Payables and Receivables Management in the Modern Treasury

by Matthew Davies, Co-Head of EMEA Product Management, Global Transaction Services, Bank of America Merrill Lynch

Treasury continues to play a more strategic role within many corporates. It is increasingly using its skills and vantage point as the location for concentration of all inflows and outflows to own the management of capital and help the organisation achieve operational goals. One way that treasury is achieving these objectives is by taking a coordinated approach to integrated payments and receivables management.

Many corporates have already embarked on some of the changes required to achieve integrated payments and receivables, using shared service centres for example. However, today treasury has to contend with myriad new payments and receivables options which, potentially, introduce complexity and inefficiency. Treasury also needs to consider its approach to centralisation to make sure that its decisions take a holistic view. In addition, treasury should keep abreast of developments in regulations and technology, which can complement the overall strategy.

Increasing payments and receivables choice

The options for both payments and receivables are greater than ever before. As an example, in order to meet the needs of their customers, companies are now quick to accept the latest online or mobile wallet or contactless card. From a sales perspective, this strategy makes sense: the goal is to make it as easy as possible for customers to pay. However, each option comes with its own associated costs as well as benefits.

Treasurers need to be aware of the implications of these new methods on receivables management. Receivables paid using an online wallet are often not automatically transferred to a company bank account and are therefore not as easily integrated into cash management structures. Treasury can work with sales to create incentives and understand different payment methods that are advantageous to the company while still offering a choice of payment methods.

At the same time, there is also a growing range of payments options available for corporates. Take the traditional batch processing protocol. It made sense before as a way to keep per transaction costs down, but necessitated early preparation of payment runs in order to optimise batches. Today improvements mean that small or individual payment runs have similar costs per transaction as larger batches. By making payments on schedule, an understanding of working capital can be optimised.

Real-time payment instruments, such as Faster Payments in the UK, are expected to become more widespread across EMEA in the coming years and could provide corporates with an even more precise way to time payments and deliver working capital optimisation. Tools such as supply chain finance or purchasing cards also offer the potential for significant working capital benefits and should be seen as mainstream tools that are visible and controllable by treasury.

Centralisation paves the way for payments and receivables integration

Centralisation has already done much to change how payments and receivables are viewed. Over the past decade, many corporates have concentrated these functions in a payment factory or shared service centre, although, typically, they are on separate platforms.

In some instances, companies have changed their corporate structure and business model in order to overcome payments and receivables challenges. Many firms are creating a central entity, which effectively owns all the goods involved in the business from the supply chain to sales. Such a structure reduces some of the complexity associated with payments and receivables, by eliminating re-invoicing for example.

For integration to work, corporates need to take the next step and move payments and receivables to a common platform while taking a broader view of both. Corporates – and banks – have tended to look at payment and receivables challenges in isolation: a fix for one problem has often pushed problems onto other stakeholders with potentially detrimental effects. For example, moving spend on to a purchasing card can extend DPO but could result in a higher invoicing cost from the supplier who has to cover the merchant acquiring costs.

Effective centralisation and integrated payments and receivables management through the use of payment factories opens up numerous additional possibilities for treasury. The payment factory can more easily be linked to regional or global liquidity structures. Similarly, an in-house bank can be introduced to operate Payment On Behalf Of (PoBo) and Receivables On Behalf Of (RoBo) structures, where one or more entities are authorised to pay or collect on behalf of other entities within the group, as well as facilitating further scope for optimising other areas such as FX.

New solutions to address treasury and operational headaches

The development of new solutions is helping to solve some perennial challenges for corporates. For example, reconciliation has always been a significant problem for corporates but the huge range of payment instruments now used – especially by consumers – has intensified the challenge. Fortunately, new solutions are emerging – from banks and other providers – that intelligently match and reconcile receivables regardless of the payment instrument used.[[[PAGE]]]

Similarly, tools that originally emerged as reconciliation solutions – such as virtual accounts, where payments are made to a central account but reconciled using a unique ‘account’ number – are now being used as an enabler to provide more information to all parties, especially in situations where third parties are involved or an on-behalf-of structure is employed.

Receivables matching and virtual accounts create opportunities for both sales and treasury by facilitating greater potential flexibility in terms of collections and improved efficiency of reconciliation. Sales is satisfied because consumers are free to make payments using a wide range of payment methods while reconciliation is fast and accurate – potentially opening up the possibility of further sales. At the same time, treasury gains an accurate aggregate picture of the company’s large-scale flows and cash is applied more quickly than in the past.

Embrace payments and receivables transformation

Adopting an integrated approach to payments and receivables offers huge potential advantages for treasury. There may be a natural tendency for treasury to hesitate given its primary role as the custodian of capital. However, the rapidly evolving payments and receivables environment means that a wait-and-see approach will not benefit the company. A progressive approach is needed.

Integrating payments and receivables can be challenging: it is a whole company opportunity and requires co-ordination and leadership. Although in some companies treasury does not house all of the processes involved in payments and receivables, it is best placed to take a holistic view of the entire payments and receivables chain. For integrated payments and receivables to work, treasurers should take ownership of the process, lead it and co-ordinate it across different parts of the organisation.