SEPA has contributed in a major way towards the harmonisation and the standardisation of formats. Corporates are now in a position to significantly improve their collections through greater automation and accelerate the centralisation of their cash. However, some challenges are still keeping them from taking full advantage of SEPA, and significantly improving their order-to-cash cycle as a result.
An efficient order-to-cash cycle
If it is a general practice for managers to be responsible for the profitability of their company, then they are rarely incentivised on the level of working capital. The impact of bills’ reconciliation on the whole order-to-cash cycle is often under-estimated, and cash is not seen as a strategic resource for success.
Yet, in a financial environment where access to cash and liquidity has been drastically reduced in the last few years, and probably will be in the next coming years, such consideration must be reviewed in order to re-position reconciliation at the heart of the financial processes with the following objectives:
- To positively impact upon the Days’ Sales Outstanding (‘DSO’), and consequently on the whole working capital
- To lower processing costs due to the reduction of manually intensive tasks associated
- To create better credit risk management
Even though SEPA has led to the simplification of the collection process for electronic instruments and opened new doors for data exchange, some issues still keep corporates from achieving a high rate of Straight Through Reconciliation (‘STR’), particularly for incoming credit transfers.
One dedicated bank account per client
With as many bank accounts in IBAN format as they have clients, corporates can now implement a true and unique end-to-end reference for each of their clients. This new capability brought by Virtual Accounts is fully transparent for the clients (debtors), the banks and the clearing houses, and it also allows a 100% success rate of automated payer identification.
As an example, a company with a global turnover of 1 billion EUR has an outstanding position in its accounts receivable of 220 million EUR, leading to a DSO of 79 days. The positive impact of improving the reconciliation by 2 days can free up almost 10 million EUR in cash.
Centralisation: the new leitmotiv
As corporates are now SEPA compliant, they are in position to benefit from the new European format to centralise their payment and collection organisations. One area where centralisation has been facilitated by SEPA relates to bank account reduction; fewer bank accounts means lower account administration costs - multinationals can use over one hundred full time equivalents just to open, close and update account signatories. More importantly, having fewer accounts also facilitates internal control and oversight.
The ultimate centralisation model for collection accounts strives to limit the number of accounts to one per currency, an account that would be used for collections for multiple entities. This model, sometimes known as the “Collections on Behalf of“ model currently raises a number of regulatory, tax and operational challenges, one of these being the identification of the final beneficiary of funds received on the central account.
In summary, the Virtual Account provides a reliable technical response to two main challenges: automatic identification of the payer and identification of the final beneficiary for direct allocation of funds, and a solution that brings corporates one step closer to a more efficient reconciliation process through customisation of the number of virtual accounts.