Automating
the Cash Conversion Cycle
Managing supplier, treasury and
commercial payments transactions in one place allows corporates to integrate their
cash and trade offerings, lowering cost and minimising errors.
While
world trade shrank significantly at the end of 2008 and the start of 2009,
conditions improved towards the end of last year. Nevertheless, it is clear
at the start of 2010 that trade flows have a long way to go before returning
to the levels before the financial crisis. In the current economic
environment, it is more important than ever for corporates to optimise
working capital to ensure they are well-placed to benefit from any strengthening
in international trade. While the worst of the credit crisis may now be
behind us, it is clear that its effects are still influencing the
availability of credit. Corporates continue to find credit comparatively
expensive and difficult to access.
One
thing is clear - corporates that are looking to minimise costs while
optimising cash and unlocking value from the supply chain are likely to be
better placed to withstand any lingering malaise that remains as the global
economy recovers. A drive to operate as efficiently as possible during
periods of difficult or changing market conditions has caused some
significant changes to behaviour patterns of market participants. In
particular, there has been a trend for corporates seeking bank-independent
solutions to mitigate payment and counterparty risk.
Corporates
are looking to allocate meaningful transaction business among their banking
syndicates without sacrificing the operational and interest efficiencies
achieved through tax-efficient shared service centre (SSC) or payment factory
solutions. The pace of centralisation of procurement into SSCs/payment
factories has typically lagged that of cash processes, but it is becoming
more frequent among multi-national buyers. Advanced technology and automation
processes are becoming increasingly essential in order to eliminate paper and
process inefficiencies, as well as accessing trapped cash inherent in
managing internal and supplier relationships. To assist in this process,
banks are beginning to provide a single online client interface to manage
supplier, treasury and commercial payments transactions, integrating their
cash and trade offerings.
A
supply chain finance (SCF) solution is often put in place in conjunction with
an extension of payment terms by the buyer. The supplier is provided with the
opportunity to accelerate their receipt of cash via sale of receivables to
the funding institution, solidifying and strengthening relationships
throughout the supply chain. The buyer is able to benefit from increased
supplier satisfaction while improving working capital by extending payment
terms. The automation of these processes can provide real-time visibility and
information, which can help to support improved analytics for decision-making
purposes.
The
centralisation of purchase-to-pay (P2P) processes into an existing SSC
environment using integrated technology can deliver a number of key
advantages. These include a reduction of operational and administrative
costs, as well as helping to minimise errors that cause non-straight-through
processing (STP) ratios to increase and reduce bank fees for repair.
An
SCF solution can also support the consolidation of transaction processing to
manage a single file transmission covering supplier, treasury and commercial payments
transactions. There is also the potential to streamline this further with
automated direct debit processes between group accounts held within the same
bank.This kind of approach can also offer the flexibility to include
syndicate members in the financing element to maintain corporate relationship
targets while achieving key operational efficiencies, such as the
consolidation of payment traffic with one trade and cash provider.
Cash and Trade
Corporates’
focus on the optimisation of working capital means that new avenues to
maximise access to cash are being pursued vigorously. This is causing a
change in the way corporates perceive cash and trade. For the past two
decades, cash and trade have been treated as separate entities by corporates
and banks - despite the fact that they usually are grouped together within
transaction banking. However, there was little impetus for cash and trade to
come together until the shortage of credit forced the issue.
The
decline in trade volumes and increase in trade risks - coupled with the
unprecedented decrease in availability, and the increase in cost, of credit -
has finally put the joining of cash and trade on the agenda for both
corporates and banks. The centralisation of supplier relationships and
procurement has taken secondary precedence in comparison with the drive and
focus of corporates on the centralisation of payments and cash processes.
Although some institutions have moved to centralised procurement, they have
been few in number and have initiated it to secure potential tax benefits.
Supply Chain Financing
In
recent years, the trend has been to extend payment terms for suppliers in
order to support buyers’ working capital. There is now an
acknowledgement that, in some cases, suppliers are in danger of being pushed
too hard by such payment terms since they are purely focused on maximising
the working capital arrangements of buyers. As a result, there is a
developing focus on supplier relationships and the creation of discount-based
finance schemes. These initiatives are starting to become more popular, as
they can assist suppliers in avoiding some of the worst effects of the
extension of terms.
However,
linking payables and cash and SCF have proven to be a technical challenge.
Integrated systems can manage and reconcile payments across multiple supplier
categories, including:
· Those taking part in a
buyer’s SCF programme on an early payment, discounted basis.
· Those participating in a
buyer’s SCF programme who have not chosen to discount specific invoices
(and pay them on their usual due date).
· Those not participating in the
buyer’s SCF programme (and paying invoices on their usual due date).
The most important factors for clients are that there is a single interface
and single channel for the three types of payments, and that the solution is
adaptable for a variety of structures.
Fully-integrated Solutions
These
integrated solutions can be used for both domestic and multi-currency relationships
and give corporates the option to parcel out financing business to a wide
number of syndicate banks without losing operating efficiency. Although
participating third-party banks are providing credit to suppliers rather than
the buyer, the lending is generally seen as working capital for relationship
purposes. The benefits of an end-to-end payables and supplier finance
solution are proving attractive to corporates who are keen to maximise their
working capital. Already, many have seen considerable improvements to their
days payables outstanding (DPO) driven by strengthening relations with key
suppliers.
Further integration
The
integration of payments and SCF is the first step in further automating the
entire value chain. A ‘hands-free’ end-to-end payable and
supplier finance solution could be extended to include other offerings from
your bank, including liquidity management and foreign exchange (FX). The end
result of the payable and supplier finance solution is an improvement in
working capital, which means money is available for physical cash
concentration or virtual pooling (while remaining in-country) and can provide
resources for short-term investment purposes or to net-off balances and lower
bank interest.
Physical
cash concentration or virtual pooling can be linked with the payable and
supplier finance solution and then further integrated into a short-term
investment solution based on pre-agreed margins, benefits and strategies.
This means that from the time that a corporate uploads a payment file to cash
going on account the process can be entirely automated.
FX
capabilities can also be integrated to enable automated, efficient currency
management strategies. The creation of a solution enabling a client to
deliver a single batch of files covering multi-currency payments (based on
agreed rates) will be highly valued, and further integration will provide
significant rewards for corporates to overcome such challenges.
Article by Lesley White is head of market management for
international cash management at RBS, where she oversees the development and
deployment of payments, delivery channels and liquidity management solutions
for corporate clients across the globe. Prior to her current role, Lesley was
the head of international cash management for Europe
and CEEMEA at RBS. White previously headed the solutions advisory desk team
within ABN AMRO Europe, managing client solutions across the full range of
ICM products and channels in partnership with GTS and relationship banking
sales teams. She joined ABN AMRO in 2004, taking up a regional product
responsibility within CEEMEA before moving to a regional role focussing on
channel strategy and alignment for European clients. White brings over 20
years transactional banking experience to the role, the majority of which has
been within the field of international cash management within a European
context. Previous management positions included Citigroup's GTS business
management team and Bank of America's EMEA cash product management team, both
based out of London.
In addition she has headed electronic banking for Credit Lyonnais.
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