With financial markets under stress, liquidity and funding risk management continue to be board level issues. It is well known that efficient working capital management and tight credit management of debtors enable a company to self-fund its operating or production cycle, invest surplus balances and use funds to pay down debt. To achieve this, companies have historically focused on applying best practice for centralising payments and liquidity, as well as maximising straight-through processing (STP). Meanwhile, cash application remained untouched. Yet improvements in cash application process have a direct impact in reducing days sales outstanding (DSO).
Together with other internal company challenges hindering the optimisation of working capital from receivables, such as decentralised processes and/or multiple enterprise resource planning (ERP) systems, the cash application process is often seen as non-controllable. This is why DSO has traditionally been considered a missing link to fully optimising working capital.
Geographical Differences in Debtor Behaviours and Industry Payment Terms
Typically in order to assess potential DSO gain, a company will benchmark against the industry peer group. Although it may not always be possible to influence the payment terms and payment instruments, companies still want assurance that they are among the top performers in their field.
Source: REL Working Capital Reports 2011
In 2010 we saw that although the median DSO performance was constant, the DSO spread between the best and the worst performer was significant: anything from five to 97 days. On the other hand, geographically, we saw that typically across industries commercial terms/payment instruments varied greatly. Complex supply chains and global operations industries typically have the largest potential working capital savings and gain from accessing internal funding sources.
By moving closer to the industry median companies can explore how to unlock trapped liquidity. Even the minimum of obtaining one day of DSO gain can derive significant benefit savings in terms of absolute numbers. So what about cash application?
Cash Application: Data Integration Drives Success
Cash application defines the various tasks involved in closing out open invoices against funds received into the bank account. Citi estimates that the majority of multinationals still have a large potential for improvement in cash application processes. When Citi recently ran an online survey1, approximately 50% of clients taking part estimated that they have an automated match rate (automatically matching invoices against incoming payments) of 60% or less. On the other hand, approximately a third of clients did not know how many full-time employees (FTEs) they have dedicated to manual reconciliation of invoices (post processing). In addition, only approximately 13% of Citi’s clients indicated that they are going to review their accounts receivable (A/R) process in the coming year.
In most cases by making the cash application a streamlined process, not only can companies work out the DSO saving but there are additional tangible cost savings to be realised such as reducing the number of FTEs servicing the manual cash application. Very often companies find that the FTE saving forms the basis for the business case when presenting it to senior management, yet the intangible benefit of DSO saving might be much bigger.
How to Identify and Illustrate the Opportunities
Corporates with the largest potential to gain efficiencies from cash application optimisation projects are typically those that have a regional shared service centre (SSC). And when it comes to SSCs, key performance indicators (KPIs) provide critical data points for monitoring the performance of the SSC. For the cash application process, we recommend the corporate to monitor the following KPIs to best understand the potential for improvement:
- Volume: What is the absolute number of invoice items you reconcile on a daily or monthly basis?
- Automation: What is your true ‘automated’ daily matching rate? Do you start each day fresh with no matching items rolled over from the day before?
- Headcount: How many FTEs do you have dedicated to closing out invoices?
It is important to note that, looking purely at the automation rates may be a misleading indicator. A company may have a high automation rate, but may still have a large number of headcount dedicated to close out the remaining percentage of invoices because a small percentage still represents a high volume of invoices.
Who Needs to Drive the Cash Application Optimisation Project?
Efficient receivables management can only be achieved by engaging individuals across treasury and SSC organisations and must involve account receivables, credit management, collections and treasury.
Furthermore, to achieve success in a cash application optimisation project there needs to be a focus on: people, process and profit. There needs to be:
- A dedicated central team with clear process ownership.
- Good systems to support workflow process and strict finance approval for credit and payment terms.
- Visibility of metrics to senior management – driving behaviour in the organisation to achieve profit goals.
Frequently, cash application projects are seen as purely technical and are left to technology teams. It is important for the SSC or treasury business teams to be driving the optimisation project to ensure that the benefits are met.
Integrating Bank Data and Cash Application Optimisation Software
Banks provide critical information to the corporates’ cash application process in the form of receivables information on bank statements and other reports. However, the information that banks provide on the bank statement may not always be sufficient to allow for a completely automated matching process due to lack of, or truncated, information provided through the clearing. The A/R team would then need to search for additional information to manually complete the cash application.
This creates the need for cash application technology tools to improve the automated match rates. Companies have the following choice of four tools in the market:
- Standard ERP cash application: Using the standard features of the ERP, which is often rigid and doesn’t allow for flexible matching.
- Tailor-made software: In-house developed software, which relies on in-house programmers and, over time, could become difficult to maintain and upgrade.
- External vendors: Cash application software developed by technology companies or a bank that sit outside the ERP and work through file transfers of data. However, some corporates are not comfortable with exchanging data in this manner.
- Integrated software from external vendor: This solution sits within the ERP but is developed specifically as a cash application module which allows for easy algorithm programming by the business user and user-friendly screens for manual processing.
In order to support corporates with the challenges in improving cash application processes, Citi is working with an experienced technology company, Hanse Orga, which has solutions and expertise in corporate financial technology platforms, particularly SAP. Hanse Orga’s FinanceSuite AutoBank Automatic Cash Application is fully embedded within SAP.
The solution leverages Citi’s proprietary reconciliation technology, Citi Accounts Receivable Matching Services (ARMS) and Hanse Orga’s AutoBank tool to deliver an end-to-end receivables solution. The collection data received from various channels and accounts is consolidated and may be corrected and/or enriched based on a series of rules and sub-rules. Sophisticated matching rules are then applied, and as these are based on complete and consistent data, reconciliation and account posting is rapid and accurate, with minimal exceptions.
Many corporates have significant potential to improve their cash application processes through an efficient, integrated reconciliation solution, reaping more benefits from their existing SSC setup. The primary tangible benefit of optimised cash application is the cost savings achieved by reducing the manual effort required for post-processing, as well as consolidating data automatically from different ERPs and bank accounts. Reducing the time to post funds against outstanding customer invoices free up customer credit lines and allows for sales to sign more business, supporting companies’ competitive position.
As companies identify the business case for cash application optimisation, Citi anticipate that treasurers and finance managers will evaluate and adopt integrated technology solutions together with their banks, enabling them to achieve improved DSO and control of cash for liquidity management purposes.
1‘From Fragmented to Integrated Cash Application’ joint webinar held with Citi and Hanse Orga in December 2011.
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