There is little doubt that we are living through the most turbulent financial times of our generation. From the international stage to euro instability, and right down to the crisis on UK high streets, we are facing a global economic struggle. The nature of austerity, coupled with increasing regulation, puts pressure on business performance, whether you are a small organisation struggling with late payments, an international corporation handling hundreds, maybe thousands, of payments or a company managing client money.
Of course, when times are hard and people are busy, administration processes are often the first to fall by the wayside. As long as payments are coming in, the seemingly arduous task of checking various bank accounts to gather accurate information as to who has or has not paid, for example, might seem to continuously fall to the bottom of the ‘to do’ list. Often, payments reconciliation comes at the end of a long process which may have taken place over a number of months and included winning a contract, receiving a purchase order, delivering the goods/services, issuing an invoice and finally, receiving payment. It is easy at this point to assume that the payment will arrive and the bank balance will simply add up.
Yet the reality is that it is precisely such times when both large and small companies must keep on top of these transactions. The acts of reconciling all of the various bank accounts of your business and planning both outgoing and incoming payments, are not simply a matter of liquidity and cash flow, there are several other business drivers for running a well-managed reconciliation process.
The Dangers of Poor Reconciliation
First, businesses cannot underestimate the problem of fraud, which is an ever-growing issue and never more so than during times of recession and austerity. This was illustrated in the most recent report from UK fraud prevention service CIFAS, which showed a 13% increase in the fraudulent misuse of accounts from 2010 to 2011. While corporate fraud data is harder to find, Corporate Fraud Solutions (CFS), a company specialising in the investigation of company fraud in the UK, state that over £40m is lost every day to corporate fraud in the country and 80% of corporate fraud cases involve the collusion of an employee. Internal fraud, for example, can easily occur when money is not instantly and easily visible or reconciled.
But with the need to manage multiple accounts and payments, it is often a challenge for businesses to stay on top of reconciliations and ensure visibility of fund movements.
Late payments can be harder to identify in businesses that simultaneously manage different bank accounts. In good times, late payments are no more than a nuisance. When times are harder and many companies are facing painfully high interest rates on their overdraft facilities, late payments can cause real challenges. Accurate and timely reconciliations may save a significant amount of work recalibrating the books if there is a long-standing error that has not been identified. Furthermore, when a customer or client is late with payment, business owners need to be asking themselves why this is so. Is it an indication of broader problems within the organisation? If so, reconciliation of your accounts can be a vital tool, alerting your company to potential issues and allowing you to take appropriate action.
Not only can late payments cause companies to face large overdraft charges, but they can also result in them defaulting on their own outgoing payments as the real cash position is not correct.
It is also worth noting that when payments are not accurately reconciled, this results not only in an inaccurate picture of your cash situation, but may also result in increased day sales outstanding (DSO). If this situation occurs within a quoted company investors will be unimpressed. Similarly if a bank sees this in a private company it would certainly raise alarm bells, often resulting in a reduction or curtailing of credit. The bank would start to operate tighter lending criteria, with resulting higher fees to compensate for the new level of risk.
Virtual Account Management to Support Reconciliation
Increasingly, companies are looking into pooling options for their accounts. That is, pooling cash into a single account for ease of visibility and to minimise bank charges, then setting up virtual accounts to ensure the operational benefits of a multiple account structure remain in place. The use of virtual accounts enables every accounts payable (A/P) client to have an account per branch, client or product, depending on the needs of the business. The incoming invoice is then paid either electronically or by cheque. The resulting transfer of funds is reconciled between the virtual accounts, the company’s back office system and the bank. The bank is taken as the golden source as to where the money is, and the virtual accounts as the golden source of the information. For corporations, which may be handling hundreds of bank accounts at any given time, there are several compelling reasons for doing this.
For a start, administration costs will fall, as the virtual accounts will be able to identify the source of payment and will automatically sync with the main account, allowing instant and accurate visibility of funds, removing the time, effort and possible inaccuracies associated with manual reconciliation. The overarching business benefit is the stronger credit control that this affords companies. By displaying real-time transaction information, accessible via any browser, companies always have access to an up-to-date overall credit picture. This will in turn deliver reduced DSO, ensure companies keep their finances within legal requirements and will increase late payment awareness.
Walter Wriston, former chief executive officer (CEO) and chairman of Citibank between 1967 and 1984, said: “Information about money has become almost as important as money itself.” John Bertrand, an expert and cash management consultant, agrees: “Visibility is the key to control when it comes to managing cash flow. This is why reconciliation, the timely and accurate monitoring of a company’s bank accounts and fund movements, is one of the keys to surviving hard times. It is also, however, the best way to ensure financial fitness, whatever the economic climate.”
Europe’s opening banking regulation is finally here. After months of preparation across the continent, the Revised Payment Services Directive comes into effect on January 13.
The revised Payment Services Directive regulation, regarded as one of the most disruptive in Europe’s financial services sector, will begin to make an impact on January 13, 2018.
This year promises to further the regulatory compliance burden imposed on financial institutions. How are firms in the sector responding to the challenge?
The benefits of an in-house bank are increasingly evident, but some treasury departments still hesitate to take the plunge. This article offers a step-by-step guide.