Working capital management has traditionally focused on payments and receivables, and while incremental improvements can be made in these areas, the recent financial crisis and the ongoing turbulence in the US and Europe leave additional challenges for corporate treasurers in determining how they look at working capital management.
Most companies have devoted time and effort to streamline their normal account payables (A/P) and account receivables (A/R) processes and have made great strides in this. Consequently, the effort devoted to managing exceptions and the time spent analysing working capital has increased, meaning this area has become increasingly fundamental to corporates.
Working Capital and A/P
A/P is one of the more easily addressed areas of working capital as it is within the direct control of the corporate. For a corporate that’s on the buyer side, adopting quicker forms of payment typically means being able to hold on to cash for a longer period of time, while still being able to meet the supplier’s payment terms.
On the other side of the coin, suppliers are also now more demanding in terms of knowing whether buyers have initiated payments to them. This used to be met by means of a phone call from the supplier to the buyer, and the buyer then checking on the funds transfer either through electronic banking (e-banking) or by further calling the bank. In order to reduce the overheads required here, banks are beginning to roll out more automated advising capabilities, especially when it comes to advising the supplier that the buyer’s bank has initiated a payment instruction to the supplier.
Working Capital and A/R
While there has been a push towards electronic modes of payments and collections, in many parts of the world, paper-based modes of payment are still fairly entrenched. These represent one of the greater challenges to any corporate attempting to manage their A/R. While many organisations have accounting systems through which the reconciliations are managed, the main challenges in this space are as follows:
- Receiving and managing the paper instruments and time lost managing these processes.
- Transcription of data from paper to an electronic format.
The ability to bridge these gaps will allow a corporate to both recover lost float and also lower the cost of managing their working capital.
Electronic modes of collections is the lesser of the two evils, however, while transcription of information to a format that can be utilised for reconciliation is not an issue, challenges still remain in terms of ensuring the accuracy of the references received and hence the ability to use this information. The bulk of the time spent in managing collections received electronically lies with sorting out exceptions where items cannot be reconciled due to incorrect references or incomplete information. The ‘Holy Grail’ in this space would be to ensure that information is always entered correctly by the payer at the creation of the payment instruction – no manual intervention required nor exception handling required.
A/R: A Case Study
The bulk of mobile phones in Singapore work on a post-paid basis, hence the collection of mobile phone bills presents a major challenge to telephone companies in Singapore. In the traditional collection model used by the companies, collections were primarily done via a lockbox solution and via direct debit.
Over the past few years, new collection models have emerged in the market, particularly in the consumer-to-business space (C2B). In addition to the direct debit and cheque based modes of collections, we have the following additional modes:
Bank-centric modes of collections
Banks have introduced the ability for consumers to pay their mobile phone bills via their internet banking platforms and other self service banking channels such as ATMs and electronic payment kiosks. Some of these even incorporate the ability to validate the payer’s invoice number at the point of creation of the payment instruction such that incorrect invoice numbers will not be accepted for payment and the consumer is prompted to review the data entered. This significantly reduces the number of exceptions that need to be handled by the telephone companies. Telephone companies are also able to benefit from quicker crediting of funds as well as later cut-off times for submission of payments by consumers – best-in-class in this aspect is cutoff times close to midnight, with funds credited into telcos collection accounts before start of the following business day.
Bank-agnostic modes of collections
The past few years have also seen the rise of kiosk-based, bank-agnostic collection modes. Payment kiosks offered by players such as AXS in Singapore also incorporate features like the ability to read bar codes off invoices, again reducing possible errors and reducing the number of exceptions that need to be handled.
The rise of these new collection models have resulted in a decline in the number of items processed through the traditional lockboxes, even as post paid mobile phone usage has increased by more than 30% in Singapore over the past 10 years
The tools and techniques used for working capital management have been around for a long time and have served corporate treasurers well throughout the years. However, recent events have also prompted a need to review other macro factors affecting working capital management. Events such as the earlier financial crisis and the continuing turbulence in Europe and the US have had a direct impact on corporates and the management of working capital, but even events as diverse as the earthquake and tsunami in Japan have affected supply chains and consequently impacted how working capital needs to be managed.
In addition to the imperative of managing the nitty-gritty of working capital, treasurers should also keep sight of the following areas:
Too big to fail
Prior to the financial crisis, the trend was for consolidation of banking relationships into a few banks. However, the recent financial crisis has seen some well known financial institutions going out of business, or being acquired while others have had to be bailed out by their respective governments. The rules of the game have changed, so some corporates are now in the process of reviewing and diversifying their cash management banking relationships. The beneficiaries of these are some of the Asian banks, and in particular the Singaporean banks who are perceived to be stronger than some of their peers. According to data recently compiled by Bloomberg, four of the 10 strongest banks in the world are from Asia, and three of these four banks are from Singapore.
Securing sources of funding
Companies need to have a re-think about where they are securing their sources of funding. The moment you need the liquidity will likely also be when everyone else will need it. Hence, it is essential that the bank providing the credit is sufficiently capitalised such that your safety net is not pulled from under you just when you need it most.
While improvements continue to be made in the space of working capital management, both in the payables and receivables and particularly in the area of managing and handling exceptions, in view of the lessons from the last financial crisis and also from the continuing uncertainty globally, it is also important for corporates to focus on more macro factors that may influence the way corporates manage their working capital.
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