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Toename SCF om werkkapitaal te financieren

| 14-3-2017 | Jan de Kroon |

Rond de Creditexpo verschijnen er tal van artikelen over de voor en nadelen van uiteenlopende ontwikkelingen rond het thema Supply chain financering (SCF). Zo publiceerde PriceWaterhouseCoopers (PwC) recent in verkorte vorm de uitkomsten van een gehouden onderzoek naar Reversed Factoring als alternatief voor werkkapitaalfinanciering van banken.

Het zal de lezer niet verbazen dat SCF in het algemeen en reversed factoring specifiek, hard groeien. Het is een nieuwe trend en dus is er ook een groeiende groep innovators en early adopters. Dat laatste echter vooral bij adviserende of toeleverende partijen in het proces. En dus met een zeker belang.

Waarbij ik overigens geen waardeoordeel geef; ik ben zelf ook adviseur.
Wel is het van belang iedere ontwikkeling en dus ook deze, te beoordelen op de werkelijke merites. Anders dan in relatie tot bancaire financiering heet het niet voor niets Supply chain financiering.

Belangrijk is te bedenken dat het juist daar van toegevoegde waarde is, waar de vertrouwensrelatie tussen leverancier en afnemer in de keten ‘beyond reasonable doubt’ is. Je hebt een relatie waarin je langer met elkaar optrekt als op elkaar ingespeelde ketenspelers. Omdat dat vertrouwen er is kan het ook zonder bank en omdat je het vaker met en voor elkaar doet, loont het ook er wat meer ‘(infra)structurele’ afspraken over te maken.

Dat houdt tegelijkertijd in dat als de connectie een minder frequente of regelmatige is, het instrument minder tot zijn recht komt. Mutatis mutandis geldt dat ook voor ‘reversed factoring’ als belangrijk SCF instrument. Anders dan reguliere factoring gaat het niet om het bevoorschotten op basis van de kredietwaardigheid van de verkoper, maar om het voorfinancieren van debiteuren in portefeuille op basis van hun kredietwaardigheid. Daarmee is het een alternatief voor die bedrijven die op basis van hun eigen kredietwaardigheid niet of moeilijk bij banken of factormaatschappijen terecht kunnen. Hoewel het wordt aangeboden door factormaatschappijen, kan echter ook een opvolgende ketenspeler hier zijn surplus cash voor inzetten. Met name dat laatste is interessant omdat op die manier er een zekere ‘disintermediatie’ plaatsvindt; de supply chain regelt het zelf buiten de financiële sector om en bespaart zich de tussenmarge.

Belangrijk is ons te realiseren dat SCF nu juist de ketenactiviteit en dus een zeker repeterend karakter benadrukt en de financiering daarop inregelt. Voor meer eenmalige transacties of transacties met minder regelmaat is SCF en daarmee reversed factoring vooralsnog minder geschikt. In dat soort gevallen is voorlopig de weg naar nieuwe start-ups als ‘Debiteurenbeurs’ meer geschikt. Daar kan een onderneming afzonderlijke facturen of incidentele liquiditeitskrapte op maat oplossen.

Jan de Kroon

Owner & Managing partner of I mprofin Groep

Managing treasury risk: Liquidity Risk (VI)

|13-3-2017 | Lionel Pavey |

There are lots of discussions concerning risk, but let us start by trying to define what we mean by risk. In today’s article I will focus on liquidity risk. Many companies have very significant credit needs and this needs to be formally addressed with a credit analysis procedure in place. In my former articles I dealt with risk management, interest rate risk, foreign exchange risk, commodity risk and credit risk. See the complete list at the end of today’s article.

Liquidity risk comes in 2 distinct forms – market liquidity risk and funding liquidity risk.

Market Liquidity Risk

This relates to assets and potential illiquidity in the market and, as such, can be considered a market risk. In a normal functioning market it is always possible for market participants (buyers, sellers, market makers and speculators) to find each other and negotiate a price for their transactions. Assuming that the transaction is of a normal market size, there should be no dramatic change to the price of the asset after the transaction.

At the time of a crisis, participants could be absent from the market, making it difficult – if not impossible – to trade an asset. Sellers are left frustrated as there are no opportunities to sell the asset they are holding and vice versa for buyers. This can occur due to a financial crisis, changes in legislature, scarcity of an asset or someone attempting to corner the market. An asset generally will have a value, but if there are no buyers in the market that value can not be realised.

Liquidity risk is not the same as falling prices – after all prices are free to rise or fall. If an asset was priced at zero then it means that the market considers its value to be nothing. This is different from trying to sell an asset but not being able to find a buyer.

Markets for Foreign Exchange, Stocks, Shares, Bonds and many Futures and other derivatives are generally highly liquid. Off balance sheet products related to physical settlement can be less liquid as there is a need to actually provide physical settlement. Bespoke products like CDO’s can be considered illiquid as their size is normally small (relatively speaking) and not freely tradeable. Also the complexity needed to value the product affects its liquidity.

Housing is an asset class with very low liquidity – sometimes a property could be sold as soon as it hits the market. At other times the same property could be available for sale for many years and the price reduced regularly, without attracting a firm buyer.
The easiest and quickest way to see if there is a heightened market liquidity risk is via the bid – offer spread. If this is suddenly seen widening, this would imply that there appears to be more risk. In a normal, liquid market, the spreads are fairly constant and small, allowing participants to easily step in and transact. A widening of spreads occurs in a normal market when government data is published – nonfarm payrolls, balance of payment, etc. Within a short time the market will return to a normal spread as the information is properly digested and the market makers return. However, if the spreads widen without a publication event taking place, it is reasonable to assume that the risk has increased.
Additionally, risk could grow if reserve requirements were increased. In markets such as Futures, it is necessary to pay margin to the exchange. If these margin payments were increased, this would lead to transactions being more expensive and so lead to less liquidity in the market.

Market makers can also observe the market depth. This is shown by the quantity available for transacting at a particular price in their order books. When a market is perceived as being deep, it means there are many orders and, therefore, a large number of orders would be needed to move the market price significantly. The deeper the market, the more liquid the market.

Funding Liquidity Risk

This relates to the risk of not being able to settle debts when they are due. Treasury specialists in a corporate environment are acutely concerned with funding risk. Every month wages must be paid, together with tax and social premiums (pensions, insurance etc.) Additionally, it would be advantageous to pay trade creditors on time. Future liabilities also have to be funded after they have been recognized. This could mean arranging external financing.

If there is a liquidity crisis in the market, it becomes difficult and expensive to arrange to borrow the necessary funds. The price may be so high that the intended profit provided by selling the goods, is negated by the increased cost of funding. A reduction in the credit rating of a company can also lead to increased costs and a reluctance to lend.
If a company is known to have problems making payments, then the liquidity risk is specific to the company – the rest of the market will function normally.

Funding risk can also occur if creditors fail to pay you, or if an unforeseen event has occurred that leads to an outflow of cash from the company.
A company can initially perform a quick spot check to ascertain its current ratio. This shows if a company can meet its current liabilities with its current assets. A ratio of less than 1 would imply that the company can not meet all its obligations at the same time. However, this could also be because there is no short term finance arranged at that moment.
It is possible to arrange a line of credit with a financial provider. He defines a maximum loan (line of credit) that can be extended which the company may utilize. While it is normal to pay a standing charge for the balance of the line that is not being used, this can be offset by the knowledge that it is possible to drawdown against the line when needed (in normal circumstances). There is greater flexibility with a line of credit than with a traditional bank loan.

Other methods include –

i) Sell assets like stock that are slow moving and tying down cash

ii) Analyse all overheads – office equipment, expense claims

iii) Increase efficiency in the debtors’ administration. Be proactive

iv) Renegotiate with suppliers – better that you talk to them before it is too late

v) Design contingency plans

vi) Subject your business to stress testing

vii) Apply the techniques of ALM (asset and liability management)

Some very well known companies have fallen to liquidity problems – Bear Sterns, Lehman Brothers, Northern Rock, ABN Amro, AIG, etc. While the risks were prevalent before the crises, the main liquidity problems occurred when it was determined that there was no more time allowed for the situation to remain.
Time is the soul of business.

Lionel Pavey

Cash Management and Treasury Specialist

More articles of this series:

Managing treasury risk: Risk management

Managing treasury risk: Interest rate risk

Managing treasury risk: Foreign exchange risk

Managing treasury risk: Commodity Risk

Managing treasury risk: Credit Risk

Blockchain and derivatives: Re-imagining the industry

| 10-3-2017 | Carlo de Meijer |

Since the first meetings organised by the Technology Advisory Committee of the US Commodity Futures Trading Commission (CFTC) on January 26 and February 23, 2016, on “Blockchain and the Potential Application of Distributed Ledger Technology to the Derivatives Market”, we have seen a lot of activity in this area.

The Depository Trust and Clearing Corporation (DTCC) last month – so a year later – launched its plans to develop a blockchain-based post-trade framework for derivatives processing with tech firms R3, IBM and Axoni starting in January. The US-based clearing institute aims to replace the technology underpinning its Trade Information Warehouse database with a distributed ledger. The announcement by DTCC of its plan to transition its Trade Information Warehouse (TIW), into a blockchain platform is described as a “watershed moment” for the industry in deploying distributed ledger technology (DLT) in production at this scale and a “reimagining” of credit derivatives processing.

DTCC and TIW

But for an idea of the scale of this operation, first something about DTCC and TIW. The Depository and Clearing Corporation focuses on post-trade financial services, providing clearing and settlement services to the financial markets. It provides central custody of securities and ways for buyers and sellers to make their exchanges in a safe and efficient way.
The Trade Information Warehouse (TIW) , a central part of its financial infrastructure, and a a major component in the credit derivatives market, currently automates recordkeeping and other workflow functions, such as lifecycle events and payment management for more than $11 trillion of cleared and bilateral credit derivatives annually, among 2,500 buy-side firms located in more than 70 countries. This is roughly 98% of all transactions in that asset class.

DTCC involvement with blockchain

DTCC has been in the forefront of early-stage experimentation, notwithstanding this technology could disrupt this industry and might make obsolete or reduce the role of a number of clearing and other business parties in the post trade market infrastructure. Already end 2015 DTCC expressed its interest in blockchain technology and became a founding member of the Hyperledger Project, an open-source blockchain development project managed by The Linux Foundation and aimed at driving the adoption and standardization of distributed ledger technology in the financial services sector. Last year DTCC also invested in and partnered with Digital Asset Holdings (DAH).

The decision to go ahead with a blockchain-powered “revamp” of the DTCC’s Trade Information Warehouse follows a successful trial of this technology by the company last year. In April 2016, DTCC announced the successful completion of a proof of concept of blockchain technology and smart contracts to manage post-trade lifecycle events for standard North American single-name credit default swaps (CDS) in partnership with Axoni, Markit, Bank of America Merrill Lynch, Citi, Credit Suisse and JPMorgan.

Soon after their partnership, DTCC and DAH started a collaboration to develop and test blockchain-based solutions for the $2.6 trillion US repurchase agreement (repo) market. DTCC and DAH said “they wanted to streamline U.S. Treasury, Agency and Agency Mortgage-Backed repo transactions and thereby lower costs and risks”.

The DTCC TIW blockchain project

In their plans the DTCC’s Trade Information Warehouse is to be “re-platformed” through a distributed ledger framework based on blockchain technology to drive further improvements in derivatives post-trade lifecycle events. The project has been developed with input and guidance from a number of market participants including Barclays, Citi, Credit Suisse, Deutsche Bank, JP Morgan, UBS and Wells Fargo, and infrastructure providers IHS Markit and Intercontinental Exchange. These parties helped develop the technology by providing workflow guidance. The final goal of the project is to develop a permissioned distributed ledger network for derivatives, governed by DTCC, with peer nodes at participating firms.

Cooperative effort

The whole project is a cooperative effort of a number of partners. By mid-2016, the DTCC submitted a request for proposal (RFP) for interested parties to “re-platform” the warehouse and cut back on reconciliation costs. DTCC has selected a series of firms including IBM, startup Axoni and bank-backed R3CEV to help integrate distributed ledger technology into its first large-scale, real-world application.

Under the DTCC agreement, IBM is the primary contract holder for the DTCC implementation and will lead the initiative, provide program management, contribute DLT expertise and integration services as well serving as the solution-as-a-service (SaaS) provider. Axoni is to provide distributed ledger infrastructure and smart contract applications, while the blockchain bank-backed consortium R3CEV is acting as a “solution advisor” from both a technological perspective and from a banking workflow perspective. R3 is thereby charged with “really helping validate that the architecture is sound, but also making sure that the feedback from this big R3 global network is heard”.

“The combined expertise of IBM and our partners enables us to provide DTCC with a resilient, open and innovative new technology platform to support this groundbreaking opportunity.” Bridget van Kralingen, SVP IBM Industry Platforms.

Phased approach

Development on the technology started in January and is expected to go live in early 2018. Over the course of 2017, the partners will work collaboratively to “re-platform” the existing Trade Information Warehouse (TIW) to a permissioned distributed ledger network custom-built for cleared and bilateral credit derivatives – governed by industry-owned DTCC with peer nodes at participating firms.

“It enables a distributed network to be built on this where, ultimately, participants could have nodes in-house,” Schvey, Axoni.

The distributed ledger technology being used for the DTCC TIW project is the AxCore protocol, created by New York-based Axoni. Deployment of the AxCore protocol will be done in phases, and even after it goes live next year, may only be adopted slowly. When the AxCore protocol goes live in early 2018, Axoni intends to submit the software to Hyperledger Project.

Rollout of the new blockchain-powered platform won’t be immediate. Initially, the distributed ledger will run in parallel with the existing settlement infrastructure. The latter can take as long as a week to close compared to the nearly instant settlement times expected from the blockchain solution. Upon launch, the DTCC will run a node that updates the TIW ledger, and other participants will also be able to run a node to support the network or to just get a feed of the information. “Not all of our clients will be moving into the world of distributed ledger at the same pace”. Large participating firms are expected to run their own individual “peer nodes” on the private ledger, with smaller DTCC clients being given the option to tap into DTCC’s own node.

By the time the Axoni technology is fully implemented, the entire life-cycle of a credit derivative will be captured as a smart contract or a “suite of smart contracts”.

Main goals ….

The new-to-create blockchain-powered platform is intended to enable DTCC and its clients to further streamline, automate and reduce the cost of derivatives processing across the industry by removing the need for “disjointed, redundant processing capabilities and the associated reconciliation costs”.

The present processes are arduous with current paper contracts in the form of computer documents still being issued. Blockchain and smart contract technology that will allow buyers, sellers and central clearing houses of derivative trades to share information, such as KYC (Know Your Customer), in real time across various distributed ledger platforms, may unleash great efficiencies. At scale, peer-to-peer networks that secure digital assets would allow parties to identify, transact, and settle with each other in expedited workflows.

Streamline derivatives processing
“Distributed ledger technology is a natural fit for derivatives processing. By recording and automatically managing shared records of financial agreements in the cloud without error, it can minimize the steps required for post-trade processing and free up middle- and back-office staff from the onerous task of reconciliation.” Rutter R3CEV
Improvement to settlement times
With regard to the settlement of derivative transactions, presently the system entails a three to five day process involving many third parties. This represents a significant opportunity cost that parties can recapture with a blockchain-based system that enables even real-time settlement.
“In a future where they move their infrastructure from what I imagine is a complex environment of interconnected software with a ton of proprietary adapters and middleware to a blockchain, the cost savings and improvement to settlement time – currently as long as a week for some of DTCC’s trades -will be pretty monumental to their business.”
Cost saving
Blockchains are “uniquely suited” to reduce costs associated with reconciliations, settlement, and security. According to industry executives cost savings can come from eliminating redundant IT systems and trading and risk management overhead. The finance industry currently spends roughly $150 billion annually on IT and operations expenditures in addition to $100 billion on post-trade and securities servicing fees. A 2015 report by Santander estimated the global savings to banks more generally speaking could be as high as $20bn a year.
To provide an example, parties that own identical records in a single, shared ledger would reap explicit cost savings around reconciliations. Similarly, parties that transact obligations in a wholly digital, peer-to-peer network underpinned by such a ledger would reap explicit cost savings around settlement activities as well. Furthermore, parties would be able to manage implicit costs in different ways, like exceptions management, regulatory reporting, know-your-customer (KYC) and anti-money laundering (AML) that stand to be streamlined in ways that provide maximum value in a peer-to-peer workflow.

… and other possible opportunities

Other possible benefits of the use of blockchain in the derivative space include increased transparency, lower counterparty risk, and easier accounting. This may ultimately lead to lower collateral needs and improved liquidity.

Improved transparency
In addition to providing streamlined processing by supporting self-executing code, or smart contracts, it is “widely heralded as a bastion of transparency”. This is especially relevant for regulatory bodies. Since the distributed ledger’s record is immutable, a regulatory node has the potential to give government observers access to real-time data about transactions, instead of having to wait for reports from market participants.
Improved risk management
The use of blockchain technology for derivatives could also improve risk management. It could provide market participants a degree of control over risk and versatility over the balance sheet that is unachievable with today’s paper assets. As an example, parties might consider cash flow exchanges every 30 seconds instead of every 30 days, reducing counterparty and credit risk commensurately, as well as changing how these risks are measured.
Improved collateral management
Under blockchain, dealers will post collateral to the clearing house in the form of initial and variation margin by escrowing cash on a distributed cash ledger or by allocating assets held on other asset ledgers to a distributed collateral ledger. Smart derivative contracts that bind both seller and buyer will be stored on a distributed derivative ledger along with information from the cash and asset ledgers. This will lead to efficiencies for calculating derivative positions and obligations, leading to lower collateral needs.
“The smart contract can automatically compute exposures by referencing agreed external data sources (e.g. S&P 500, NASDAQ) that recalculate variation margin. Interoperable derivative and collateral ledgers would automatically allow the contract to call additional collateral units on asset ledgers to support these needs. At maturity, a final net obligation is computed by the smart contract, and a payment instruction automatically generated in the cash ledger, closing out the deal”
Improved liquidity
Transparency, alongside reduced transaction and trade maintenance costs, could, in turn, enhance trading liquidity. In present situation in order to maintain liquidity levels firms nowadays have to overcompensate where the money has to be tied up for some time before the next transaction. The improvement in funds settlement and counterparty risk assessment in a blockchain environment may shorten the liquidity cycle for various derivative positions, allowing banks to inject liquidity into the system for other transactions much more quickly.

Remaining challenges

Despite all the positives around blockchain and smart contract technology, still many challenges exist. These are mostly the same as for other financial transactions, including lack of scalability, no common standards, no legal and regulatory certainty and the arrival of multiple distributed ledgers. But also smart contracts are at an early stage of development. Defining exactly what they are and how they would work is still a challenge. Regulators and standards bodies across many different industries will need to come together to define what they mean for each transaction and sector.

“The industry assumption is that there should not be one ledger to rule them all, there will be different ledgers and we need to work together to make sure they interoperate, not just from banks.” Braine Barclays

Are there opportunities for derivatives CCPs?

An interesting question is: why is DTCC so active in the blockchain arena: for defensive or offensive reasons? Blockchain technology is seen by many as a disruptive factor for a number of market infrastructure players such as CSDs, repositories and CCPs.

One of the original goals of blockchain technology is to remove the need for central governing bodies. Traditionally, financial exchanges have required clearing houses to provide a guarantee to the winning party of the derivative contract in case the loser does not pay. The clearing house is able to provide this guarantee by requiring both parties to make cash deposits during the pre-trade phase.

The ledger will replace today’s process by which multiple parties reconcile proprietary books and records to accurately represent the custody and value of a financial instrument at any given point in time. With respect to the derivatives markets, blockchains would ultimately come to be used as digital asset registries, as a record residing in a single, shared ledger. So the mechanisms by which parties maintain custody of their obligations and the smart contracts that enshrine those obligations.

….. Yes there are!

A number of industry analysts however reason traders will continue to novate derivative trades via a Counterparty Clearing House (CCP) in order for dealers to net their exposures and monitor the financial well-being of counterparties (ensuring problems like double-spending are eliminated).

Also Nasdaq thinks there are opportunities for derivatives CCPs.

“The concepts of DLT – in its fundamental form with decentralised recording of asset ownership – and derivatives CCP clearing are inherently different. At first, it appears counterintuitive for a derivatives CCP to pursue a technology aimed at decentralising the processing of transactions and removing the need for a CCP. However, derivatives clearing consists of several processes such as position keeping, reconciliation, collateral management, risk and default management, and settlement. While margining and default management do not benefit from a decentralised process, position keeping and settlement could do – and here DLT can increase efficiency.” Fredrik Ekström, Nasdaq’s Clearing President in “Blockchain Tech for Derivatives CCPs — Friend or Foe?”

Final remarks

If this first large-scale implementation of a distributed ledger proves successful, there’s plenty of room to expand. In my mind one should be optimistic of further developments in this space, especially in consideration of the rising cost of reconciliations, post-trade operations, and security issues that market participants confront today.

It seems very likely that the DTCC initiative, once it becomes operational, will have a significant impact on the derivatives world and may open doors to massive adoption of distributed ledger technology for financial services including derivatives.

“This will be one of the first [instances] globally where we are using distributed ledger technology to become a piece of the infrastructure in a very critical market, in the credit default swaps market, and use it across the entirety of multiple players” “By recording transactions in a distributed ledger, everyone uses that same piece of information, that same trade batch, in the same exact way.” DTCC CEO Bodson.

The entire global credit derivatives market in 2016 was $544tn, according to the Bank for International Settlements (BIS), much of which is processed by the DTCC.

Carlo de Meijer

Economist and researcher

Making the most of excess cash: The optimal balance between safety, availability and profitability

| 9-3-2017 | Pieter de Kiewit | TreasuryXL|

We came across this article from our expert Pieter de Kiewit in co-operation with a candidate on De Kiewit Treasurer Search and thought it interesting enough to share it with you.

To get inflation to its target of close to 2%, the ECB has launched an unprecedented package of measures. It cuts borrowing costs, expanded its QE programme and reduced bank deposit rate into negative territory. Interest rates are expected to remain at present low levels for an extended period of time. Great for those who need to borrow money, but depressing for the return on savings or excess cash.

Many commercial banks effectively already charge a negative interest rate on checkable deposits. They charge fees in excess of interest payments (if any). The new Basel rules may involve certain costs or risks, some banks may choose to pass these to their customers. Regulatory shift will have wide-reaching implications on cash pooling, cash deposits (distinction between operating and excess cash deposits) and Money Market Funds (liquidity fee and redemption gates will be imposed). The Basel Committee postponed the meeting scheduled for Jan. 8 on new capital standards. The good news is that it will take some time (2018/2019) before new regulations become fully operational.

Many companies now hold larger cash balances due to their growing sensitivity to the economic cycle and continued need for operational funding. Excess cash is a luxury and isn’t always a problem. However, keeping it on the book is often not the answer for a company’s long term health. Excessive non-earning cash balances create opportunity costs and decrease the rate of return on equity and the firm’s value.

What are your options after minimizing the cash balance in non-interest-bearing accounts? Each business has its own goals and financial outlook. The best thing to do with excess cash is manage it appropriately in line with strategic objectives and for the best risk-adjusted return possible, without sacrificing liquidity. You can sit on it, use it to buy property or assets, or invest it in commercial paper, money market funds, other mutual funds, bonds or stocks—or some combination of these things. Whatever you may choose, the process of investing excess cash should be integrated in overall cash management, with the same fundamental principles of keeping risk low and having the right amount of cash on hand for short-term and long-term needs.
Companies tend to have very low appetites for risk when it comes to investments. It’s not their business. Their primary objective is capital preservation and maintaining liquidity, and yield is third on the priority list.

Are you looking for investment solutions spanning a range of currencies, risk levels and durations, designed to suit specific operating, reserve and strategic cash management needs? Whatever your investment goals may be, a treasurer might be able to assist you in making the right decision with your excess liquidity. If hiring a treasurer is one step to far for your organisation, you might want to consider a Flex Treasurer. TreasuryXL can bring you in contact with treasury professionas of different disciplines.

Pieter de Kiewit

Owner at Treasurer Search

Cash forecasting 2.0

Cash forecasting has been a hot topic in 2016 and it looks like it will keep this status in the years to come. As Cash Specialist, I’m frequently asked about my vision on this subject. About a month ago, I presented my thoughts to an audience of Group Treasurers & CFOs at the ACT Smart Cash conference in London. During the Q&A, I was asked an intriguing question: “How does a cash management platform, such as Cashforce, differentiate itself from old school Treasury Management Systems in terms of cash forecasting?”

TMS vs. Cash Management/Forecasting platform

Classic Treasury Management Systems (TMS) are focused on inputting, maintaining & managing complicated financial instruments and managing bank connectivity. In other words, they focus on cash optimization from the treasury side.
Cash management & forecasting platforms, on the other hand, focus on cash optimization from the business side. Hence, they typically connect to a company’s ERP systems, in which you’ll find 90% of the company’s cash flows.
And guess what, it’s this refreshing vision on cash optimization that is now attracting the attention by more and more Corporate Treasurers worldwide: they call it “connecting treasury with the business”.

Difference No 1: Transparent cash forecasting

With a classic TMS, a Corporate Treasurer will typically consolidate cash forecasts from the different OpCo’s, which are already consolidated from the underlying business transactions. So, there is no drill-down available into the business drivers, no assurance on the quality of the data/input/manipulations. This blurs a treasurer’s view on what’s actually happening on the business side, taking away the cash visibility into the company’s different OpCo’s. Full drill down isn’t offered by a classic TMS due to two main reasons:

It is simply not designed for carrying millions of transactions on a daily basis, while cash management/forecasting solutions use a ‘big data’ approach and have built-in engines to process millions of transactions daily.
Connecting to each single ERP requires deep knowledge of each of these systems (to avoid long implementation times) and traditionally, Treasury Management Systems didn’t have a need to develop these connectors.

Difference No 2: Collecting the data in a smart way

One of the pain points often linked to Cash Forecasting, is the lacking ability to merge all relevant data and apply smart logics to it. Indeed, it might be a challenge to connect to all data sources and, at the same time, to do this in a smart way. At Cashforce, our reaction to this issue is twofold: A smart logics engine takes care of the forecasting algorithms, while easy connections to ERPs and other systems (like HRM, CRM..) ensure the continuous supply of rich data.

Defining and applying smart logics are often a challenge to overcome and have an enormous impact on the accuracy of the cash forecast. For example, well-defined smart logics help you to better estimate actual payment times and hence improve the accuracy of a forecast. A TMS system often lacks this powerful ability and has no built-in smart engine for forecasting rules.

Difference No 3: Cash saving from the business instead of treasury optimizations

Finally, driving action from forecasts should be the main objective. Intelligent simulation engines enable companies to consider multiple scenarios and measure their impact. This gives users the power to report on cash saving opportunities and compare options to ultimately pick the better one. As a result, finance departments can be turned into business catalysts for cash generation opportunities throughout the company. In contrast, Treasury Management Systems are not designed to perform complicated business-driven cash simulations.

Complementary or Competitors?

New, often innovative cash management platforms, like Cashforce, are complementary to a TMS and tend to bring a lot of value in working capital intensive businesses. They are complementary, as they have a different focus: Treasury Management Systems look at the entire treasury spectrum in order to improve treasury processes. Cash Management/Forecasting platforms start from the business and want to enable finance departments to become a strategic partner on one of the key growth indicators, cash. On the other hand, for smaller companies, these platforms might be a good alternative for an often expensive TMS, when only limited financial instrument management functionality is required.

Nicolas Christiaen

Managing Partner at Cashforce

Treasury & amp; Working Capital Quick Scan Methodologie – Voorbeelden uit de praktijk

| 7-3-2017 | François de Witte | Patrick Kunz | treasuryXL

Als je ondernemer bent of als financiële professional werkt in een kleine of middelgrote organisatie die geen treasurer of cash manager in dienst heeft, vraag je je wellicht soms af of je alle treasury taken wel goed geregeld hebt. Iemand aannemen voor deze taken gaat misschien een stap te ver. Maar dat betekent niet dat je geen kosten zou willen besparen of dat er geen mogelijkheden zijn voor bijvoorbeeld funding.

Heb je al eens gedacht aan de mogelijkheid van een treasury quick scan?

Wij bieden je aan om deze quick scan voor je uit te voeren.
Een ervaren hands-on treasurer maakt een scan van jouw organisatie om te kijken of het de moeite waard is om te investeren in treasury. En vaak blijkt dat je door deze quick scan flink geld kunt besparen, zoals de volgende praktijkvoorbeelden laten zien.

Onderneming A: Productie onderneming in de verpakkingssector

(omzetcijfer ca. 150 miljoen euro)

A gebruikte voor zijn financiering een combinatie van EUR 5 MM met straight loans aan 2,25 % en EUR 3,5 MM met factoring (totale factoring faciliteit : EUR 10 miljoen) aan een rente van 0,75 % + 0,15 % flat op het omzetcijfer (of 225.000 euro op jaarbasis).
Een treasury quick scan maakte snel duidelijk dat er een besparingspotentieel was indien de onderneming een deel van zijn bankfinanciering verschoof naar de factoring. Het beroep op de factoring werd verhoogd naar EUR 7,5 miljoen, wat toegelaten heeft een jaarlijkse besparing toe realiseren van EUR 60.000.
De facturen werden niet altijd tijdig opgesteld en werden per post opgestuurd. De quick scan maakte duidelijk dat er besparingspotentieel was. Dankzij een strikter facturatieproces en het overgaan op e-invoicing is de onderneming er in geslaagd 3 dagen te winnen in de Order to Cash Cyclus of een besparing van ca EUR 1,25 miljoen aan werkkapitaal en ca. 30.000 euro aan financiële lasten.

Onderneming B: Groep die een aantal autoconcessies bezit

(omzetcijfer ca. 175 miljoen euro)

B gebruikte voor zijn korte termijnfinanciering (ca. EUR 13 miljoen) korte termijn kredietlijnen bij banken (financieringskosten voor van 1,90 %) en bij de financieringsmaatschappij van de importeur (financieringskosten van 1,10 %).
Een treasury quick scan maakte duidelijk dat er een besparingspotentieel was indien men een deel van de bankfinanciering verschoof naar de importeur financierings-maatschappij. In casu besloot de onderneming EUR 7,5 miljoen meer op te nemen bij deze, wat een jaarlijkse besparing aan rentelasten heeft toegelaten.
B had regelmatig credit saldi op een aantal bankrekeningen, terwijl ze debetsaldi op andere bankrekeningen had. Een van de aanbevelingen van de quick scan was het invoeren van een dagelijkse opvolging van alle banksaldi. Hierdoor is onderneming B erin geslaagd het gemiddeld uitstaand bedrag aan bankleningen te doen dalen met EUR 1,6 miljoen, wat een rentebesparing oplevert van 30.000 Euro.
B ondervond regelmatig vertraging in de incassering van facturen op leasingmaatschappijen, omdat de dossiers niet in orde waren (ontbrekende documenten, etc.). De quick scan maakte duidelijk dat een striktere opvolging van de procedures en keurige dossiers (first time right) zou toelaten de gemiddelde incassoperiode te reduceren van 23 naar 18 dagen. De onderneming heeft uiteindelijk een besparing van werkkapitaal van 800.000 Euro en een jaarlijkse rentebesparing van meer dan 15.000 Euro gerealiseerd.

Herken je een of meer situaties uit je eigen organisatie? Heb je een vraag? Onze experts zijn gaarne bereid om met jou in gesprek te gaan. Zij werken als Flex Treasurer en helpen jou graag verder. Overigens ook als je bijvoorbeeld na een treasury quick scan behoefte hebt, om tijdelijk een (flex) treasurer in dienst te nemen.

Patrick Kunz

Treasury, Finance & Risk Consultant/ Owner Pecunia Treasury & Finance BV

MEER INFORMATIE

Wil je gebruik maken van een treasury quick scan of een Flex Treasurer of heb je een andere vraag?
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Pieter de Kiewit helpt je graag verder.

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+ 31 (06) 1111 9783

Buddy, can you spare a virtual dime?

| 6-3-2017 | Lionel Pavey |

In januari 2017 was in Het Financieele Dagblad in een artikel te lezen, dat mobiele telefoonprovider Bharti Airtel India’s eerste betalingsbank had gelanceerd, de Airtel Payments Bank. Dit is een nieuwe banksoort, waarvoor de Indiase centrale bank RBI in 2014 richtlijnen uitgaf. Wij vroegen onze expert Lionel Pavey om uit te leggen wat het verschil is tussen een betalingsbank en een traditionele bank en wat een betalingsbank mogelijk maakt.

Wat is een betalingsbank?

Bij een betalingsbank kan men geld storten en betaalopdrachten verrichten, maar de bank kan geen krediet verstreken. Traditionele banken kunnen vele malen hun eigen vermogen uitlenen onder het huidige systeem – een betalingsbank kan zijn overtollige middelen alleen uitlenen aan de overheid. Zo een bank wordt beschouwd als heel veilig en heeft een zeer solide balans.

Betalingen worden aangeboden via online betaalsystemen gekoppeld aan mobiele telefoons. De bank heeft geen fysiek netwerk van kantoren – hiermee kan zij haar diensten goedkoper aanbieden dan traditionele banken. Toegang tot een bankrekening is dus makkelijker en daarmee ontstaat concurrentie voor de bestaande banken. Het toetredingsdrempel is lager – hiermee kunnen meer mensen gebruik maken van bankdiensten.
Een betalingsbank (bijvoorbeeld via een telefoon provider) kan uiteindelijk leiden tot een toekomst waar contant geld niet meer zal bestaan.

Cashless betalen

Pinnen is al een vorm van cashless betalen. Sportverenigingen, bedrijfsrestaurants, winkels, horeca en openbaar vervoer zijn instanties du nu al gebruik maken van cashless betalen. Niet alleen via een bankpas, maar ook via een betaalsleutel die gekoppeld is aan een digitale portemonnee. Zulke diensten kunnen ook aangeboden worden door niet bancaire partijen – zoals telecom providers. In 2003 introduceerde Rabo al het product MiniTix – een elektronische portemonnee.

Wat zijn de voordelen?

Bescherming tegen criminaliteit – de kans op (winkel) overval wordt sterk verminderd.
Omzet verhoging – het gemak zal kunnen leiden tot meer uitgaven. De drempel om uit te geven is lager.
Direct ontvangst – door direct overmaken kan de omzet gelijk geboekt worden.
Inzicht – betere analyse op omzet en klanten. Producten kunnen meer gericht worden op de klant.
Cash is onveilig, duur in onderhoud en vergt een hoop administratieve handelingen
Inzicht – alle bonnen worden digitaal opgeslagen in jouw portemonnee na afrekening
Zwart geld – dit verdwijnt steeds meer – dit is voordelig voor de fiscus.

Wat zijn de nadelen?

Verplichting – iedereen moet mee doen, dus geen vrije keus.
Privacy niet meer veilig – het gebruik leidt tot een elektronische spoor. Betalingen zijn traceerbaar.
Veiligheid is zeer belangrijk – wie bewaakt alle gegevens, wie heeft toegang, hoe controleer je dit?
Kwetsbaar – zoals al gezien met bitcoins, cybercriminelen geven aandacht aan het kaalplukken van elektronische rekeningen.
Interventie – de staat zou een negatief rente kunnen invoeren op bankrekeningen. Men zou dan niet hun tegoed kunnen opnemen in contante.

In het dagelijkse leven: mijn dochter

Mijn dochter is 10 en krijgt zakgeld. Het geld gaat in een spaarpot. Als zij iets wil kopen moet het geld uit de spaarpot gehaald worden en geteld. Eenmaal aangekomen bij de winkel treedt de “wet van Pappa” in werking.
Als ik haar aankoop als educatief beschouw, wil ik 50 pro cent van de aankoop-prijs betalen. Maar als iets EUR 20 kost moet mijn dochter wel EUR 20 in haar spaarpot hebben. Zij kan niet komen met EUR 10 in de veronderstelling dat ik de andere EUR 10 ga betalen.
Zo leer ik mijn dochter om te gaan met geld. Zij moet ook zelf afrekenen bij de kassa en, indien nodig, alle relevante vragen aan de verkoper stellen. Op het moment dat zij alles uit haar spaarpot uitgeeft, moet zij beseffen dat zij er niets meer zal overhouden als zij de gewenste aankoop doet – zij gaat terug naar nul en moet weer alles opbouwen. Dit kan een sober effect veroorzaken – een openbaring.

Hoe doet u dit met uw eigen kinderen?
En hoe gaan wij onze kinderen leren omgaan met geld als het niet meer fysiek is?
Dat is pas een uitdaging!

Never spend your money before you have it – Thomas Jefferson

Lionel Pavey

Cash Management and Treasury Specialist – Flex Treasurer

Fintech Recruitment Considerations

| 3-3-2017 | Pieter de Kiewit |

Last week one of my clients started an unscheduled brainstorm session about recruitment for Fintech companies. We ended up having quite an interesting discussion. Within Treasurer Search we see an increase in assignments in this market, both permanent as well as interim. I would like to share the result of the discussion and what our experience taught us so far.

Fintechs are interesting beasts. They are a mixture of innovations in marketing, technology and finance. Very often they are relatively small, flexible and extremely entrepreneurial. Their ownership, funding and organisation structure are non-standard. Finally Fintechs were able to avoid the regulators but do know they cannot escape them forever. The easiest examples of this are the PSD2 introduction and fiscal authorities zooming in on Bitcoin. What will be the exact consequences? Joop Wijn being recruited by Adyen might be a smart response to this.

From a job content perspective, recruitment in Fintech is quite straightforward: we are looking for skills in software, in regulations, new business development and marketing. Where it gets tough is combining skills with a start-up mentality. If you have this mentality, why be an employee and not start your own company? And does the personality of somebody being excellent in a team of five also match when the team is growing much bigger? This often leads to constantly shifting requirements and creative recruitment. I need more personal interviews because the cv is often not the proper predictor of success. All this makes my position more challenging and appealing. Using on-line personality assessments really does add value in processes like these.

I want to wrap up with a remark about bankers making the transfer to Fintech. From a skills perspective they are a good match and often served the proper clients. Hurdles they have to overcome are working within the mentality of a small company, with little support and a very diverse number of tasks. Together with a non-banking remuneration and a non-banking work-life balance the number of hurdles is too high for many of them .

What successful Fintech recruits did you see recently?

Pieter de Kiewit
Owner Treasurer Search

De controller in een veranderende omgeving: Budgetteren als hulpmiddel bij cashmanagement

| 28-2-2017 | Olivier Werlingshoff | FM.nl |

Op de website FM.nl vonden wij een artikel van Theo van Houten ( 21 februari 2017) die wij graag met jullie willen delen.
Hij schrijft: ‘Zijn de methoden en technieken die controllers tijdens hun studie leerden nog wel relevant nu organisaties in een omgeving werken die inmiddels veel dynamischer en complexer is?’ Het artikel is een onderdeel van een serie en richt de focus op cash managment.

Cash Management

Theo van Houten schrijft dat cashmanagement gaat over alle activiteiten die verband houden met de optimalisatie van de kasstromen tussen de organisatie en haar stakeholders, zoals bijvoorbeeld klanten, leveranciers, werknemers en financiers. Een goed kasbeheer is voor een organisatie vaak van doorslaggevend belang. Dat komt mede door de hoge kosten die verbonden zijn aan het aanhouden van liquide middelen en het afwikkelen van ontvangsten en betalingen.

Maar de belangrijkste reden voor een goed cashmanagement is het voorkomen van een faillissement. Het CBS doet jaarlijks onderzoek naar de oorzaken van een faillissement. Daartoe onderzoekt zij gerechtelijke vonnissen om het eerder uitgesproken faillissement te beëindigen, omdat er bijvoorbeeld door de curator een akkoord met de schuldeisers is bereikt of omdat er een gebrek aan baten is. De rechter baseert zich bij die uitspraak op het verslag van de curator die de oorzaak van het faillissement heeft vastgesteld. In december 2016 publiceerde het CBS de cijfers over 2015. In dat jaar werden van 7.602 rechtspersonen (exclusief eenmanszaken) het faillissement beëindigd. Die organisaties waren door de volgende oorzaken failliet gegaan;

De belangrijkste oorzaken zijn dus:

Economische oorzaken. Denk hierbij aan toegenomen concurrentie, smaakveranderingen bij het publiek en veranderende economische omstandigheden (al dan niet in het buitenland).
Mismanagement, waarbij gedacht moet worden aan administratieve problemen, gebrekkig debiteurenbeheer, te hoge of te lage financiering en marketingmissers.
Overig. In deze categorie vallen zaken als een kredietstop en dubieuze/frauduleuze handelingen

Volgens The van Houten maakt het overzicht duidelijk dat in verreweg de meeste gevallen de oorzaken direct (krediet-stop, oninbare debiteuren, te lage financiering) of indirect (tegenvallende afzet, administratieve missers, hoge financieringslasten) de liquiditeit van de organisatie aantasten. Het gevolg daarvan is, dat er bijvoorbeeld niet meer kan worden ingekocht op rekening, personeel niet meer betaald kan worden of de te betalen belasting verschuldigd blijft. Een faillissement is dan vaak onafwendbaar.

Budgetteren als hulpmiddel bij cashmanagement

Een van de belangrijkste planningsinstrumenten waar een controller volgens The van Houten mee werkt is het budget. Budgetten zijn taakstellende begrotingen, dus aan financiële grenzen gebonden plannen van actie. Er zijn belangrijke redenen om te budgetteren. Vaak genoemd worden: kostenbeheersing, het verhogen van de slagkracht, coördinatie en communicatie, prestatiemeting en de bijdrage die ze leveren aan het voorspellen van de financiële resultaten van de organisatie.
Ook op het gebied van cashmanagement kunnen budgetten een belangrijke bijdrage leveren. Dat gebeurt via het zogenaamde masterbudget. Hiermee wordt een samenhangend geheel van alle deelbudgetten bedoeld, dat resulteert in een begrote eindbalans, begrote resultatenrekening én een liquiditeitsbegroting.
Om dat masterbudget op te stellen, begint de controller om in samenspraak met degenen die er zicht op hebben (de verkoopafdeling, bijvoorbeeld) een inschatting te maken van de te verwachten omzet voor komend jaar en meestal wordt dat nader gespecificeerd in verkopen per kwartaal, maand of week. Zodra dat bekend is, kan bepaald worden wat er elke periode geproduceerd moet worden, waarbij rekening gehouden wordt met beschikbare en gewenste voorraden eindproducten. Daarna kunnen de inkopen gebudgetteerd worden die noodzakelijk zijn om te kunnen produceren, waarbij ook hier rekening gehouden wordt met beschikbare en gewenste voorraden grondstof.

In veel organisaties start het budgetteringsproces in het najaar met het opstellen van een begroting, waarna voor het einde van het jaar de budgetten van komend jaar worden bepaald die vervolgens vaak een heel jaar ongewijzigd blijven. Deze budgetten zijn niet zelden ook het uitgangspunt waarop het cashmanagement is gebaseerd. De economische omstandigheden veranderen tegenwoordig echter zo snel, dat de budgetten veel minder houvast geven. Dat heeft grote gevolgen voor de mogelijkheid om aan betalingsverplichtingen te voldoen. Gaat het immers plotseling slechter, dan neemt de omzet af en dat heeft al snel veel minder ontvangsten tot gevolg. Als daar qua uitgaven niet op geanticipeerd wordt, ontstaan mogelijk onoverkomelijke betalingsproblemen. Maar ook als het economisch ineens veel beter gaat, dan zijn er potentiële risico’s rond de liquiditeit. De extra inkopen en de eventueel extra personeelsleden die ingezet moeten worden, dienen vaak veel eerder betaald te worden dan het moment waarop de extra ontvangsten worden geïncasseerd.

Taken controller

Theo van Houten : ‘Het bovenstaande maakt budgetteren geen zinloze exercitie voor cashmanagement, integendeel. Nog steeds spelen ze een belangrijke rol bij het inschatten van toekomstige ontvangsten en uitgaven. In mijn vorige column gaf ik echter al aan dat de hoogte en samenstelling van planningsinstrumenten als budgetten beduidend vaker moet worden herzien dan in veel organisaties nu het geval is.
Hiervoor dient de controller veel dichter op de business te zitten en te begrijpen hoe de bedrijfsprocessen werken, zodat de gevolgen voor de geldstromen van veranderingen veel beter en sneller ingeschat kunnen worden. Dat maakt het namelijk mogelijk om te anticiperen en tijdig, voordat de problemen ontstaan, maatregelen te nemen, zoals het uitstellen of vervroegen van investeringen, het maken van afspraken over betaaltermijnen met klanten en leveranciers of het regelen van extra kredietfaciliteiten. Kortom, de controller heeft hier een spilfunctie. Om die goed uit te voeren is het noodzakelijk dat hij of zij in de gesprekken met budgethouders de te verwachten ontvangsten en uitgaven steeds aan de orde stelt.’

De hele serie artikelen kunt u lezen op FM.nl

Theo van Houten is hoofddocent management accounting en onderzoeker bij het lectoraat Financial control aan de hogeschool van Arnhem en Nijmegen. Tevens is hij onder meer (mede-)auteur van de boeken ‘Financial control van projecten’ en ‘Bedrijfseconomie in de praktijk’.

Zo ver het artikel van Theo van Houten. Wij hebben onze expert Olivier Werlingshoff gevraagd om zijn eigen inzichten hierover met ons te delen. Zijn antwoord:
‘Ik ben het helemaal eens met wat er in het artikel word aangegeven.Wat ik tot nu toe echter heb gemerkt is dat (financial) controllers vaak naar de organisatie kijken vanuit de boekhouding en niet zozeer vanuit geldstromen. Business controllers kijken daarentegen weer meer naar de organisatie-processen. Het zou goed zijn als er ook meer gericht wordt gekeken naar de geldstromen en hoe deze kunnen worden ingeschat en zelfs kunnen worden geoptimaliseerd. Een voorbeeld hiervan is om te kijken naar de cashmanagement mogelijkheden die er bestaan om gelden sneller binnen de organisatie op de gewenste plek te krijgen.
In wat complexere organisaties zou de functie van het opvolgen van de diverse processen met een cash bril beter kunnen worden opgepakt door een toegewijde cashmanager. Een cashmanager is vaak beter dan een controller op de hoogte van de mogelijkheden die er in de markt bestaan om cashstromen te optimaliseren en te beheersen. Een goed combinatie en samenwerking tussen een controller en een cashmanager is naar mijn mening de oplossing om de financiële processen goed in beeld te krijgen, budgetten op te stellen en acties op te zetten om indien nodig bij te sturen.’

Olivier Werlingshoff

Managing Consultant at Proferus

Working capital management : Some practical advice on the optimization of the Order to Cash Cycle

| 27-2-2017 | François de Witte |

As mentioned in my article “Treasury : proposed “to do” list for 2017”, working capital management will remain a hot topic throughout the year. The first priority is to reduce the working capital needs and financial expenses by optimizing the Order to Cash cycle. In this article, we will develop a plan of approach and propose some concrete actions enabling to generate tangible savings.

Background

The purpose of the Order to Cash optimization is to improve the whole cycle from the moment of the ordering of the goods or services, until the final payment, with the aim to:

reduce operational inefficiencies and risks such as delays between goods or service delivery and invoicing, credit management issues, unapproved discounts and deductions, data quality issues, etc.).
improve a number of processes such as the invoicing, the dispute management, the credit management and credit control
assess the current the tools, build business case for the improvement thereof, and implement them.

Plan of Approach

When starting such a project, I recommend to have at first a quick scan of the overall Order to Cash process so as to identify the critical areas and to assess the business case. Based hereupon, one can then subdivide the project in a number of streams.

In such a project, typically the following processes should be covered:

Ordering processes:
It is important to have a client acceptance process (for me a must in the B2B) and a clear policy on the way orders are accepted. I recommend to only accept written orders. For nonstandard goods, we also need to examine if a prepayment is required before an order is accepted, so mitigate the risk in case that the client does not execute this obligations. It is also useful to check beforehand if the exposure on the client will not exceed the existing credit limits.

Current invoicing processes:
Ideally the sending of the invoice should coincides with the delivery of the goods or services. Furthermore it is important to have the invoices sent timely. These actions enable to reduce the “hidden DSO”. Quite a lot of companies lose several days of easy working capital by neglecting this.
A good customer database is key, and in combination with the ERP, this enables an automation of the invoicing process. I recommend to use as much as possible e-invoicing, so as to reduce the costs and the postal delays.

Current credit management processes:
A formalized credit policy is a prerequisite. A number of solution providers offer solutions for the scorings of your clients, so as enable you to define the credit limits in function hereof. In some sectors this information can be enriched by market information. Of course, one need to ensure that sales staff comply with this and check beforehand that the credit terms have been duly approved. The credit manager needs to work hand in hand with the sales staff.

Current dispute management processes:
Prevention is important. For this reason, when ordering nonstandard goods, it is recommended to check beforehand the availability of the goods and the timing of the delivery, so as to manage the expectations of your clients. Throughout the process (from the order acceptance to the delivery and the invoicing) one should apply thee “first time right” so as to avoid disputes and litigation afterwards. Check also if some services and repairs are to be done under a maintenance contract or warranty, in which case they should be invoiced to other parties.

Current collection and credit control processes
It is important to have a well-organized credit control process enabling to send reminders quite soon after the due date (if possible the first reminder after 15 days). It can help to send to send to your clients some days before a gentle reminder of the forthcoming due invoices. Once the 2nd reminder has been sent, and provided that there is no dispute, it can be useful to block the delivery of goods and services to your client, so as to have an additional leverage, and to have the credit collectors should calling the clients to see why they do not pay, and agree with them on an action plan.
When the classic reminder and call actions do not succeed, involve also the sales department and consider first a final call by another person, before sending your clients to the debt recovery service or to the debt collection agency.
It is important to also ensure an automation of the processes, in particular if one has to address high volumes. If you cannot do it with your current systems, there exist good solutions in the market.

Reconciliation and allocation of incoming payments:
This is a big challenge for many companies. Make sure that your clients use the right payment instruments and payment messages, so as to facilitate the reconciliation process. Within the accounting department, incoming payments are not always allocated promptly, distorting the real accounts receivable outstanding. As a result, reminders can be sent unduly, leading to client dissatisfaction.

KPI’s and Dashboards:
It is important to foresee KPI’s for all the involved stakeholders, as well as incentives to ensure that everybody play the game. Dashboards should enable to remain in control and to monitor regularly a number of key indicators. An area of attention are the overdue receivables. A too high percentage of overdue receivables/total portfolio might be an indicator of possible uncollectable receivables and the need for write-offs.

Attention points

An Order to Cash optimization program is complex and we need to address a number of issues such as :

The resistance to change: people will come up with several reasons to keep on with the current processes. Overwork or client dissatisfaction will be used as excuse for deviations with the processes. Hence involve all the stakeholders, take time to listen to them and to make sure that they buy in the change. If the change is well explained, people will tend to accept the changed processes. The support of the senior management is key to address this resistance.
The limitation of the systems such as e.g. the ERP or the accounting package: Quite a lot of companies miss opportunities because they do not understand the capacities of their ERP. Involve from the start system experts and examine with them possible workarounds.
The standardization of processes throughout the organization : This can be an issue, in particular when working on multiple locations. Processes should be well documented. Once this is done, one can look for the automation.
The information and training of the stakeholders: Make sure that process documentation is easily accessible, and consider organizing training sessions for the involved staff.
The time and effort needed to implement external solutions: This requires a good business case, including all the aspects. Do not underestimate the cost, the effort and time to implement the tool.
The determination of the KPI’s and incentives: this should not only involve finance, but also other Sales, sales administration, the production department and the other involved stakeholders. Build in incentives to ensure that everybody play the game. Make sure that the KPI’s are monitored regularly so as to be able to take corrective action in case of divergences

Conclusion

By managing better the order to Cash Cycle, you can generate a lot of savings. This requires a global approach involving all the stakeholders. To be successful, an optimization requires a number of concrete process improvements, but also the buy-in of all parties involved. A good change management should ensure that the improvements are embedded in the organization, and smart dashboards will enable to monitor that one remains on track.
Technology can help to automate the processes, but do build first a business case and to not underestimate the effort.

It can be a long journey, but in the end, it is worth the effort.

François de Witte

Senior Consultant at FDW Consult

More articles of the author:

PSD 2: A lot of opportunities but also big challenges (Part I)

PSD 2: The implementation of PSD 2: A lot of opportunities but also big challenges (Part II)

Treasury: Proposed “to do” list for 2017

Working capital management – not just a finance issue