Treasury Today Country Profiles in association with Citi

Virtual accounts become a reality

As the role of the treasurer becomes more strategic, corporates are focusing on the accounts receivable (AR) process to improve operational efficiencies. Virtual account management is an advanced tool that provides the accuracy, visibility and automation required to optimise these transactions.

Many treasurers struggle to reconcile their accounts receivable due to insufficient information. When a payment cannot be accurately reconciled, cash positions are skewed and days sales outstanding (DSO) are increased. In turn, this will have a negative impact on conversations with your bank relationship manager when it comes to credit lines and rates, and can also lead to inaccurate forecasting, according to Steve Wright, Product Development Manager at VocaLink.

“Forward planning, especially for smaller corporates, is still a key item on the business agenda. They need to be working from a solid and reliable foundation to be able to make constructive assumptions for the future,” says Wright.

Straight through reconciliation (STR) is becoming a popular trend among corporates in resolving these inefficiencies and as we explored in last week’s Insight. Virtual account management is an extension of this, offering optimum productivity and data precision. So how does it work?

Corporates will often build an intricate infrastructure of multiple accounts to help segregate the responsibilities within an organisation and assist in the book-keeping management of the various produce or subsidiaries of the company. Equally, they may choose to pool their numerous accounts in order to reap benefits such as reduced charges and the elimination of trapped cash. However, through pooling, they can lose the reconciliation rationale behind having separate accounts; the granularity and detail that allows ease of settlement.

“That is really where the virtual account comes in,” maintains Wright. “It is the bridge between the benefits of pooling and the operational and commercial benefits of having a more complex account structure.”

For a simple virtual account system, an application will ‘talk’ to your bank and synchronise any movements on your accounts held there, mirroring those transactions in the corporate’s pooled account, explains Wright. “Behind that lie the ‘sub-accounts’ and the reference number that is quoted in the payment that you have received is your virtual account number. Best practice is where this payment is then allocated automatically to the appropriate account – the sub-account in your ledger,” he adds.

Poor reconciliation can introduce a multitude of dangers into the treasury and virtual accounts can do more than simply settle figures, according to Wright. “Insider fraud can lay undetected in companies for quite some time,” he cites, as an example. “If you have a way in which you can automate payments where they can drop into the correct bucket without any manual intervention, such as virtual accounts; this acts as the ideal mitigation tool.”

Virtual accounts themselves come in different shades of density and sophistication. This will depend upon the level of complexity the corporate is prepared to introduce into its settlement processes, and the facilities required for the accounts involved (eg applying different rates of interest to the various accounts depending on their cash balances on any given day).

Wright presents the example of a corporate with several subsidiaries, centralising the cash but also retaining some segregation and delineation. Through cash pooling, some subsidiaries are effectively giving loans to others and the corporate may want to reflect this borrowing facility through ‘transfer pricing’ that can be programmed into the virtual account system.

“Not everyone does it as it introduces a layer of complexity into your business,” he believes. “But sometimes if you want to drive behaviours – if you want to get your subsidiaries to get receivables in – one way of incentivising is through virtual accounts.”

Getting ready

Thus, there are a number of potential benefits for implementing a virtual account system but like all new functions there are preparation and planning procedures to follow. For corporates considering virtual account management, Wright shares six best practice steps:

  • Get specialist advice on legal and regulatory aspects.

    If you are multi-banked or located in several countries globally, there are certain rules that need to be considered and adhered to, even just for pooling cash without adding virtual accounts to the process.

  • Don’t look at virtual accounts in isolation.

    Don’t lose sight of the fact that your treasury has a whole basket of needs. You can’t just look at the virtual accounts and receivables in isolation because you could lose a really powerful banking relationship elsewhere.

  • Plan for surplus cash.

    If you are pooling all of your accounts, it is likely that you will have surplus cash. Be smart; don’t put all of your eggs in one basket.

  • Consider operational elements.

    If you are going to centralise, who are the people that are going to look after your cash? What policies and procedures do you need? What mandates do you have in place?

  • Security and compliance.

    For IT, you will obviously require a very resilient and well-protected service but, in addition, do you want your branches/outposts/product managers to have visibility as to what is going on in these buckets?

  • Self-governance.

    You have these accounts set up and the centre sets the rules and manages the cash flow aspect at that level but do they want some of these tasks managed on an operational level by the region?

Optimising efficiencies internally is a daily task for the corporate treasurer. How can virtual accounts take your reconciliation function to the next level? And how best can you prepare?