customers’ working capital cycles. The challenge, therefore, is how to break down these silos, both within corporates and banks, to enable an integrated approach to working capital efficiency and optimisation.
Centralisation is typically an important step. A centralised business model is far more conducive to standardising and streamlining processes than an organisation where business units are responsible for their own financial activities. Centralised visibility and control makes it easier to align objectives across different business functions, and to encourage better communication. Similarly, working with global banks can provide a consistent approach to payments and receivables processing and cash and liquidity management, making bank relationships more productive. In a decentralised treasury environment, in-country business units are more inclined to work with local banks and systems, resulting in fragmented information flows, reporting and processes.
Treasurers are increasingly recognising the need to manage counterparty risk more proactively, achieve greater visibility and control over cash positions globally and enhance process efficiency. This in turn is driving momentum towards a more centralised treasury and finance organisation. In some cases this will result in a regional treasury organisation as opposed to a single global treasury centre, but with global visibility of liquidity and risk, consistent use of technology and coherent processes.
The move towards centralisation is not restricted to treasury. As key elements in the working capital cycle, centralisation of payables and receivables can make a major contribution to working capital optimisation, as well as cost reductions and process efficiency. Payment factories and shared service centres (SSCs) that incorporate purchase-to-pay activities are well-established amongst corporations globally, but centralising receivables has typically proved more difficult. While companies have control over their payables, such as the choice of payment instruments and timing of payment, this is not the case with receivables, where customers control how and when they pay. The problem is further exacerbated by commercial sensitivities surrounding customer collections with sales teams often reluctant to lose control of this activity. Regulatory and taxation issues have also posed considerable obstacles in the past. We are now seeing regulatory advances across virtually every region making a harmonised, centralised approach to receivables management a more realistic option.
Additionally, some companies may consider outsourcing these activities to an expert third party. For example, as banks process the cash flows, they already have much of the intelligence required to automate processes such as straight-through reconciliation. Where clients then send their receivables files to the bank, we are able to provide considerable data enrichment and intelligence to automate reconciliation and posting, enabling treasury to focus on issues such as capital structure, risk management and liquidity.
There are a variety of factors that are changing corporate attitudes towards receivables centralisation, which is resulting in a growing number of clients approaching the bank to explore and deploy techniques such as ‘receipts on behalf of’ structures to optimise and centralise collections. The first is senior management support for centralisation, as they recognise the importance of working capital optimisation, particularly during an extended period of economic uncertainty. Receivables are vital, and centralising activities such as credit and collections allows local businesses to concentrate on sales and productive customer engagement.[[[PAGE]]]
Second is the changing profile of treasury. While treasury was often less visible prior to 2008-9, recognition of its activities, and the value that the treasury function brings to the organisation, has expanded enormously. Having achieved considerable success in areas such as liquidity and risk management, treasurers are able to play a pivotal role in optimising working capital by co-ordinating different parts of the business such as procurement, technology, supply chain, payables and receivables. It is often the first time that companies have strived for and achieved this degree of co-operation across business functions. This allows treasurers to initiate improvements across the financial supply chain that can result in efficiencies and achievements throughout the company. This is not a fait accompli, however. In many cases, treasurers may have to earn business unit confidence when taking responsibility, or an oversight role, for activities such as receivables. Value-added contributions from treasury need to be demonstrable, such as better transparency, measurable performance and process and cost efficiency.
Third is the opportunity created by SEPA (Single Euro Payments Area) in Europe, which harmonises both the instruments used for payments and collections (whether domestic or cross-border) and the legal basis under which they are transacted. With the SEPA migration deadline only months away (February 2014) this is a significant opportunity to optimise the receivables cycle (and payables cycle if this has not already been done) as opposed to focusing solely on compliance.
The potential to leverage a SEPA migration project to achieve working capital advantages should not be underestimated. Few projects have in the past, or will in the future, bring together the number of cross-functional business units that both a SEPA project and working capital optimisation initiative typically require. New payment and collection instruments, such as SEPA Direct Debits also create new opportunities to improve receivables management, particularly the predictability of collections, both for business-to-business (B2B) and business-to-consumer (B2C) collections.
Technology and banking solutions are pivotal in enabling receivables centralisation and working capital optimisation, with a comprehensive range of integrated solutions available to address each stage of the working capital cycle. Within individual regions such as North America or Europe (particularly post-SEPA), it is often relatively straightforward to harmonise the use of technology platforms and solutions. Across regions, this becomes more challenging, not least due to the diversity of payment cultures. For example, use of cheques is still prevalent in the United States, while electronic payments are ubiquitous in Europe. However, there are increasingly ways to address these issues; for example, virtual accounts can be implemented in all regions, and can be a powerful means of providing intelligence into customer payment trends. Virtual accounts can result in simplified credit decisions, as well as automated account reconciliation and posting by using data-based algorithms. However, while these solutions bring substantial benefit, the business organisation needs to be optimised in order to derive the greatest value.
Having centralised and optimised their payables and receivables activities, either under their own responsibility or as a key influencer, what is the next step for treasurers and finance managers in adding value to their organisation?
Once the company has visibility, control and standardisation across payables and receivables, the gap between DSO and DPO can be improved, bringing significant efficiency and better overall use of funds. Furthermore, by sustaining a strong culture of process improvements, treasury can continue to optimise cash beyond the supply chain. For example, some companies may have more cash than ever before, but having the money in the right place at the right time has become a board-level concern. Having a strong cash flow forecast in place is crucial for funding day-to-day operations and meeting long-term investment objectives and/or paying down debt. By refining the accuracy of their forecast and demonstrating a deep understanding of the enterprise’s business objectives, treasurers can demonstrate the value they bring to the organisation.
As a leading global bank, we have a rigorous advisory process we’ve developed to refine our strategy in the interests of our clients, enabling them to achieve their goals. We’ve built strong relationships in which our clients act as advisors, providing input to our investment priorities related to solutions and services which would add the greatest value to them. Equally, we are focused on developing deep insights into our clients’ industry trends and priorities, understanding their company strategy in detail and tailoring solutions to meet their specific needs. We further reinforce the importance of taking a holistic approach with clients through our Global Business Solutions team. This team comprises expert corporate treasury and shared services practitioners with a wealth of personal experience, who can share expertise and best practices, facilitating dialogue across our clients’ business functions. In doing so, they support clients in their efforts to break down silos and identify and address opportunities for improvement across the entire working capital cycle. Furthermore, by engaging with our client holistically, we are able to construct cohesive, integrated solutions to meet strategic working capital objectives.
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