A Straight Path to Receivables Reconciliation
by Liz P. Minick, Head of U.S. Corporate Treasury Sales for Global Treasury Solutions, and Rodney Gardner, Global Head of Receivables, Bank of America Merrill Lynch
Few would dispute the benefits of straight-through processing (STP) for payments. For years, companies have worked with their banks to achieve the holy grail of sending a single electronic file containing payment and remittance data that a bank can use to issue a multitude of payment instruments without manual intervention. In fact, large companies today operate ‘factories’ to achieve straight-through processing in their accounts payable operations worldwide.
But straight-through processing and accounts receivable (AR) is another story. For years, the idea of receiving a matched receivables file to close all open items seemed so unattainable that long-established paper-based processes, with inevitable manual intervention, remained the norm.
This is not to suggest that receivables processing and automated reconciliation rates have not improved consistently. They have. It’s just that the challenges to straight-through reconciliation for receivables (STR) have always seemed more imposing than on the payables side.
Yet with recent advances in regulations, electronic payments acceptance and paper-to-electronic (P2E) conversion, some companies have moved rapidly toward the STR ideal, and are now looking to achieve rates of success similar to what they have achieved with straight-through processing for payables (STP).
STR delivers improved visibility and control across the entire working capital cycle and completes the cash flow cycle with vastly reduced human capital. The benefits may include more effective working capital management, improved customer relationships and decreased internal costs. STR drives lower cost and P2E, and improved Days Sales Outstanding (DSO), resulting in more precise end-to-end cash forecasting and working capital management.
True, STR is considerably more complex than automated receivables matching. Ultimately, it requires that a single payment covering multiple invoices can be received, broken into its component invoice transactions, and applied against each open account receivable — all automatically. The beneficiary’s bank sends back a transaction file to the client’s ERP system to close the open accounts receivable.
In many cases, STR also results in improvements in customer service, as companies receive fewer calls about unapplied or misapplied payments.
Receivables processing traditionally is manually intensive, because it often requires experienced people to sort out payments representing multiple invoices, especially when discounts are involved. However, as STR rates improve, head counts in receivables areas can be reduced, and in many cases personnel can be deployed elsewhere. Highly experienced receivables personnel have a depth of customer knowledge and experience that can often serve a company better in other areas, like customer service, credit management or even account management, allowing a company to make better use of human capital.
In many cases, STR also results in improvements in customer service, as companies receive fewer calls about unapplied or misapplied payments. More efficient account posting can mean better relationships, as key trading associates are less likely to be inadvertently called over mistaken payment delinquencies.
The biggest benefit, however, is the enriched data STR provides for invoice matching by the beneficiary’s bank. With that comes the ability to move away from paper, for both payers and beneficiaries. If the payer pays with a simple ACH, the beneficiary’s bank has a good chance of matching the incoming payments to open invoices, even when a payment covers multiple invoices and even when invoices are not paid in full. Recent innovations include the ability to accept faxes, emails, and payers’ websites to obtain payment details
The role of automated rule matching
What makes STR more achievable is increasingly sophisticated data-enrichment capabilities, which banks can use to help clients fill in gaps in their data and use information more effectively from multiple sources, including other banks in forecasting and managing working capital.
Automated rule matching improves payment-to-invoice matching and reduces the risk of alienating a company’s good customers, particularly if a customer is wrongly charged for payment as a result of a mismatched payment by an automated system. Savings gained from more efficient posting can be shared by rewarding favoured customers through better terms or financing, further enhancing customer relationships.
When developing STR at any company, receivables reconciliation processes and practices are studied, including common problems. Business rules are then set for systems to use in automatic matching and can be generated for specific trading partners as well as for broad patterns.
For instance, a long-time and important trading partner may consistently take a discount, even if it is not strictly within terms. The matching rule for that trading partner can be adjusted to allow — and set limits — on a deduction, if that is acceptable to management.
The improved matching processes that contribute to STR not only help ensure that customer relationships are handled properly and positively, but also allow local account managers to focus on business issues rather than collection concerns.
Centralised receivables processing
Just as regulatory changes made it easier for one legal entity within a corporation to make payments on behalf of another, new regulations allowing ‘receivables on behalf of’ (ROBO) structures are paving the way for the creation of centralised collections factories. As STR rates increase and centralised treasury factories show increasing cost savings, many companies may find it logical to add centralised receivables processing to their activities.
Adding receivables to centralised payment factories is not yet a common practice, even among large corporations. However, with ROBO and improved automated matching processes that reduce the need for manual intervention, many of the previous challenges to receivables centralisation have been removed.