SEPA Interview: Account Receivables Management

One of corporate treasury’s primary challenges remains the efficient management of the order-to-cash (collections) cycle in order to minimise cash held in inventory and accounts receivable. It is not uncommon for companies to have substantial amounts of capital on their balance sheet for accounts receivable and hence trapped in their financial supply chain. Treasurers could reduce their weighted average cost of capital by using this capital more efficiently.

In this interview with Sonia Rossetti and Soledad Cordova, at ABN AMRO, we discuss whether the introduction of the single euro payments area (SEPA) will improve the efficiency of accounts receivable management for eurozone-based corporates (and/or those with eurozone based operations/subsidiaries).

gtnews: Within the eurozone, SEPA should result in single/fewer accounts and thereby a more unified approach to both accounts payable (A/P) and accounts receivable (A/R). Much of the current focus is on payments, yet for every payment there is a receivable. What is your response to a statement sent into gtnews by a corporate treasurer that “it is not just payments, but more the improvement in receivables management and reconciliation that will make or break SEPA”?

Sonia Rossetti: Today’s fragmented European infrastructure has meant the focus for most corporates has always been on improvement and centralization of their payables processes, in particular to give them the ability to control the payables flow using fewer banks and reduced infrastructure. Therefore, in many companies, the payables process is the one element they can identify with when considering harmonization. SEPA, however, can be a catalyst to re-engineer the receivables business and enable benefits from process improvements on payables to be replicated on the collections side.

For other companies, the ability to improve both processes may in the future become a reality. Among most companies, the receivables process is ultimately much more critical to cash flow management. The ability to migrate from today’s in-country process to a more streamlined regional view will show considerable improvements for companies operating in many markets. This is why SEPA can help companies realize great benefits and really drive forward their business.

gtnews: How you do think SEPA will affect receivables management?

 Soledad Cordova: SEPA will allow for improvement of days sales outstanding (DSO) management as both receivables and pooling mechanisms could be simplified by the rationalisation of in-country account structures (single euro accounts). Benefits will also arise from a unified framework and reduced barriers to managing liquidity. Standardisation of information received and sent, common identifiers and other features will positively impact STP rates because faster, better and more reliable information speeds up the decision-making process when it comes to funds application either for debt reduction and/or investment inventory management. Working capital will therefore receive a substantial boost as a result.

SEPA will speed up receivables centralisation, as it represents an opportunity for companies to reassess their current business process and local infrastructures. Centralisation enables cost reductions as it also means that the company will be able to manage and monitor the collection process end-to-end.

As control and decision making switches from multiple local points to a single point, economies of scale can be achieved and risk can be more efficiently mitigated. Centralisation will also improve a company’s ability to manage collections using a single account, allowing comprehensive management of their cash while simplifying decision-making when it comes to funds application (whether for debt reduction or further investment aligned with corporate growth strategy).

gtnews: What should corporates do now to be able to take advantages of the benefits that SEPA could bring?

Cordova: SEPA implementation will be rolled out in a step-by-step approach. It is initially aimed at the 12 euro countries in 2008. However, other countries are likely to join in the near future (e.g. Slovenia will adopt the euro in 2007). All 25 EU member states and their territories should complete the final scheme in 2010.

The European Payments Council (EPC) has approved all necessary documents (i.e. credit transfers and direct debit rulebook as well as cards and pan-European ACH framework) necessary for banks and their customers to start full speed preparation for SEPA. It is estimated that the SEPA instruments will be available for client use in 2008 and that critical mass implementation will be completed by the end of 2010.

Taking these timeframes into consideration, corporates should start a cost benefit analysis of an early versus mature or late adoption. The decision will be dependent on their current model (centralised or decentralised), the projected transaction volumes within euroland as well as their extended presence in the region (e.g. how many countries and which ones?). With the euro payments environment changing, companies will face debate from their clients favouring various instruments. Last, but not least, reducing DSO and achieving efficient liquidity management are two of the main incentives for early adoption.

gtnews: What, if any, are the challenges on the receivables management side?

Rossetti: Current challenges on the receivables side are: the multiple and different local instruments; different regulations that vary per country; and differences between B2B versus B2C. However, the main challenge is the smooth conversion of the existing multiple receivable instruments (e.g. cheques, electronic funds and direct debits), which are currently being imposed by the local market conditions and the country regulations.

gtnews: Could you explain how the use of payment factories and shared service centres (SSCs) will reduce the cost of receivables processes and if the use of them is open to small- and medium-sized companies (SMEs) as well as larger corporates?

Cordova: SSCs are creating numerous benefits that can be directly associated with reduced costs of receivable processes, such as dramatic reduction of local accounts and local offices and lower banking fees through economies of scale and volume tiered pricing; predictable DSO; fully automated reconciliation; standardisation of returns rejects; and transparency in pricing.

The SSC is not a concept that is strictly restricted to large corporates though. Conceivably, SEPA will allow smaller companies to structure ‘SSC-like’ concepts even faster than larger corporates. SMEs, having simpler account structures, can be more flexible and may find it easy to adopt a centralised model. The investment will be less in money and time, while they will eventually enjoy similar benefits to the larger corporates in terms of standardized euro payments and receivables environment. Adopting an SSC concept will also depend on their current receivables structure and the respective electronic versus manual collections ratio.

gtnews: One of the challenges to receivables STP is the lack of a standard communication protocol. Through the EPC, some European banks have built in a dedicated field for the ordering customer reference on the accounts payable side and also a beneficiary reference as the base standard for accounts receivable. Could you tell us how this will operate and work in practice?

Cordova: The EPC has written SEPA implementation guidelines for both direct debits and credit transfers. The message elements defined by the EPC represent the core and basic elements. Going forward, SEPA payments would be executed using messages containing only elements defined as part of the SEPA core message elements. This constitutes a step towards standardisation and harmonisation across the payment flow.

gtnews: Are you confident that these EPC guidelines will overcome the current (communication) challenges to receivables STP? Or will there still be obstacles and, if so, what are they?

Rossetti: The current EPC guidelines are the result of continuous roundtable discussions, workshops and meetings between banks and their clients where all the current problems in communication and receivables STP have been raised, analysed and therefore eliminated through the approved rulebooks. With all banks following the same standards, STP in receivables will no longer be an option but a new reality.

gtnews: Will corporates need to invest in new SEPA-compliant financial IT infrastructure? What is the business case for corporates to do so?

Rossetti: SEPA can mean radical changes to the current infrastructure on the bank side as well as on the corporate side. Companies will have to evaluate their current system capabilities and may need to upgrade their ERP systems.

Current SEPA rules demand the support of XML formats, which could potentially be supported by major ERP suppliers. The message elements are standard and mandatory to be included in the collection files sent for processing. Some of that information is currently not available. Hence, in order to start using SEPA direct debit, corporates (including SMEs) will need to develop databases containing relevant necessary information to be included in the collection file. An example of that would be the adoption of IBAN/BIC as standard payment information in all invoices.

Some investments will inevitably have to be made, however, and larger companies and SMEs need to do a cost benefit analysis to determine what the gains will be from centralisation, fully automated reconciliation and improved liquidity management versus the investment in systems and IT infrastructure. This is an opportunity to make the necessary changes to prepare for a future where payments and receivables can be fully standardised and automated.

gtnews: In your view, what are the benefits of early adoption?

Cordova: In general, I would say that there are operational and decision-making benefits. An early SEPA adoption will immediately result in more efficient liquidity management structures and, of course, so-called ‘reachability’ to new markets without the current entry barriers or unnecessary expensive local operating offices.

All types of corporates will certainly benefit from SEPA. Large corporates and multinationals will do so by further streamlining their administrative processes (e.g. stronger risk management, reduction of associated risks linked to potential customer default or other trade finance and letter of credit instruments). Medium-sized companies using existing payment factories will benefit from higher STP rates and minimized cycle times. Finally SMEs, through their simpler structure, will be able to adopt the ‘centralised SSC model’ and, as such, enter new markets with an increased competitive position.

gtnews: What about global companies whose market also extends beyond the eurozone? How will SEPA affect their European collections/AR processes?

Rossetti: Globally operating companies are continually seeking ways to optimize their organizations through improved automation. SEPA provides an opportunity to further optimize their, already far advanced, liquidity solutions (by adopting the single euro account concept). As conversion to the euro rolls out in the various EU countries, standardization in their European collections will enable this type of corporate to adopt a single process and replicate it, fast and efficiently, to any newly added operational and commercial practice across the eurozone. SEPA will, therefore, provide the platform for an easy migration of any additional countries and processes when required.

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