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Pioneering a Transformation in Receivables Optimisation

by Rodney Gardner, Head of Global Receivables, Bank of America Merrill Lynch

Efficient payments processing has been an objective for corporate treasurers and finance managers for some years, and many corporations have successfully established financial shared service centres or payment factories. Less attention, however, has been given to ensuring that receivables are equally efficient and timely. There are a variety of reasons for this. Receivables are commercially more sensitive, particularly for B2B flows, as collecting against accounts receivables is one aspect of the wider customer relationship. This activity is often closer to the sales and customer support business. Receivables may also be more complex as a variety of currencies, collection methods and commercial terms may exist, particularly in regions such as Europe and Asia and Latin America.

While optimising collections can be more difficult than optimising payments, the business imperative to focus on receivables is becoming stronger as the impact of doing so can be dramatic. Historically, when credit was more readily available and working capital less of a priority, treasurers dedicated their efforts to efficiency, with payments being the greater priority. Today, however, companies are increasingly recognising that an optimal approach to receivables is essential for effective credit risk, working capital and liquidity management purposes.

Establishing a centralised framework for receivables is typically one element of an efficient overall collections strategy, with close collaboration with sales and customer service teams. By adopting a more systematic approach to reducing overdues, maximising access to cash through efficient accounts structures, and reconciling and posting collections promptly, i.e., straight-through reconciliation, companies can enhance working capital, reduce risk and improve cash flow forecasting considerably. In addition, there is the potential to manage FX risk more effectively. Traditionally, companies collecting amounts in foreign currency have waited until a certain value has been accumulated before converting to base currency. This practice exposes a company to potentially significant FX risks, particularly when a large number of currencies are involved. However, by centralising collections, treasurers and finance managers can work with their bank to aggregate and convert foreign currency amounts each day at an agreed spread, increasing control and auditability and significantly reducing FX risk.

It should be noted that a receivables factory or shared service centre for collections may not be sufficient in itself to achieve the required efficiency. For example, countries like the United States that make substantial use of cheques continue to experience significant challenges, despite developments such as Check 21. And while payments are gradually shifting from cheque to ACH and commercial cards, these payment types are not yet fully mature, particularly in the richness of information that is held on each payment, which creates challenges for straight-through reconciliation. Until more persuasive incentives exist for both payers and payees to migrate from cheques, companies need to find alternative ways to optimise their collection processes, irrespective of collection method. For example, at Bank of America Merrill Lynch, we work with clients to examine their receivables portfolio to find solutions that enable the value of collections to be obtained as close to the point of presentment as possible, in a similar way to POS credit card transactions. One solution the bank is offering is with regards to cash and cheque transport and processing, which can be expensive. We are helping clients minimise these costs by installing devices that enable cash to be posted to a bank account, reconciled and recycled without the need to transport cash physically to a branch. Similarly, smart-safe technology enables cheques to be processed in stores, reducing the time from collection to posting on accounts, and supporting the electronic capture of cheque information. Additionally, portions of our Wholesale Lockbox infrastructure are being physically moved into targeted US Postal Service mail processing facilities to further reduce transportation expenses and the amount of time required to post the transaction and associated invoice details to our client’s account.