Collection Factories: Reaping Benefits to the Max

Centralisation is an opportunity.

Shared service centres (SSC) give companies the chance to centralise their receivables activities by bringing them under one roof. What’s more, companies can expand their payment factories by setting up a collections factory in the process. For this to succeed, it is vital to have a clear vision and a precise roadmap of how the SSC will include such receivables activities, coupled with an understanding of the tools and solutions needed for the job.

Many companies have gained centralisation experience for their payments and liquidity; fewer have done the same for their receivables, particularly with regard to setting up receivables on behalf of (ROBO) structures. This is largely due to the fact that collections are typically handled by local businesses, which tend to have more detailed knowledge of their customer relationships.

That said, this year’s advent of single euro payments area (SEPA) has removed the need to maintain multiple formats and processes for collections. So a growing number of companies are looking to centralise their euro collections, moving their receivables activities into SSCs.

Activities that can be centralised

There is a range of receivables-related activities that can be centralised into the SSC setup:

  •  Billing and invoicing of buyers.
  •  Customer services for collections (multilingual) and chasing-up unpaid invoices.
  •  Direct debit mandate management.
  •  Generation of direct debit files.
  •  Cash application and reconciliation activities.
  •  Setup of virtual accounts to identify payers.
  •  Setup of a ROBO process to receive payments in a single account on behalf of other business units.
  •  Setup of virtual accounts to support ROBO.

Direct debits:
Direct debits (DDs) are essentially very similar to payments from an operational perspective, as they are controlled and initiated by the company. Therefore the file generation of DDs can be included in the SSC’s activities, similar to payment generation.

Moreover, for countries that are part of SEPA companies need to maintain a DD mandate database, which can also be set up centrally at the SSC. This removes the need for the business units to maintain them locally.

Cash application and reconciliation:
Today, in many companies, cash application is conducted locally at business level, using standard cash-application modules in local enterprise resource plans (ERPs). Any unmatched items are manually reconciled again by local businesses.

Cash application is a key workstream that can be moved to a central hub, but we must bear in mind that basic cash application requires two data points: bank statements that show receipts and the invoice database.

Invoices are simply matched to incoming entries on the bank statements. Any unmatched items are manually reconciled, using the following two items:

  •  Customer tables, including details of customer names and account numbers.
  •  Historical customer information behaviour.

Some companies, such as those in the retail sector, have several discount schemes. This means that the incoming receipt on the bank account may not match the amount invoiced, resulting in an exception. This necessitates a multiple manual check to successfully reconcile exceptional items.

Cash-application tools are available in the market that can help to reduce manual reconciliation activities through algorithms and multiple matching options.

Bank statements, invoices and customer tables can all be used readily by a central cash-application tool. But some of the historical customer behaviour information will be lost when this activity is transferred centrally from the local units. However, over time the centralised operations should be able to realise more benefits.

The move to an SSC creates an opportunity to improve the reconciliation solution and make use of some of the market solutions to increase the automation of this activity. However, it is important to understand the business case for such an improvement, such as finding out the number of manual resources decked against the manual reconciliation of unmatched collections in order to evaluate the cost/benefit trade-off of implementing either a standard ERP or an additional cash-application solution.

Standard ERP solution
ERPs typically have a built-in cash application module that is based, in most cases, on one-to-one matching. It is, however, possible to enhance the module with more flexible matching capabilities.

Additional solutions
There are cash-application solutions provided either by banks or by technology companies, which apply algorithms for matching, and it may also be possible for the user to set up new rules for reconciliation. These use bank statements, algorithms and customer tables to enrich receipt information and create a matched and unmatched file for reconciliation.

ROBO
Many companies have successfully implemented a payment on behalf of (POBO) structure, using local accounts in the name of regional treasury, where payments are made on behalf of the local entities. For such structures, a legal/regulatory/tax review for the countries and entities would have been completed before implementation.

 
Citi SSCs
Source: Citi

The flipside is a ROBO structure, where the agent collects the assets belonging to other entities. A ROBO setup helps to achieve bank account reductions, facilitates the centralisation of reconciliation activities and leads to better credit management. It is important to establish – preferably via an independent source – whether participating entities are allowed to operate under a ROBO model and what (if any) are the reporting or regulatory approval requirements.

Conclusion

To gain some immediate benefits from centralising collections, it is not necessary to centralise all activities or to move to a ROBO structure from day one. Instead, an optimal roadmap would include the adoption of a phased approach to the collections factory, building towards a desired state over time. What might these phases consist of?

Phase one:

• Move the reconciliation activity to the SSC.
• Move DD processing and mandate management to the SSC.
• Then centralise other activities such as customer invoicing and servicing.

Phase two:

• Centralise receivables accounts to a single location (for euros) where possible.
• Set up ROBO accounts, either locally or centrally (for euros) in a single location.

The SSC is an opportunity for companies to make use of a setup that enables them to consolidate their receivables processes in a central location. To seize it, companies need to work with their banking partners to carefully plan a roadmap that will help bring them to their ultimate goals.

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