Virtual accounts have been receiving substantial attention lately – and it isn’t hard to see why. This solution offers flexibility for corporates to ease reconciliation, improve cash flows and strengthen credit control – particularly desirable outcomes for treasurers seeking working capital optimisation. Standard Chartered details how this solution works and the benefits corporates can expect.

Organisations of all shapes and sizes continue to face challenges in managing their accounts receivables, particularly around reconciliation. A lack of payment information on incoming receipts typically results in the process breaking down with substantial administrative time and cost spent investigating and resolving receivables matching. The resulting unapplied cash and open invoices routinely lead to compromised customer service and delays in shipment release. Closure of monthly financials and working capital management often suffer as a consequence.

A working solution in practice

The use of virtual accounts ensures unique and immediate identification of remitter details which facilitates straight-through cash application. Corporates seeking centralisation and optimisation will no longer need to manage extensive physical bank accounts and instead are able to draw the same advantages using one central account. Accounts receivable (AR) teams also save on time and effort previously spent investigating and reconciling open receipts.

Virtual accounts, as the name implies are bank-issued virtual bank account numbers that reroute payments to the underlying physical bank account they are linked to and ensure each remitter is uniquely identified. From a remitter perspective, virtual accounts look and function exactly like a real bank account number, and do not require any changes other than ensuring they pay into the new unique account number provided to them.

Virtual accounts offer a number of key benefits including:

• Ease of management

  The solution does not require corporates to operate multiple physical bank accounts, eliminating the cost for opening and managing multiple accounts. Further, Standard Chartered offers flexibility by allowing virtual account numbers to be set intuitive to corporate’s customers, which smoothens the transition, with minimal cost and disruption to the business.

• Operational efficiency

  The solution eliminates issues around missing remitter information and subsequent manually-intensive tracking and investigation processes, enabling clients AR team to focus on more productive core functions and value-added activities.

• Automated reconciliation

  Automatic remitter identification allows for straight-through cash application in an AR system. This significantly reduces the processing float and enables faster release of remitter’s credit line and booking of next sales.

Standard Chartered offers virtual accounts across its geographic footprint in Asia, Africa and the Middle East, where historically the quality of remittance data is poor. As such, the solution has been very popular with corporates across industry sectors. Table 1 below illustrates just some of the ways virtual accounts are used across industry sectors:

Client case study

Unilever is one of the world’s leading FMCG companies with unrivalled presence in the developing markets, especially in Asia. In Pakistan, Unilever has established an extensive dealer network covering several remote and rural locations, receiving a high volume of receipts in the form of guaranteed instruments, cash and electronic transfers, resulting in considerable time spent on reconciliation.

Client’s goals

Unilever has always perceived automated cash application into their ERP as an intrinsic part of their business model, which is highly dependent on the efficient turnaround of orders received from their vast distribution network. It had been observed that shipment releases were often delayed whenever payers were not being promptly identified.

“Technology like virtual accounts gives us the flexibility not only to improve our cash flows but also to minimise our credit exposure. This is indeed a big leap forward in how businesses can manage their operations more effectively especially in volatile market situations. Unilever is proud of its partnership with Standard Chartered on this breakthrough initiative.”

Zahid ul Islam Malita, Corporate Finance Director, Unilever Pakistan Limited

This gave Unilever a compelling reason to seek an integrated receivables solution to help expedite release of shipments once payments had been received from their respective dealers. Additionally, Unilever wanted to reduce the time it was taking for them to receive payments from their dealers, especially those located in remote parts of the country. Unilever approached its bank to request a solution to this problem.

The solution

Working with Unilever across Asia, Standard Chartered were able to facilitate straight-through cash application by streamlining the payer identification process. Through understanding the client’s existing processes, the bank was able to structure a virtual account solution to accommodate the dealers’ preferences for a variety of payment types.

Whilst the bank collaborated with Unilever in promoting adoption of virtual accounts amongst their dealers, Standard Chartered simultaneously engaged with dealers’ banks to seek their assistance in helping dealers remit funds electronically.

Paving the way with easy and non-disruptive transition for their client’s dealers, the bank delivered an integrated solution that expedited the adoption of electronic payment methods to achieve straight-through cash application. This solution has also enabled the following:

• Early release of shipments to Unilever’s dealers with faster payer identification.
• Operational efficiency with straight-through ERP update.
• Reduction in float costs that were associated with paper instruments and addressed with the adoption of electronic funds transfers.
• Enhanced dealer satisfaction.

The results of the solution are impressive. The move to virtual accounts has shortened the shipment release cycle and encouraged dealers to opt for electronic payment methods. Unilever benefits from same-day credit of funds into their collection account leading to working capital improvements (eg in days sales outstanding – DSO), as well as a considerable reduction in the manual work associated with ERP updates, monitoring and tracking of outstanding receivables. Most importantly, Unilever’s sales organisation can now book successive orders from respective dealers without delay.

Looking ahead, Unilever is looking to gain further efficiencies in receivables management by driving higher adoption of virtual accounts amongst its dealer network. They are also exploring further automation of invoice level reconciliation while improving the analytics available on their paid and outstanding receivables.