The Benefits of Moving from Fragmented to Integrated Cash Application

The Benefits of Moving from Fragmented to Integrated Cash Application Basak Toprak, EMEA Market Manager for Receivables and Channel Services, Global Transaction Services, Citi Frank Gastl, MD of Hanse Orga International BV. March 2012

With financial markets under stress, liquidity and funding risk management continue to be board level issues. It is well known that efficient working capital management and tight credit management of debtors enable a company to self-fund its operating or production cycle, invest surplus balances and use funds to pay down debt. To achieve this, companies have historically focused on applying best practices for centralising payments and liquidity as well as maximising Straight Through Processing. Meanwhile cash application remained untouched. Yet improvements in cash application process have a direct impact in reducing Days Sales Outstanding (DSO). Together with other internal company challenges hindering the optimization of working capital from receivables such as decentralized processes and/or multiple ERPs, the cash application process is often seen as non-controllable and this is why DSO has traditionally been considered a missing link to fully optimizing working capital. Geographical Differences in Debtor Behaviours & Industry Payment Terms Typically in order to assess potential DSO gain, a company will benchmark against the industry peer group. Although it may not always be possible to influence the payment terms and payment instruments, companies still want assurance that they are amongst the top performers in their field. Europe and US DSO Performance Average DSO per Country Country 100 90 80 95 97 95 89 70 60 50 30 10 47 32 40 20 45 19 10 5 0 Consumer Technology, and Media, Healthcare Telecom Median DSO (2010) Energy, Pow er, Chemical Industrials Minimum DSO (2010) Maximum DSO (2010) 2010 2009 2008 Austria 46 42 Belgium 57 60 63 Denmark 59 63 62 Finland 51 49 France 64 63 67 Germany 50 Ireland 54 Italy 83 77 75 Luxembourg 43 38 36 Netherlands 50 Norway 49 49 Portugal 56 51 55 Spain 70 71 68 Sweden 54 59 Switzerland 56 59 56 UK 51 US 36 36 32 Source: REL Working Capital Reports 2011. In 2010 we saw that although the median DSO performance was constant, the DSO spread between the best and the worst performer was significant anything from 5 to 97 days. On the other hand, geographically, we saw that typically across industries commercial terms/payment instruments varied greatly. Complex supply chains and global operations industries typically have the largest potential working capital savings and gain from accessing internal funding sources. By moving closer to the industry median companies can explore how to unlock trapped liquidity. Even the minimum of obtaining one day of DSO gain can derive significant benefit savings in terms of absolute numbers. So what about cash application? 1

Cash Application: Data Integration drives success Cash application defines the various tasks involved in closing out open invoices against funds received into the bank account. Citi estimates that the majority of multinationals still have large potential for improvement in cash application processes. When Citi recently ran an online survey (1) approximately 50% of clients taking part estimated that they have an automated match rate (automatically matching invoices against incoming payments) of 60% or less. On the other hand, approximately a third of clients did not know how many full-time employees (FTE) they have dedicated to manual reconciliation of invoices (post processing). In addition, only approximately 13% of our clients indicated that they are going to review their AR process in the coming year. In most cases by making the cash application a streamlined process, not only can companies work out the DSO saving but there are additional tangible cost savings to be realised such as reducing the number of FTEs servicing the manual cash application. Very often companies find that the FTE saving forms the basis for the business case when presenting to senior management, yet that the intangible benefit of DSO saving might be much bigger. (1) From Fragmented to Integrated Cash Application joint webinar held between Citi and Hanse Orga in December 2011. How to identify and illustrate the opportunities? Corporates with the largest potential to gain efficiencies from cash application optimisation project are typically those that have a regional Shared Service Centre (SSC). And when it comes to SSCs, Key Performance Indicators (KPIs) provide critical data points for monitoring the performance of the SSC. For the cash application process, we recommend the corporate to monitor the following KPIs to best understand the potential for improvement: Volume What is the absolute number of invoice items you reconcile on a daily or monthly basis? Automation What is your true automated daily matching rate? Do you start each day fresh with no matching items rolled over from the day before? Headcount How many FTEs do you have dedicated to closing out invoices? It is important to note that, looking at purely the automation rates may be a misleading indicator. A company may have a high automation rate, but may still have a large number of headcount dedicated to close out the remaining percentage of invoices because a small percentage still represents a high volume of invoices. Who needs to drive the Cash Application Optimisation Project? Efficient receivables management can only be achieved by engaging individuals across Treasury and Shared Service Centre organisations and must involve account receivables, credit management, collections and treasury. Furthermore, to achieve success in a cash application optimisation project there needs to be a focus on: people, process and profit: Dedicated central team with clear process ownership Good systems to support workflow process and strict finance approval for credit and payment terms Visibility of metrics to senior management - driving behaviour in the organisation to achieve profit goals 2

Frequently, cash application projects are seen as purely technical and are left to technology teams. It is important for the SSC or Treasury business teams to be driving the optimisation project to ensure that the benefits are met. Integrating Bank Data and Cash Application Optimisation Software Banks provide critical information to the corporates cash application process in the form of receivables information on bank statements and other reports. However, the information that banks provide on the bank statement may not always be sufficient to allow for a completely automated matching process due to lack of, or truncated, information provided through the clearing. The accounts receivable team would then need to search for additional information to manually complete the cash application. This creates the need for cash application technology tools to improve the automated match rates. Companies have the following choice of tools in the market: 1. Standard ERP cash application: Using the standard features of the ERP, which is often rigid and doesn t allow for flexible matching 2. Tailor made software: In-house developed software, which relies on in-house programmers and, over time, could become difficult to maintain and upgrade 3. External Vendors: Cash application software developed by technology companies or a bank that sit outside the ERP and work through file transfers of data. However some corporates are not comfortable with exchanging data in this manner. 4. Integrated Software from External vendor: This solution sits within the ERP but developed specifically as a cash application module which allows for easy algorithm programming by the business user and user-friendly screens for manual processing. In order to support corporates with the challenges in improving cash application processes, Citi is working with an experienced technology company, Hanse Orga, that has solutions and expertise in corporate financial technology platforms, particularly SAP. Hanse Orga s FinanceSuite AutoBank Automatic Cash Application is fully embedded within SAP. The solution leverages Citi s proprietary reconciliation technology, Citi Accounts Receivable Matching Services (ARMS) and Hanse Orga s Autobank tool to deliver end-to-end receivables solutions. The collection data received from various channels and accounts is consolidated and may be corrected and/or enriched based on a series of rules and sub-rules. Sophisticated matching rules are then applied, and as these are based on complete and consistent data, reconciliation and account posting is rapid and accurate, with minimal exceptions. Autobank has a series of user-defined matching rules based on experiences derived from multiple projects across various industries, in order that clients can achieve the highest possible auto-reconciliation rate with maximum accuracy. It is also possible to easily handle exceptions as well as monitor key performance indicators and provide executive dashboards for senior management. Conclusion Many corporates have significant potential to improve their cash application processes through an efficient, integrated reconciliation solution, reaping more benefits from their existing SSC setup. The primary tangible benefit of optimized cash application is the cost savings achieved by reducing the manual effort required for post-processing, as well as consolidating data automatically from different ERPs and bank accounts. Reducing the time to post funds against outstanding customer invoices free up customer credit lines and allows for sales to sign more business, supporting companies competitive position. 3

As companies identify the business case for cash application optimisation, Citi anticipate that treasurers and finance managers will evaluate and adopt integrated technology solutions together with their banks, enabling them to achieve improved DSO and control of cash for liquidity management purposes. This Article First Appeared on GTnews in March 2012 Frank Gastl is Managing Director of Hanse Orga International B. V., the international subsidiary of the German financial software specialist Hanse Orga AG. He joined Hanse Orga in 2002 and has since 2004 led the significant international expansion of Hanse Orga s activities. Frank Gastl and his international sales team, which is based in the Netherlands, drive the business development in EMEA and contribute to the ever-increasing number of over 500 satisfied customers worldwide. Hanse Orga provides state-of-the-art financial software solutions embedded in SAP that help market leaders such as Philips, Honeywell and IBM unlock efficiencies in cash application and reconciliation, payment management, cash and liquidity management, treasury and the administration of bank accounts. Hanse Orga also entered successfully the US-American market in early 2011. Prior to joining Hanse Orga, Frank Gastl worked over 20 years for a number of renowned national and international companies in the sector of financial and controlling software. Basak Toprak is the EMEA Senior Market Manager for Citi Global Transaction Services, responsible for the market development of end to end Receivables and Channel Services solutions. She joined the bank in 2000 as a Management Associate and completed her rotations in London and New York. Basak held product management roles in EMEA Payments and Liquidity Management, and was responsible for developing and commercializing best in class liquidity and investments solutions for clients in EMEA. Prior to her current position, Basak was EMEA Senior Cash Management Sales Manager. Basak holds an MBA from Cass Business School in London. 4

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