Published: January 01, 2000
After years of working to optimise their payments, corporations are now beginning to centralise their accounts receivable. The arrival of the SEPA Direct Debit – coupled with developments in technology – has presented new opportunities for companies to reduce costs, improve working capital and achieve automatic reconciliation.
From cheques to direct debits and from mobile payments to high-value wires, receivables come in all shapes and sizes – and companies are focusing on all of these different instruments as they work to make their collections processes more efficient.
The current focus on receivables is relatively recent. Historically, companies have paid more attention to accounts payable, which can more readily be centralised using structures such as payment factories, shared service centres and in-house banks. Receivables, on the other hand, have long been regarded as a more local undertaking. While companies have certainly focused on improving the efficiency of their receivables – collecting money is, after all, a crucial step in any company’s business model – most have not attempted to manage receivables on a centralised basis.
Companies which have already achieved a degree of centralisation in the area of payments are now asking how they can do the same with receivables.
However, this is beginning to change. Factors such as developments in technology, and the arrival of the Single Euro Payments Area (SEPA), have paved the way for companies to adopt a centralised approach. The SEPA Direct Debit (SDD) is a notable driver: even though differences remain in terms of how the SDD has been implemented in each country, the new instrument allows for the standardisation, automation and centralisation of collections to a level that has not been possible in the past.
As a result of these factors, companies which have already achieved a degree of centralisation in the area of payments are now asking how they can do the same with receivables. The potential benefits can be considerable: as well as cost savings, companies can also expect to see significant working capital benefits if they can reduce their days sales outstanding (DSO) by even a couple of days. Another key goal is to improve efficiency within the collections process by achieving automated reconciliation.
Companies have a number of tools at their fingertips when it comes to centralising receivables. One of these is the mandate management solution, which has gained more attention in light of SEPA: since companies are now required to manage their direct debit mandates themselves. Companies can use mandate management solutions provided by banks or technology vendors to reduce the cost of storing and maintaining mandates. Such solutions can also improve the quality of collection data, resulting in fewer errors and rejections. The relevant mandate information can then be integrated by corporations into their client facing portals, thereby improving the overall user experience.
Electronic invoicing (or e-invoicing) can also be leveraged by companies looking to manage receivables more centrally, and interest in this topic has ramped up in the last five years. E-invoicing allows companies to initiate the invoicing process sooner. This, in turn, means that the customer receives the invoice sooner and the payment term begins earlier.
Even if the benefit is only two or three days per invoice, the working capital benefit can be significant – particularly for companies with high-value invoices or a large volume of invoices. If the invoice data is integrated with other steps in the value chain, such as the purchase order and the payment instruction, the process can be shortened even further. The basis of such integration is the use of a standard such as ISO 20022 XML, on which SEPA is based.
For companies with consumer customers, online bill payment options should also be considered as part of a receivables centralisation project. As well as including online billing in their own portals, companies may also consider solutions in which the bill can be presented in their online banking portal.
These solutions are often country specific. Bill payment options are common in the US but are less prevalent in Western Europe, although they are beginning to emerge in some countries: online billing is mandatory in Finland and Denmark, for example, and is gaining traction in countries including the UK, the Netherlands, Germany and Belgium.[[[PAGE]]]
Receivables finance solutions can also be used to improve a company’s working capital position and thereby free up more cash to be invested in the production process. Such solutions allow a company to receive funds from a lender such as a bank based on approved invoices. Supply chain finance, in which a company can receive financing based on the buyer’s borrowing costs, can be paired with e-invoicing, enabling the company to receive payment even sooner. The applications of supply chain finance are explored in more detail in the article by Martin Knott and Melissa Gargagliano, Taking a Holistic View of the Supply Chain, which also appears in this supplement.
Getting paid quickly is only one part of the exercise. Reconciliation is one of the biggest stumbling blocks where receivables are concerned: clients do not always use the right reference numbers in their payments, while local clearing may truncate information to the extent that companies cannot automatically reconcile a transaction. In some industries, corporations cannot readily identify who has made a particular payment for as many as 40% of their collections.
Again, tools are emerging which can streamline the process and support straight-through reconciliation. Recent developments in this area include virtual account solutions, whereby the payer is identified using a virtual account number. Each account is effectively a subsidiary or sub-account of the company’s own account with the bank; virtual accounts cannot exist outside of that relationship. It is possible to establish a multi-level hierarchy of virtual accounts to mirror the structure of the company’s business relationships.
Intelligent receivables solutions, meanwhile, can also support straight through reconciliation by matching an incoming receipt with the original invoice. This type of tool generally requires invoices to be stored electronically such that they can be automatically matched with receivables based on business rules defined by the corporation. This topic has been around for some time in the market, but is only recently beginning to gain traction as companies focus more closely on receivables.
Companies looking to centralise their receivables might consider any or all of these solutions depending on the nature of their businesses. For companies with a large number of direct debit collections, mandate management is likely to be an attractive solution – but online bill payments and electronic invoicing may also be appropriate in some cases. At the same time, companies may seek to streamline the receivables matching process using solutions such as virtual accounts and intelligent receivables.
While receivables centralisation remains a relatively recent discussion, some companies with a mature payments factory in place are now looking to expand their structures to include a receivables factory. As the model matures, companies may also look to adopt the receivables on behalf of (ROBO) model, whereby a centralised structure collects payments on behalf of other entities within the group.
As a first step, companies embarking on this type of project will need to conduct a thorough evaluation of their client base, the countries in which payments are received, the payment instruments currently used by customers and the information that is provided within those payments. By analysing this data, companies can then determine whether the information available is sufficient to support automated reconciliation.
However, it is important to bear in mind that this type of project can be affected by sensitivities within the organisation. Local sales people often like to retain control over their receivables so that they can see what they are bringing in – so bringing receivables under central control may be a significant cultural change.
Receivables centralisation is a largely untapped area, and companies may find that they can achieve significant benefits by exploring the solutions available. As the focus on receivables continues to develop, it is likely that banks will begin to merge the available tools into product suites or dashboards whereby different tools can be applied using the same underlying data. This will bring additional opportunities for companies to optimise receivables using a more centralised approach.
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