ReceivablesThe Next Frontier for Centralisation - Bank of America

							Receivables: The Next Frontier
for Centralisation
The benefits of centralisation of accounts receivable (A/R) are similar to those
achieved in payables, including improved risk management, cost savings
and greater efficiency of processes. Today a number of solutions have been
developed to overcome many of the barriers to greater centralisation of A/R.
Rodney Gardner, Head of Receivables and Paul Zanker, Senior Vice President,
Global Business Solutions Americas, Global Treasury Solutions, Asia - Pacific
Long after centralisation of accounts payable (A/P) became a recognised and widely-accepted practice, evolving
attitudes among regulators and improved technology are prompting increasing centralisation of accounts
receivable (A/R), delivering improved visibility and control across the entire working capital cycle.
Centralisation has been a strategic activity for companies for many years and a key operational tool in enterprise
development. Having already addressed the easier opportunities for centralisation, corporations are inevitably
looking at ever more ambitious centralisation programmes.
As the drive towards centralisation has accelerated, the most important trend to have emerged is that
centralisation is no longer just about cost saving but about overall efficiency of processes and value creation for the
enterprise. As a result, there is a greater focus on the end-to-end working capital cycle, involving both A/P and A/R.
Centralisation of A/P is evolving as a common practice for companies. Automation, regulatory changes, effective
management of those changes and significant advances in technology have enabled enterprises to build effective
payment environments that overcome the challenges of payments in different currencies and the need for support
in different languages.
The benefits of centralisation of A/P, through payment factories or shared services centres (SSCs), are clear. Risks
are managed more effectively, working capital management is enhanced (helping to reduce borrowing) and
payment terms can be improved to the benefit of buyers and vendors. Additionally there are cost savings and
efficiency gains through automation of processes and reduction of errors.

What has Changed for A/R?
Historically, receivables have been harder to centralise than payables for a variety of reasons. Notably regulatory
and taxation issues across different territories and jurisdictions have made centralisation complex, if not impossible
to achieve.
However, following advances in the use of payment on behalf of (POBO) structures, where one or more entities are
authorised to pay on behalf of other entities within the group, many of the challenges faced in the centralisation
of receivables are also being overcome. The emergence of receivables on behalf of (ROBO) structures is leading to
the development of collections factories that are able to collect funds for other group entities.
The increased viability of collection factories is being driven by a number of factors. First, changes by regulatory
authorities are crucial in determining the extent to which A/R can be centralised. The growth of POBO structures
was facilitated by an easing in tax regimes as regulators responded to companies’ demands for easier pass-through
of payments. Over time, regulators recognised the importance of such changes and gradually regimes were
amended in many countries.
Similarly, gentle but persistent pressure from companies and banks regarding the treatment of cross-border             >
receivables and ROBO structures is gradually delivering results. Regulatory bodies in Asia are becoming more
accommodating, although caution is required: clearly any receivables that end up in China, for example, can
become trapped cash. Meanwhile, in Europe the introduction of the single euro payments area (SEPA) should
theoretically enable centralisation of A/R across the region as it treats all EU countries as a true single market.
Second, technology is enabling better use of information and greater efficiency in managing A/R and is
consequently facilitating greater centralisation. Both bank providers and third-party providers now offer
applications that automate tasks related to A/R, such as enriching data to help ensure accurate and timely
reconciliation and cash application, and delivering precise forecasting that can enhance working capital
management. In particular, banks’ ability to help with matching and reconciliation using virtual accounts has
dramatically advanced the practicality of A/R centralisation.
The benefits of centralisation of A/R are similar to those achieved in payables, including improved risk
management, cost savings and greater efficiency of processes. However, the additional benefits of A/R
centralisation are perhaps less tangible than those for A/P. With A/P, analysis of category spend, for example,
can facilitate lower procurement costs. With A/R, centralisation can be used to strengthen customer relationships,
through the provision of financing or rewarding favoured customers, or because greater straight-through
processing (STP) means more efficient customer account posting and therefore better customer service.

Challenges are Being Overcome
While there have been significant advances in the ability to centralise A/R, challenges remain. First, in contrast to
A/P, key information required to efficiently process collections resides with customers. Invoice details are localised,
making it difficult to manage problems when they do arise.
In order to address this challenge, companies need to find new ways of managing information and must ensure
they have the change management skills needed to implement them. Specifically, it can prove helpful to break
down A/R into high and low value collections. Banks have both the technology and data enrichment capabilities
needed to help corporations in the process of using information more effectively and filling the gaps in their data.
Second, it remains essential to ensure that customer relationships are managed correctly. Companies tend
to be less concerned about allowing their SSC staff to follow up with vendors. In contrast, the business is
often understandably reluctant to permit SSC staff to contact customers. If a key customer is harassed over
an inadvertent delinquency on a payment, the disadvantage to the company, in terms of the damage to the
relationship, can be disproportionate to the scale of the problem. In order to overcome this problem, additional
training of SSC staff is essential.
Third, clearing standards continue to vary significantly, despite initiatives such as SEPA. Clearing regimes and
practices differ considerably between countries and some countries, such as India, have no established centralised
clearing system. Equally, payment practices vary between countries: some developing countries remain firmly
focused on cash payments, others (such as the US) continue to have sizeable volumes of cheques, and different
forms of electronic payment (e-payments) are in use in different countries.
Unlike with payments, it can be hard to enforce rules on payment methods for collections. Companies have little
leverage in forcing a customer to pay using a particular electronic instrument, for example: their main concern is
simply getting paid. Historically, many companies attempting to centralise A/R simply ‘lifted and shifted’ existing
country-based processes to a central location without delivering gains in process or technological platform efficiency.
However, increasingly banks and third-party technology providers are able to overcome many of the challenges
associated with different payment methods and can standardise and automate migration during centralisation.
Nevertheless, understanding the constraints under which a company operates is crucial to designing an effective
centralised A/R solution.

What Solutions are Available?
A number of solutions have been developed to overcome many of the barriers to greater centralisation of A/R.
These include applications that match invoices, enable companies to identify the payer of an incoming payment
through various A/R channels, helping to ensure that received cash is put to use even if it has not been reconciled,
and deliver optimised foreign exchange (FX) rates for companies’ A/R.
Straight-through reconciliation (STR) through invoice matching has long been the goal of many corporations. Now
there is the capability to match receipts to invoices, pair them off and electronically update a company’s enterprise
resource planning (ERP) system. The process is seamless and requires no human intervention: exception items are
identified early in the process so they can be corrected online before they are posted.                              >
As well as making reconciliation straightforward, invoice matching tools also enable the company to receive any
type of payment method or currency and match it against its invoices, providing significant efficiencies for the
company. In addition, by working with a bank provider, companies can identify which vendors are paying using
sub-optimal methods (such as cheques) and work to encourage them to switch to low or high value electronic
transactions as appropriate.
Another tool which is facilitating greater centralisation of A/R is virtual account management, which assigns
an identifier to a company’s clients so that payments are automatically reconciled against open invoices, saving
time and reducing costs, enhancing remittance information and improving reconciliation rates. Virtual account
management is ideal for companies that receive large volumes of payments, such as insurance or utility firms.
For companies that do business in multiple territories but process their A/R in one SSC, reconciliation is inevitably
unwieldy, and far from the straight-through ideal, meaning that sometimes payments are collected but cannot be
immediately applied to open invoices. Given the increased importance of working capital to all companies, it is
essential that rather than those funds lay idle, a global liquidity overlay is used so that all funds are put to work.
One of the barriers to greater centralisation of A/R is the challenge associated with getting a fair FX rate when
receivables are converted to another currency. Traditionally, companies operate a treasury desk to source multiple
FX quotes at various times of the day in order to facilitate this process. However, using treasury resources in this
way, at a time when demands on the treasury have increased significantly, can be challenging.
Instead, companies can aggregate their payments and optimise their FX rates by using a single auditable FX rate
, based on a public rate on Bloomberg or Reuters with an agreed spread, that provides certainty and frees up the
time of treasury staff for more value-added tasks.

Bridging the Gap Between A/P and A/R
The ability to centralise collections, combined with an existing centralised payments capability, completes the
working capital equation. For the first time, it is possible to have visibility across the entire working capital cycle in
one location. As a result, it is possible to better align vendor payments and customer collections so that the gap
between days sales outstanding (DSO) and days payables outstanding (DPO) is narrowed, improving the working
capital cycle and managing the need for borrowing. Centralisation of both A/P and A/R also facilitates process
excellence and efficiency and real end-to-end process optimisation across the enterprise.
The ability to centralise both A/P and A/R could not have come at a better time: the uncertain operating
environment makes it less viable than ever for payables and receivables to continue to be managed on a country
basis. Local businesses need to be focused on serving customers rather than managing payments or collections.
By centralising receivables, companies can ensure that they have the right strategy and operating model in place,
balancing proximity to market with control and risk management, to meet changing business and customer needs.
Centralising A/R in order to improve DSO and gain many other benefits is not easy. Despite improvements in the
regulatory environment and technology, it requires discipline and human capital by a company to instil a strong
focus on processes with clearly defined roles and responsibilities. A deep understanding of the business objectives
of the enterprise and localised business rules is also critical.
Using a common ERP group-wide can be a useful enabler. However the importance of sustaining a strong culture
of continuous improvement shouldn’t be underestimated. Banking providers have a major role to play not only in
the provision of information and technology but in delivering effective support to enable companies to achieve
their payables and receivables goals. Overall, while seemingly ambitious from the outset an overall integrated
working capital centralisation programme across A/P and A/R can bring significant efficiency and better overall use
of companies’ funds, all in support of the enterprise reaching its business objectives.




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                  Rodney Gardner is managing director and head of global receivables for Bank of America Merrill
                  Lynch (BofA Merrill). He joined the bank in September 2011. In this role, Gardner is responsible
                  for managing the firm’s global receivables product including wholesale lockbox, cheque deposits,
                  and cash vaults across five regions. His focus includes the leadership of an end-to-end product
                  organization, coupled with responsibility for product strategy, development, pricing and revenue
                  growth within both the commercial and corporate client segments. Prior to joining BofA Merrill,
                  Gardner spent two years at Standard Chartered Bank, with global product management
responsibility for the payments business. In that role, he was based in Singapore and was responsible for domestic
and cross-border payment products in more than 70 markets. Previously, he spent seven years with JP Morgan, where
was located in Hong Kong for three years with product management responsibility for payments and collections in 14
countries across Asia. Earlier, he spent four years in New York as product executive for controlled disbursements and
global demand deposit accounts. With over 20 years of financial services experience and leadership, Gardner’s career
has spanned roles in operations, customer service, and sales with several major transaction banks including Deutsche
Bank, Bankers Trust, and Citibank. He has a MBA in Finance from Long Island University and a BSc in Business
Management from Florida A&M University.

                Paul Zanker, is recognised as a sourcing subject matter expert in the market and is frequently called
                upon as a speaker or expert panel during local and regional conferences. He is an outsourcing and
                shared service specialist and has advised a variety of clients in Europe, North America and in Asia
                on multiple strategic sourcing initiatives. Zanker’s clients range across a variety of industries which
                includes financial services, industrial, pharmaceutical, retail, and technology. He has helped his clients
                manage the complexities of globalisation and gain efficiencies from their organisational processes
                and operations through strategic sourcing initiatives, such as outsourcing and shared services. Zanker
has also been involved in service provider third party arrangements, vendor management, organisational change
programmes, and tax structuring, providing his clients with a holistic approach towards their business transformation
and organisational enhancement initiatives.

  Bank of America Merrill Lynch
  Through offices in 30 countries, Bank of America’s Global Corporate and Investment Banking group provides
  investment banking, trade finance, treasury management, capital markets, leasing and financial advisory
  services to domestic and international corporations, financial institutions and government entities. Bank of
  America has been in Asia for more than 50 years and has more than 2,000 employees based in 12 countries
  throughout the Asia-Pacific region.




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