Published: September 01, 2010
An important starting point for many companies in achieving financial process efficiency is to centralise processes in a shared services environment.
The role of corporate treasurers has traditionally involved disciplines such as cash management, debt, investment and foreign exchange management. Today, accentuated by the global financial crisis, treasurers have become more actively engaged in the business of seeking financially sustainable business practices, sufficient access to liquidity, and appropriate risk management in line with stakeholder objectives. As issues such as working capital and risk mitigation have been forced to the top of the CFO’s agenda, treasurers have been tasked not only to manage the results of financial processes that comprise the financial supply chain, but also to take an oversight role in the key factors that affect working capital, namely payments and collections.
To fulfil this expanding role, treasurers are increasingly working closely with other departments that support the various elements of the financial supply chain. This is not always easy, despite the benefits of an integrated approach. Inevitably, every department is accustomed to its own processes and technology, and it can be difficult to establish synergies and collaboration unless the advantages of doing so are clearly recognised and promoted at a senior level. To facilitate greater co-ordination, whilst recognising the individual efficiency goals in each department, at Citi, we are working closely with our customers to create holistic solutions from procurement through to payment
The working capital dilemma
An important starting point for many companies in achieving financial process efficiency is to centralise processes in a shared services environment. Consequently, payment factories and shared service centres (SSCs) have become increasingly prevalent amongst large multinationals over a number of years, with this trend now also extending to smaller companies. Early SSCs were established with the objective of reducing costs and increasing efficiency in the payments process. Today, with liquidity and risk key priorities for treasurers and CFOs, working capital is no longer simply a by-product of the payments and collections cycles but a key indicator of the financial health of the business.
With many companies seeking to optimise the amount of cash available for business investment, managing working capital metrics such as payment terms and days payable outstanding (DPO) has become a higher priority. In some companies, there is still a disconnect between the metrics on which the payment factory or SSC is measured, and the working capital impact of these measures. For example, in some cases, past successes in increasing processing efficiency have had a negative impact on working capital by shortening DPO, as invoices have been approved quickly and consequently paid before the due date. At the same time, however, it is not in companies’ interest to squeeze their suppliers that are themselves experiencing liquidity constraints, and risk the loss of key suppliers and resulting disruption to the supply chain. Consequently, effective payments management has to balance the need for process efficiency, managing key working capital metrics, and maintaining a robust supply chain.
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Treasurers are playing an increasing role in managing this potential conflict, supported by key partner banks such as Citi. Citi is working with a wide variety of companies to implement initiatives that satisfy both payment efficiency and working capital objectives whilst aiding sufficient support for suppliers. For example:
Supplier financing. Supplier financing enables companies to support their suppliers by offering invoice discounting at a competitive rate whilst maximising their own days payable outstanding (DPO) and replacing multiple supplier payments with a single payment on an agreed date to the bank. Such a solution brings working capital advantages to both the buyer and its suppliers, increases the resilience of the supply chain and strengthens relationships between commercial partners.
Commercial cards. Companies of all sizes are also becoming increasingly aware of the merits of purchasing card programmes as a means of ensuring that procurement spend is performed in line with corporate processes. There are considerable economic benefits to be gained from the use of commercial cards, including rebates, workflow efficiencies, ease of reconciliation, tighter control over costs and increased buying power with key suppliers. Multiple payments to suppliers with various payment terms and due dates are replaced by a single payment of a known amount on an agreed date.
Virtual card accounts. Virtual card accounts help to enable companies to prevent unauthorised expenditure, avoid fraudulent purchases and simplify reconciliation by generating a unique virtual account number against which purchasing or events managers can set spending and reconciliation controls according to their purchasing needs. Accounts are flexible, designed to complement an existing card programme or be used as a stand-alone solution to streamline the purchasing process.
Electronic payment solutions. Citi’s electronic payment capabilities enable customers to make payments in over 190 countries and 135 currencies across a spectrum of payment methods, from funds transfers and ACH to cheque printing and mailing through a single channel. In addition, advanced payment warehousing capabilities mean that payment instructions can be submitted at any time. Based on the value date provided, our systems will calculate the optimum time to debit accounts and release the payments. This avoids the need for customers to calculate cycle-times, manage due dates or choose between efficient processing and high DPO.
While these types of solution bring specific benefits, there are even greater advantages if a more holistic approach is taken to optimising the payments process. There are a number of processes that connect the point of procurement through to payment (fig 1). A truly efficient payments cycle requires automation of each stage of the chain from purchase order management through e-invoicing, approval and payment. By doing so, companies can reduce costs, improve visibility throughout the process, increase compliance with workflow requirements, enhance reconciliation and control payment timing as part of a wider working capital strategy. Consequently, we are seeing treasurers working more closely with areas such as procurement and supplier management to create synergies across the payments cycle and leverage the most effective payment method.[[[PAGE]]]
As an intergrated and fully modular solution, Citi Procure to Pay provides holistic approach to payments, working capital and process management.
To achieve a holistic approach requires not only a robust product portfolio across the procure-to-pay spectrum, but also a collaborative approach across financial functions so that efficiencies and transparency of information gained at one stage of the process is not lost at the next. To facilitate this collaboration, and to enable customers to leverage the right payment solution for their needs, we recently launched our Procure to Pay solution for EMEA, which combines our payment solutions into a convenient and fully integrated offering (fig 2). The aim of Procure to Pay is to help to enable clients to select the most appropriate payment method for each supplier, including supplier finance tools, commercial card and virtual card solutions, without sacrificing the efficiency and simplicity of an integrated process. Our customers can send a single file containing all their supplier finance and payment transactions directly to us; we then separate and route payments to the right solution at the right time.
There are a variety of advantages to this approach. Firstly, by enabling a broader range of payment processes to be accommodated through a single solution, payment services can be centralised more easily. Furthermore, there are considerable opportunities for working capital improvements by managing payments more strategically. As an integrated and fully modular solution, Citi Procure to Pay provides a holistic approach to payments, working capital and process management. These tools are supported by Citi Working Capital Analytics, an analytics service that helps us to understand customers’ supplier payment needs and recommend the improved payment method for each supplier.
Developing a holistic approach to financial management across business silos is a challenge for many organisations, but senior management are increasingly recognising the benefits. Those that have been most successful in achieving this are companies with senior level sponsorship and a high degree of cross-department training and awareness to ensure that each area understands the needs of the others. Banks such as Citi are facilitating this collaboration, enabling closer integration between different parts of the business, creating solutions that recognise the diverse payment needs within each organisation and enabling these requirements to be addressed in an integrated way.
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