Cash & Liquidity Management

Mastering accounts receivables

Published: Mar 2017

Optimising accounts receivables has traditionally proved challenging for the corporate treasurer. However, the last couple of years have brought new opportunities for efficiency and automation. What steps should treasurers take to overcome the challenges of AR optimisation and how can innovative new tools help them achieve this?

Ireti Samuel-Ogbu

EMEA Head of Payments & Receivables, Treasury and Trade Solutions, Citi

John Walsh

EMEA Head of Domestic Payments & Receivables, Treasury and Trade Solutions, Citi

Corporate treasury departments have long been under pressure to improve working capital metrics. The easiest and most practical area to improve has typically been the procure-to-pay side of the equation. Treasurers have therefore tended to focus on this area, centralising, streamlining and driving efficiency across the accounts payables (AP) process.

The same cannot be said for the order-to-cash side of the working capital equation, which has proved a notoriously complex area to centralise and automate. With many treasury teams and shared service centres (SSCs) already short of resources, accounts receivables (AR) has become increasingly burdensome as considerable time and effort is tied up in reconciliation and cash application processes. To alleviate this, some corporates have drafted in local teams to handle reconciliation activity. Indeed, Citi Treasury Diagnostic Research highlights that approximately 50% of the bank’s clients manage receivables processing/cash application at the country level. But there are questions as to how sustainable this method is.

Corporate treasury teams are recognising that this is the case and as Ireti Samuel-Ogbu, EMEA Head of Payments & Receivables, Treasury and Trade Solutions at Citi comments, treasurers are becoming increasingly focused on “speeding up and building efficiency into the order-to-cash cycle”. It is an intelligent move because even minor improvements can have a multitude of benefits including significant cost savings, freeing up credit lines and enhanced working capital.

How, though, can the complexity of streamlining AR be overcome and what tools are available to enable treasurers to realise the benefits of AR optimisation?

Barriers to efficiency

Before analysing the strategies and tools available, Samuel-Ogbu says that it is important to understand fully the challenges that stand in the way. These challenges are interlinked, but perhaps core to many companies’ struggles is the disconnect between the settlement and invoicing process. “This disconnect means that it is often not clearly apparent who has paid and for what,” says Samuel-Ogbu. “So from an accounting perspective the money is unreconciled.”

This disconnect exacerbates the second issue faced by many corporations: a lack of straight through reconciliation (STR). Samuel-Ogbu highlights that the AR process of many corporates is highly inefficient, with teams of people required to match receipts to AR ledgers manually and deal with exceptions. This is often driven by a lack of data standardisation through clearing, truncation issues and inefficient client payment behaviour.

Indeed, as companies expand their geographical footprints around the world, the challenge only becomes more acute. “Even though we are in an era defined by digitisation and innovation, we must remember that in the vast majority of countries, especially in the emerging markets, cash and cheques remain king,” says Samuel-Ogbu. “Cash, by default, has to be manually managed and this adds risk, time and inefficiency to the AR process.”

A further issue is the large number of bank accounts and banking partners that corporates may adopt during global expansion. “Collecting receipts in multiple currencies is a challenge in itself. But if you overlay that with a multitude of accounts with different banks, that just adds to the cost, complexity and lack of standardisation across the AR process,” says Samuel-Ogbu.

Going digital

Given the broad scope of these challenges there is, unfortunately, no silver bullet. However, the interlinked nature of the obstacles does mean that solving one problem opens the door to solving another. As organisations of all shapes and sizes increasingly shift their business models onto digital platforms, treasury teams are being presented with opportunities to remove paper from AR processes – the first step when looking to optimise this area.

“A number of platforms have been developed that help digitise paper invoices, for instance,” says John Walsh, EMEA Head of Domestic Payments & Receivables, Treasury and Trade Solutions at Citi. “Whilst creating some efficiency, it only solves part of the problem. The invoice flow is still disconnected from the settlement of the payment, meaning that manual reconciliation still has to take place.” Cash and cheque receipts also warrant manual reconciliation.

The need to look beyond ‘traditional’ payment methods is a must for corporates looking to streamline AR. “This goes beyond simply being an efficiency play,” says Walsh. “Offering digital collection channels and managing receivables more efficiently potentially offers the business, especially as it moves to online channels, the opportunity to improve its sales and customer experience.”

Even in those instances where it remains impossible for cash to be completely eliminated, Citi is working hard to ensure companies can still streamline their AR processes. “In the Middle East, Africa and Eastern and Central Europe we are piloting a solution that enables our corporate clients to deposit cash they have received into a machine on their premises,” says Walsh. “This provides our clients with a ‘digital’ experience because the cash deposit is instantly shown in their accounts along with the information they inputted around the payment.”

Bringing it all together

Whichever method the treasury department adopts to switch from paper to electronic receipts, the result is the opportunity to leverage a host of solutions that can help streamline and automate AR. Virtual accounts are a powerful tool in this area and can help treasurers rationalise the number of physical accounts held, as well as addressing AR and reconciliation issues.

In the case of Citi’s offering, Samuel-Ogbu explains that the solution works by using an automated payer identification service that begins with the bank assigning unique account numbers to its client’s payers. The individual account numbers can then be created within the ERP system for all the client’s payers. These ‘virtual accounts’ are shared with the bank for identification purposes. “Payers can then initiate payments to their virtual account number, which Citi will process and automatically link to the client’s real account number,” Samuel-Ogbu says. “This is then credited with the payment and identifies who the payer is, which helps the reconciliation and cash application process.”

This goes a long way to solving AR issues for Citi’s clients. But to further enhance the solution, the bank has also developed its unique AR matching service that overlays the payer identification tool. The solution consolidates payment data in an electronic report and uploads it directly to the client’s ERP system, which auto matches the data and highlights any exceptions. As well as accelerating collections, the solution eliminates the need to match and manage receivables manually.

“If you pair these solutions together then you have an incredibly powerful tool that automates the matching of the invoice and settlement – the key issue when dealing with reconciliation,” notes Walsh.

Linking trade finance: value add

The potential for treasury to add further value does not stop there, however. Citi’s focus on this area has seen the bank find innovative ways to add further value to what its clients are doing. “When discussing virtual accounts these are often talked about as being the zenith,” says Samuel-Ogbu. “But what is often overlooked is that further improvement to the working capital cycle can be sought by overlaying a virtual account/receivables matching solution with trade finance tools.”

When it comes to speeding up DSO, Samuel-Ogbu adds, “having the ability through these solutions to demonstrate to the bank that you know exactly who is paying you and for what, enables you to use discounting more strategically. This really transforms the AR process from a burdensome task to one that can add significant value to the bottom line.”

The time is now

For the many treasury professionals who have previously struggled to solve AR issues, the promise of these solutions may be viewed with some degree of cynicism. Walsh can understand this: “It has only been in the last one to two years that all of these elements have come together to create a true value-adding proposition for our clients,” he says. “Before now there were still issues that meant adopting similar solutions required a little too much work.”

But with the solutions now available in 40 markets across EMEA and Asia, Samuel-Ogbu states that “now is the time for treasurers to begin taking advantage of what is on offer”. Working with a bank that has a global network can be “particularly advantageous” as well, she says. “The fact that Citi has local capabilities in over 90 countries means that we are able to handle local collections for our clients, feed these into our reconciliation tools and then provide a consistency and richness of data back to the corporate treasury and SSC.”

Samuel-Ogbu also states that Citi’s global footprint gives the bank a distinct advantage when developing further solutions for clients operating globally and receiving in multiple currencies. “We are exploring a centralised collection solution where our clients can receive funds in multiple currencies and then select these to automatically be converted into their operational currency – removing further complexity from the AR process.”

Treasurers may also be interested to hear that Citi’s focus on AR doesn’t stop there. The bank is actively developing a number of different solutions, including evolving its virtual ledger solution. It is also exploring how APIs can impact this space and developing a consolidated reporting tool that corporates can use to manage all their receipts.

Finally, the proliferation of faster payment schemes around the world may provide further opportunities for corporates. “We are exploring ways that we can provide our clients with an instantaneous collection mechanism along these rails,” concludes Samuel-Ogbu. “It could be revolutionary, watch this space.”

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