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).

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.

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

efficient harmonised exchange of payment instructions.

According to recent report by PwC1, an important driver of

this innovation and its ongoing persistence is the population

demographic. The main online transacting population (defined

as those aged from 15 to 34 years) will migrate to the next

age bracket over the coming decade and continue to execute

transactions online, thus increasing the overall percentage of

users looking for efficient electronic payment mechanisms.

Countries where demographics particularly favour growth

in the online transacting population and innovative payment

systems include Brazil, India, Indonesia, Malaysia, the

Philippines, South Africa and Turkey.

A classic example of this new breed of payment system

is India’s Unified 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 requests2. 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 C2C and

the second phase of China’s CIPS, which participating banks

anticipate will go live in 20173.

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.

1 http://www.pwc.be/en/documents/20160812-fs-emerging-markets.pdf2 http://www.npci.org.in/UPI_Background.aspx3 http://www.euromoney.com/Article/3584057/China-looks-forward-to-

second-phase-of-CIPS.html

Prerequisites: getting it rightWhile evolving financial 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 benefits 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 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 de w 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 sufficiently advanced financial 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 satisfies 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 refine a roadmap for a full scale roll-out. In addition,

a proof of concept can provide additional reassurance and

confidence to internal partners that a full scale project will not be

deleterious to customer relationships.

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 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.

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: November 2016

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