Emerging Trends and Developments in Liquidity Management

How can corporates track where their available cash is and how can they release this from the payments and receivables system to utilise it elsewhere in the organisation?

The global economy is experiencing an unprecedented credit crisis that is forcing companies to review and optimise their operational systems. While a reduction in operating costs is a primary goal throughout the entire organisation, payments and receivables systems need to also be reviewed and optimised for better liquidity management. The frozen credit markets create a more urgent need for a company to understand where their available cash is and how they can unlock it from the payments and receivables system to utilise it elsewhere in the organisation.

Emerging trends and continued developments in payments and receivables systems deployment, workflow and automation technology are making this initiative more manageable, less expensive and faster to execute. Large organisations typically have many back office systems (enterprise resource planning (ERP) or accounts payable (AP)/accounts receivable (AR) systems, cash management, payroll, etc.) that touch upon payments and collections and as a result, liquidity management. These 'silos' make it difficult to move quickly on opportunities that have a positive effect on liquidity. A solution to this problem is to implement a 'hub' on top of these back office systems, shielding the complexity of changes from the silos. In other words, there is no need to invest in many potentially expensive back office system changes - only one investment in a central hub will do the job.

Payment and Direct Debit Factories

The implementation of the 'hub' principle is well known for payment processing and is often called a 'payment factory'. Payment factories have been around for some time. Many companies have been using them to centralise and automate their payment processes across various payment types, payment formats and banks, as well as connect disparate systems to create one convenient, actionable view of payment flows. As a result, payment factories contain information from various systems across the enterprise, such as ERP systems, payroll systems and treasury management systems (TMS), which can be extracted, analysed and used for cash management purposes. They also provide information about payment status that can be shared with external parties like suppliers, enhancing relationships with them.

Some companies have also extended their payment factory to other areas such as account statement processing and direct debits (a collection instrument), making them more than just 'payment' factories. Direct debits (DD) are cheap collections instruments and help standardise and automate the collection process, significantly reducing operational costs, speeding up collections procedures and lowering days sales outstanding (DSO).

A key feature of DD instruments that creates greater efficiency is the establishment of pre-determined collection dates. Rather than having to wait for the customer payment, a DD instruction can be sent to the bank with a well-defined and clear due date. Having the exact dates of the collections increases the visibility of cash flows for better liquidity management, while also reducing credit risk. By adding or implementing direct debits into a payment factory - or better a 'payments and direct debits factory' - the collection process across various direct debit schemes and formats can lead to the same operational benefits as mentioned for the traditional payment processing. This includes allowing for a better use of staff resources, as they become free of time-consuming, manual processes.

DD Factories and SEPA

The European Payments Council (EPC) has set a clear vision and has outlined objectives for all DDs within the single euro payments area (SEPA) to be processed under the conditions of either the SEPA Core Scheme or the SEPA Business-to-business Scheme to enable the achievement of best-in-class security, low risk and improved cost efficiency for all participants in the scheme. SEPA regulations create an incentive for pan-European creditors to look into a dedicated SEPA solution for DD processing. SEPA brings the promise of maximum two DD schemes instead of separate schemes in the 31 SEPA markets (at least for euro-denominated DDs). It brings a novelty to the market, as it will become possible to operate a central collections programme from one location, removing the need for multiple banking relationships in each country. This eliminates the requirement for multiple banking applications, their respective system interfaces, and the corresponding administration management. As an example, Belgian creditors will be able to initiate DDs from a Belgian bank, even if the customer is a Spanish resident holding a bank account at a Spanish bank.

The SEPA DD (SDD) scheme introduced by the EPC offers corporations who operate across the SEPA market the opportunity to improve and standardise their cash collection process and underpin it with a central direct debit infrastructure at a much lower cost compared to the previous defragmented situation which was typically implemented on top of a local back office system. As SDD will eventually replace the existing national schemes, creditors with operations in multiple SEPA countries can start to explore how to make a business case around adopting SDD sooner rather than later.

One requirement under the SDD scheme is that the creditor needs to have a mandate signed by the debtor. This mandate authorises the creditor to collect funds from the debtor. The responsibility of storing all mandates and ensuring that there is a mandate in place before the transaction is on the creditor. In some schemes this is the responsibility of the debtor bank. A SDD solution should address this directive by logging and managing the lifecycle of mandates between creditor and debtor, as well as end-to-end handling of the direct debit collections workflow, from initiation through to status reporting and exception handling. The regular logging of this transactional information creates an excellent resource to increase the visibility on cash flows and optimise liquidity.

Implementing a SDD solution in an existing organisation can be done in various ways. It can be done with a de-centralised approach, in each of the various back offices or silos; or it can be done centrally using a dedicated hub, a SDD factory, potentially as an extension of the existing payment factory.

Best Practices in Liquidity Management

Leveraging the new developments in payments and receivables automation will help lower operational costs and improve liquidity management, optimising the organisation, an important notion in this economy. The centralisation of DD processing in a central DD factory is one example of payments and receivables automation technology, and the continued progression of SEPA regulations provides an excellent incentive to embrace the technology today. It will help the organisation comply with SEPA regulations, conform to standards and enable companies to take advantage of the automation and streamlined processes that SEPA regulations engender.

The current economic cycle should also be a powerful incentive for many companies to adopt automated payments and receivables technologies that will improve liquidity management. Enterprises that are unlocking the cash moving through their payments and receivables systems are better able to make the necessary adjustments to operate as efficiently as possible through this downturn. For those that are not managing their liquidity well, this time can create the tipping point needed to adopt these solutions and should allow them to be championed and shepherded through the organisation. A down economy creates opportunities like this. Once in place, these technologies will create a system of best practices in liquidity management that will continue to be leveraged, regardless of the economic cycle.

Article by Luc Belpaire, Sungard Avantgard.