Consumer Brands, Retail and Healthcare: The Receivables Opportunity

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Consumer Brands, Retail and Healthcare: The Receivables Opportunity

An increasing number of corporate treasuries in the Consumer Brands, Retail and Healthcare (CBRH) sector have already centralised and automated their liquidity management and payables. Now they are considering taking the next logical step: doing the same for receivables. As Hans van den Bosch, Global Sector Head CBRH at HSBC explains, while the opportunity in terms of cost savings and efficiencies is very substantial, there are a number of key factors critical to success. Companies in the CBRH sector have typically placed a heavy emphasis on liquidity management and working capital, with many of them implementing a variety of cash pool and other structures in order to optimise their cash. Once they have that in place, many of them then move on to focus on their supply chain. Since companies in CBRH typically have significant leverage over their suppliers, they have been able to improve working capital (DPO) and streamline payments to suppliers with the aid of suitable technology and finance solutions. When seeking payment term extensions, CBRH corporates have often sought to

ameliorate the impact on their suppliers through the use of supply chain financing solutions provided by their partner banks.

Another motivation for CBRH companies to tackle payables has been the number of market infrastructure initiatives that facilitate the process. The emergence of standardised formats such as ISO20222 and the evolution of SWIFT into a platform that corporates could access were key to the emergence of payment factories and payments on behalf of structures. (POBO).

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Receivables: why now?

Until recently, the same sort of supportive infrastructure has been less readily available for the centralisation/automation of receivables. For instance, collection processes and infrastructure in many countries are often locally organised, which makes it difficult to achieve synergies.

This has been a significant factor in CBRH companies deferring projects in this area. Another important consideration has been that in the case of receivables customer relationships are involved, which are usually regarded as having considerably greater commercial sensitivity than supplier relationships. This has engendered a more cautious approach, as the risk of damaging relationships by introducing new solutions to receive payment has often been deemed too high.

Nevertheless, a large amount of manual activity, human resource and unnecessary cost is currently absorbed by order to cash processes in general, with the processing and reconciliation of accounts receivable (AR) responsible for a considerable proportion of these overheads.

Therefore, the centralisation/automation of receivables potentially represents a very considerable cost saving and efficiency opportunity. The magnitude of this opportunity, in conjunction with recent infrastructure

developments in certain important markets, is prompting CBRH treasuries to re-evaluate their approach to collections and receivables.

Differing business models, differing challenges

In terms of these infrastructure developments, it is important to differentiate between more developed and emerging markets. For example, SEPA has already created the potential for more harmonised collection processes, platforms and solutions in Europe. This also fits well with the business model that CBRH companies typically apply to European and North American markets, namely concentrating on fewer and larger customers, such as major retailers. For some consumer brand companies, these customers may represent a significant part of their total business.

However, distribution models in emerging markets such as India, Indonesia etc. are often very different, in that CBRH companies may be dealing with a large number distributors, possibly all the way down to very small family-run shops. This inevitably results in collection processes in these markets that are more fragmented, complex and manually based. Nevertheless, taken as a whole, the sheer size of markets such as India for CBRH companies make them extremely important.

1http://www.npci.org.in/UPI_Background.aspx2http://e-peso.ph

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A supportive combination: new infrastructure and solutions

The potential game changer here is a combination of infrastructure improvement and solution availability. Next generation payment systems are starting to appear in emerging markets that provide real time electronic settlement execution and instantaneous debit/credit, thus enabling the effi cient harmonised exchange of payment instructions.

An important driver of this innovation and its ongoing persistence is the changing online population demographic. As today’s (relatively youthful) primary online transacting population ages, they will continue to execute transactions online. However, they will also be joined by a new younger generation also transacting online, thus increasing the overall percentage of users looking for effi cient electronic payment mechanisms. Coupling this growth in the total online transacting demographic and the innovative new payment systems being introduced around the world would suggest a signifi cant increase in electronic payment traffi c is likely.

A classic example of this new breed of payment system is India’s Unifi ed Payment Interface (UPI). This combines multiple bank accounts into a single mobile application, merging several banking features, plus fund routing and merchant payments under one umbrella, as well as catering for peer to peer collection requests1. In some respects, this overtakes the payment capabilities of several developed markets. Other similar innovations include the Philippines’ E-Peso e-payment system that covers B2C, B2B and C2C2 and the second phase of China’s CIPS.

In parallel with the development of emerging market payment infrastructure has come the evolution of solutions from banks and other providers that can support enhanced collection processing. While some of these are not new per se, more innovative providers are continually updating them to take advantage of the latest payment system developments. Receivables management solutions help address the reconciliation issues that can arise when customers bundle multiple invoices, credit notes and other items against a single remittance. Clearing systems are understandably intended primarily for the exchange of payments rather than payment information, so they typically have limited capacity for free form information, such as multiple invoice numbers. However, they usually have space for a single reference number that can then be automatically linked to a full list of invoice and credit note numbers sent separately by a service provider, such as a bank. Coupling this with an electronic connection to a corporate accounts receivable system forms a key part of any receivables management solution. The use of virtual accounts can also add value in this context.

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Prerequisites: getting it right

While evolving fi nancial infrastructure and solutions provide two key building blocks in the centralisation and automation of receivables, CBRH treasuries need to bear a number of other important points in mind if any resulting project is to succeed.

Sales function engagement

One of the most crucial of these points is the need to obtain buy-in from whoever owns the customer relationships. While treasury may own the discipline of liquidity management, and have considerable knowledge of payment infrastructure, the same does not always apply to customer receivables. Therefore, to gain the support of the corporate sales function, treasury needs to explain how the potential benefi ts of a receivables centralisation/automation project will not come at the cost of customer relationships. Such a project is most unlikely to succeed if treasury attempts to go it alone without this sort of engagement.

Any such engagement is an area where the involvement of a suitable banking partner can add considerable value. If it is involved in discussions with a CBRH treasury and the company sales function, it will be able to share the experiences of other clients in the area, as well as detailing the infrastructure and solution developments that now make this sort of project feasible. This can help treasury to further reassure the sales function that a receivables centralisation/automation project will not jeopardise customer relationships.

Right markets, right approach

Assuming the sales function agrees to support the project, the next step is to pick the markets with which to begin. The exact choice will obviously vary considerably from company to company, but in the case of consumer brands companies, a logical choice might be to select markets with a high number of consumers and suffi ciently advanced fi nancial infrastructure, such as Europe and North America. Among emerging markets, India would be a strong candidate for inclusion, as the launch of UPI means it now satisfi es both selection criteria.

Having selected the initial markets, it may be prudent to minimise risk by implementing a small proof of concept project across those markets, rather than opting for a ‘big bang’ approach. Experience derived from this can then be used to create and refi ne a roadmap for a full scale roll-out. In addition, a proof of concept can provide additional reassurance and confi dence to internal partners that a full scale project will not be deleterious to customer relationships.

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Choosing your banking partner

When selecting a banking partner for a receivables project, it is tempting to focus purely on technology and solutions, such as clearing system connectivity and product functionality. In practice, and especially with a multi-regional or global project, the devil is very much in the local detail and how well it is handled. Local business practice, regulation and other factors can have a considerable impact on the success or otherwise of a receivables project. In this respect, a bank with a comprehensive physical network (rather than just a single branch per country) that can also offer specialist local financial and technical expertise is valuable.

A bank with an extensive global physical network is also more likely to be already banking an appreciable percentage of a CBRH corporate’s customers. This can be extremely useful, as the bank may, for example, be able to act as advocate to those customers of the benefits of switching from cash or cheque remittances to electronic payments. More generally, a bank with an extensive footprint can help in fostering buyer/ supplier relationships by bringing the various parties together. Nevertheless, a bank’s strong global network and expertise is of less value if the bank cannot also offer a strong internal networking model that provides a single point of overall project contact. This contact can then act as the focus of the bank’s local expertise globally for the client. A CBRH treasury in the US may find a bank’s local expertise rather less valuable if it is only accessible directly via multiple points of contact and conference calls with remote time zones.

Realism

While much of the success of a receivables automation/ centralisation project may depend upon external factors and entities, one that is internal to treasury is an understanding of what is realistically achievable. If the treasury has not yet tackled liquidity or payments, receivables may not be the ideal first step. Instead, the logical progression from liquidity to payments and then finally receivables may make more sense and incur fewer risks. There may be exceptions to this: a single market might be so important in terms of receivables, with such overwhelming cost and efficiency opportunities, as to justify a receivables project before a payables one. It might also develop the skills for future receivables improvements elsewhere later.

Another aspect of this realism concerns existing technology and working practices. If a corporate already has all its entities running on the same version of SAP, then it is well placed technologically to proceed with a more ambitious receivables project. If on the other hand its entities all use different Accounts Receivables (AR) technology and have completely different AR processes, then a more gradualist approach may be preferable, perhaps rolling out to a small sub set of markets. Alternatively, treasury may opt to defer any project altogether until corporate technology and working practices become more harmonised, while a similar approach might also be appropriate for any new acquisitions. As a general principle, the more, better-structured, data that is held in a central repository before starting a project, the better.

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Conclusion

For CBRH companies that have already optimised their liquidity and payables, the potential opportunity inherent in doing the same for receivables is probably highly appealing. Apart from the cost savings and efficiency gains already mentioned, working capital and liquidity should also benefit, as cash will both come in and be reconciled more quickly. The good news is that the infrastructure and solutions to help maximise this opportunity are now increasingly available. The caveat is that a number of other conditions, ranging from internal buy-in to choice of bank to realistic thinking, also need to be fulfilled.

Published: July 2017

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