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Optimising Receivables

 

Optimising Receivables


Is a ‘Receivables Hub’ the answer?

Corporate treasuries globally are looking for ways to manage their account receivables better while freeing working capital to deliver business growth. With the effects of Basel III kicking in, the importance of receivables management is increasing in two ways:

(a) The provision of credit is becoming a less attractive proposition for banks, forcing them to shift their focus on activities that give capital light revenues;
(b) Corporates are finding it difficult to get bank financing and the optimal use of internal cash is becoming a reasonable alternative to costly bank credit


The normal account receivables management process is fairly straightforward where the buyers and suppliers exchange goods and services to satisfy their business needs followed by the payment against the trade.


There are various modes of payment options available including cash, cheque, account credit etc. While this process seems simple it can get extremely complex for a number of reasons such as:

  • Non-standard modes of payment
  • Invoice formats are not standardised
  • Subsidiaries have their own procurement and payment cycles
  • New remittance mechanisms
  • Payment information gets truncated across the value chain etc.

Globalisation has created new challenges in treasury management. Corporates and financial institutions are seeking to optimise working capital, manage risk and comply with increasingly complex local regulations.

This requires flexible receivables management solutions integrating local and regional needs within the framework of a focused global strategy. For those in international businesses, the challenges involved in managing receivables are multiplied by the complex nature of international regulation and varying local banking practices around the world.

Mobilising and optimising receivables on a global basis with the use of a ‘Receivables Hub’ can help the group treasury operate more efficiently and relieve the corporate from the manual or semi-automated process to manage their accounts receivables.

A Receivables Hub is a solution that is designed to consolidate payments and corresponding remittance information from multiple channels and sources to help treasurers unlock internal trapped cash by matching outstanding invoices to payments automatically. This has multiple advantages:

(a) The account receivables team is no longer required to hold on to the cash to identify who has paid for what
(b) It brings down Days Sales Outstanding
(c) It helps achieve speed and scalability to release working capital for daily operations

Businesses have been centralising their payment operations via a Payment Hub for a number of years, but centralising receivables via a Receivables Hub is a new phenomenon.

With the harmonisation of the account structures in Europe due to SEPA, many new business models like ROBO/COBO (receivables/collections on behalf of), global netting and virtual accounts are gaining increased prominence.  The rise of Receivables Hubs is a prominent step in this direction transforming the plain business of receivables management into a new Cinderella of working capital optimisation.

Traditionally, receivables management was controlled and managed by local entities primarily due to local regulations, diverse payment methods and non-structured remittance information. With the advent of shared service centres, a global corporate with multiple subsidiaries need not maintain different accounts for the subsidiaries.

Instead they create a virtual account which is mapped to the global centralised treasury account. The buyers and vendors make payments against the dummy virtual account and when the payments hit the beneficiaries’ bank the Receivables Hub extracts the account number from the virtual account and makes appropriate credit to the centralised account.

As a result, the key benefits that accrue to the global treasury are:

  • Reduction in the number of actual banking accounts; with reduced account fees
  • Increased confidentiality for the treasury account
  • End-to-end and Straight through reconciliation (STR) possible for each subsidiary as dedicated reconciliation rules can be configured for each subsidiary against outstanding invoices and incoming payments
  • Dedicated MIS available at each subsidiary level
  • Central treasury account has correct bifurcation as to how much collection has been made on behalf of each subsidiary. Hence, it can create a notional pool structure of virtual accounts across subsidiaries and achieve interest optimisation. This interest can then be allocated back to the subsidiary or retained by global treasury
  • Inter-company loan management is greatly facilitated.  The funds retained by the global treasury on behalf of a subsidiary is like an inter-company loan thus enabling banks to offer In-house banking(IHB) facilities to corporates
  • If there are inter-company business dealings across subsidiaries then the netting process kicks in to calculate net of receivables and payables to optimise the fund flow
  • ISO 20022 payment standards facilitates the remittance information along with the payment value being transmitted verbatim, leading to STR
  • Banks benefit by cross selling other products like receivables and payables financing to skim the entire financial value chain

Optimising the accounts receivable puzzle through a Receivables Hub can significantly free up trapped cash and lead to working capital optimisation.

An automated Receivables Hub encourages a scalable account receivables management model that delivers greater visibility, improved transaction tracking and reconciliation while reducing credit risk to the corporate.

 
Source : https://www.sibos.com/media/news/optimising-receivables