Receivables: The Next Frontier for Centralisation

Long after centralisation of accounts payable (A/P) became a recognised and widely-accepted practice, evolving attitudes among regulators and improved technology are prompting increasing centralisation of accounts receivable (A/R), delivering improved visibility and control across the entire working capital cycle.

Centralisation has been a strategic activity for companies for many years and a key operational tool in enterprise development. Having already addressed the easier opportunities for centralisation, corporations are inevitably looking at ever more ambitious centralisation programmes.

As the drive towards centralisation has accelerated, the most important trend to have emerged is that centralisation is no longer just about cost saving but about overall efficiency of processes and value creation for the enterprise. As a result, there is a greater focus on the end-to-end working capital cycle, involving both A/P and A/R.

Centralisation of A/P is evolving as a common practice for companies. Automation, regulatory changes, effective management of those changes and significant advances in technology have enabled enterprises to build effective payment environments that overcome the challenges of payments in different currencies and the need for support in different languages.

The benefits of centralisation of A/P, through payment factories or shared services centres (SSCs), are clear. Risks are managed more effectively, working capital management is enhanced (helping to reduce borrowing) and payment terms can be improved to the benefit of buyers and vendors. Additionally there are cost savings and efficiency gains through automation of processes and reduction of errors.

What has Changed for A/R?

Historically, receivables have been harder to centralise than payables for a variety of reasons. Notably regulatory and taxation issues across different territories and jurisdictions have made centralisation complex, if not impossible to achieve.

However, following advances in the use of payment on behalf of (POBO) structures, where one or more entities are authorised to pay on behalf of other entities within the group, many of the challenges faced in the centralisation of receivables are also being overcome. The emergence of receivables on behalf of (ROBO) structures is leading to the development of collections factories that are able to collect funds for other group entities.

The increased viability of collection factories is being driven by a number of factors. First, changes by regulatory authorities are crucial in determining the extent to which A/R can be centralised. The growth of POBO structures was facilitated by an easing in tax regimes as regulators responded to companies’ demands for easier pass-through of payments. Over time, regulators recognised the importance of such changes and gradually regimes were amended in many countries.

Similarly, gentle but persistent pressure from companies and banks regarding the treatment of cross-border receivables and ROBO structures is gradually delivering results. Regulatory bodies in Asia are becoming more accommodating, although caution is required: clearly any receivables that end up in China, for example, can become trapped cash. Meanwhile, in Europe the introduction of the single euro payments area (SEPA) should theoretically enable centralisation of A/R across the region as it treats all EU countries as a true single market.

Second, technology is enabling better use of information and greater efficiency in managing A/R and is consequently facilitating greater centralisation. Both bank providers and third-party providers now offer applications that automate tasks related to A/R, such as enriching data to help ensure accurate and timely reconciliation and cash application, and delivering precise forecasting that can enhance working capital management. In particular, banks’ ability to help with matching and reconciliation using virtual accounts has dramatically advanced the practicality of A/R centralisation.

The benefits of centralisation of A/R are similar to those achieved in payables, including improved risk management, cost savings and greater efficiency of processes. However, the additional benefits of A/R centralisation are perhaps less tangible than those for A/P. With A/P, analysis of category spend, for example, can facilitate lower procurement costs. With A/R, centralisation can be used to strengthen customer relationships, through the provision of financing or rewarding favoured customers, or because greater straight-through processing (STP) means more efficient customer account posting and therefore better customer service.

Challenges are Being Overcome

While there have been significant advances in the ability to centralise A/R, challenges remain. First, in contrast to A/P, key information required to efficiently process collections resides with customers. Invoice details are localised, making it difficult to manage problems when they do arise.

In order to address this challenge, companies need to find new ways of managing information and must ensure they have the change management skills needed to implement them. Specifically, it can prove helpful to break down A/R into high and low value collections. Banks have both the technology and data enrichment capabilities needed to help corporations in the process of using information more effectively and filling the gaps in their data.

Second, it remains essential to ensure that customer relationships are managed correctly. Companies tend to be less concerned about allowing their SSC staff to follow up with vendors. In contrast, the business is often understandably reluctant to permit SSC staff to contact customers. If a key customer is harassed over an inadvertent delinquency on a payment, the disadvantage to the company, in terms of the damage to the relationship, can be disproportionate to the scale of the problem. In order to overcome this problem, additional training of SSC staff is essential.

Third, clearing standards continue to vary significantly, despite initiatives such as SEPA. Clearing regimes and practices differ considerably between countries and some countries, such as India, have no established centralised clearing system. Equally, payment practices vary between countries: some developing countries remain firmly focused on cash payments, others (such as the US) continue to have sizeable volumes of cheques, and different forms of electronic payment (e-payments) are in use in different countries.

Unlike with payments, it can be hard to enforce rules on payment methods for collections. Companies have little leverage in forcing a customer to pay using a particular electronic instrument, for example: their main concern is simply getting paid. Historically, many companies attempting to centralise A/R simply ‘lifted and shifted’ existing country-based processes to a central location without delivering gains in process or technological platform efficiency.

However, increasingly banks and third-party technology providers are able to overcome many of the challenges associated with different payment methods and can standardise and automate migration during centralisation. Nevertheless, understanding the constraints under which a company operates is crucial to designing an effective centralised A/R solution.

What Solutions are Available?

A number of solutions have been developed to overcome many of the barriers to greater centralisation of A/R. These include applications that match invoices, enable companies to identify the payer of an incoming payment through various A/R channels, helping to ensure that received cash is put to use even if it has not been reconciled, and deliver optimised foreign exchange (FX) rates for companies’ A/R.

Straight-through reconciliation (STR) through invoice matching has long been the goal of many corporations. Now there is the capability to match receipts to invoices, pair them off and electronically update a company’s enterprise resource planning (ERP) system. The process is seamless and requires no human intervention: exception items are identified early in the process so they can be corrected online before they are posted.

As well as making reconciliation straightforward, invoice matching tools also enable the company to receive any type of payment method or currency and match it against its invoices, providing significant efficiencies for the company. In addition, by working with a bank provider, companies can identify which vendors are paying using sub-optimal methods (such as cheques) and work to encourage them to switch to low or high value electronic transactions as appropriate.

Another tool which is facilitating greater centralisation of A/R is virtual account management, which assigns an identifier to a company’s clients so that payments are automatically reconciled against open invoices, saving time and reducing costs, enhancing remittance information and improving reconciliation rates. Virtual account management is ideal for companies that receive large volumes of payments, such as insurance or utility firms.

For companies that do business in multiple territories but process their A/R in one SSC, reconciliation is inevitably unwieldy, and far from the straight-through ideal, meaning that sometimes payments are collected but cannot be immediately applied to open invoices. Given the increased importance of working capital to all companies, it is essential that rather than those funds lay idle, a global liquidity overlay is used so that all funds are put to work.

One of the barriers to greater centralisation of A/R is the challenge associated with getting a fair FX rate when receivables are converted to another currency. Traditionally, companies operate a treasury desk to source multiple FX quotes at various times of the day in order to facilitate this process. However, using treasury resources in this way, at a time when demands on the treasury have increased significantly, can be challenging.

Instead, companies can aggregate their payments and optimise their FX rates by using a single auditable FX rate , based on a public rate on Bloomberg or Reuters with an agreed spread, that provides certainty and frees up the time of treasury staff for more value-added tasks.

Bridging the Gap Between A/P and A/R

The ability to centralise collections, combined with an existing centralised payments capability, completes the working capital equation. For the first time, it is possible to have visibility across the entire working capital cycle in one location. As a result, it is possible to better align vendor payments and customer collections so that the gap between days sales outstanding (DSO) and days payables outstanding (DPO) is narrowed, improving the working capital cycle and managing the need for borrowing. Centralisation of both A/P and A/R also facilitates process excellence and efficiency and real end-to-end process optimisation across the enterprise.

The ability to centralise both A/P and A/R could not have come at a better time: the uncertain operating environment makes it less viable than ever for payables and receivables to continue to be managed on a country basis. Local businesses need to be focused on serving customers rather than managing payments or collections. By centralising receivables, companies can ensure that they have the right strategy and operating model in place, balancing proximity to market with control and risk management, to meet changing business and customer needs.

Centralising A/R in order to improve DSO and gain many other benefits is not easy. Despite improvements in the regulatory environment and technology, it requires discipline and human capital by a company to instil a strong focus on processes with clearly defined roles and responsibilities. A deep understanding of the business objectives of the enterprise and localised business rules is also critical.

Using a common ERP group-wide can be a useful enabler. However the importance of sustaining a strong culture of continuous improvement shouldn’t be underestimated. Banking providers have a major role to play not only in the provision of information and technology but in delivering effective support to enable companies to achieve their payables and receivables goals. Overall, while seemingly ambitious from the outset an overall integrated working capital centralisation programme across A/P and A/R can bring significant efficiency and better overall use of companies’ funds, all in support of the enterprise reaching its business objectives.


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