With virtual accounts, for example, specific customers are allocated a dedicated bank account number. This means that any cash that goes into the virtual account can be posted automatically into the accounts receivable ledger. As a result, credit control teams no longer need to spend hours of their time trying to match outstanding invoices to payments received, but can focus on more value added tasks such as managing slow payers.
Indeed, one of our clients was able to reduce DSO from 60 days to 48 days by implementing such a solution. This freed up a significant amount of capital, and also meant they could carry out better investigations and credit checks on new customers, as well as more effectively chase slow payers.
Should companies be looking at both sides of this equation at the same time? Absolutely. When companies are looking at working capital, DSO, DPO and other activities that are all happening at the same time, there is no point in focusing only on purchases if your sales organisation isn’t also focusing on collecting the cash as it comes in.
Another important consideration is the need to improve visibility on cash balances. Real-time balance information can enable treasury teams to focus on where they are right now, how they can invest surplus cash, and whether they have short-term borrowing requirements that need to be met. This might mean using banks’ liquidity management portals that can drill down into cash concentration structures. Or it might mean taking advantage of automated investment solutions, whereby surplus cash can be automatically invested and taken off the balance sheet to reduce counterparty risk, while also maximising returns.
Treasury transformation is often positioned as a means of improving a corporate’s working capital. To what extent are your corporate customers engaged in this journey, and what are they looking to achieve?
Centralisation via treasury transformation is still the most prevalent topic for the clients I speak to in Europe. Even big multinationals often feel that there is still scope for them to achieve a greater level of centralisation. We’re also seeing considerable focus on this topic from our large corporate and middle market customers, whether they are regional or have disparate business units within a particular country. These companies are now looking to centralise – whether that means putting in place a cash overlay solution to minimise idle cash, or setting up a full-blown in-house bank solution along the lines of the structures used by very large corporations.
The centralisation process allows companies to review their own internal systems and processes. They then look to the banks to complete this process, in some cases by achieving greater integration through their payments or receivables. The main objectives are really to enhance visibility, streamline processes and build efficiencies within the working capital cycle. That is really what the focus tends to be on this centralisation journey.
While it feels like this topic has been around for quite some time, the level of maturity within conversations with our clients is very striking. Some clients have carried out a lot of work over the last five years and have moved to a highly centralised regional or global treasury centre arrangement with an in-house bank.
These companies may have very sophisticated setups, but at the other end of the spectrum there are those that are just starting out on this journey. For these companies, there are plenty of challenges to consider – not least of all the need to get the whole company behind them for what really is quite a fundamental business change. This isn’t just a change to the treasury system, which might be contained to treasury, and perhaps the finance department. It is something that affects the whole company, including business heads, treasury, finance, procurement, operations, sales and distribution functions. So the topic is broad and there is a lot to consider – but there is also a lot of opportunity for companies to get started on that journey.
Do companies tend to work their way up the centralisation ladder one step at a time, or do some set their sights on implementing an in-house bank from the outset?
We see examples of both approaches. A lot of it is down to the appetite within the broader leadership structure and the level of risk that the company is willing to take at the time. I was speaking to a client a few weeks ago, and they wanted to focus on basic connectivity in the first instance before looking into a payment factory solution – they were not ready to look at other parts of the puzzle yet.
They may equally look to tackle their risk management by centralising their FX exposure and no longer have their business units managing foreign currency transactions at the local level. Even if they are not putting in place an in-house bank, companies may centralise their liquidity in order to have better visibility and access over cash. As a result, they can manage their liquidity more effectively. This might mean using solutions such as notional pooling, which enable companies to offset short-term working capital deficiencies within a certain currency against long positions in other currencies, rather than having to do costly foreign exchange swaps and hedging processes.
Generally companies that do want to aim for a highly centralised structure in the longer term may engage in a phased approach defining intermediary milestones. The question is how much treasuries can afford to do at this point in time and how much they are willing to disrupt in one go, particularly given the continuing uncertainties in today’s macroeconomic environment. This level of uncertainty and volatility has to be factored in when companies are looking at making significant changes to how they receive or make payments.
How can companies use these types of centralisation structures to support their working capital initiatives?
Bringing all these things in-house, reducing the number of bank partners and potentially reducing the number of accounts, without necessarily adopting a full payments on behalf of (POBO)/receivables on behalf of (ROBO) virtual accounts structure, really does help treasury teams manage their working capital more effectively. As a result, they may be able to fund legal entities that would otherwise require expensive overdraft solutions with a non-core bank.
Bringing all of that into play also adds to a company’s purchasing power.