The Role of Trade Finance in Working Capital- Receive invoice.
The next stage is to receive the invoice.
On open account terms, this will usually
give the purchaser a period of time in
which to pay. If the goods are being
imported, there may be a requirement for
a bill of exchange to be accepted before
the goods can be dispatched. The receipt
of an invoice should trigger a change in
the status of due payments in the cash
flow forecasting system. - Process payment.
Whichever form of payment is used,
there needs to be a robust process for
authorising payment, with an adequate
separation of duties. If payments are
initiated automatically, perhaps through
the use of electronic invoice presentment,
a clear process should be in place to
ensure payments cannot be initiated
without appropriate authorisation. This
should be subject to spot checks. There
is a risk of fraud when an insider knows
the authorisation limits of individuals
within the accounts payable or treasury
department. With more and more
payments being made electronically
between banks, control over supplier
bank account details in the database is
another important area for tight controls. - Perform back office duties.
The final part of the process is to
perform the full range of back office
duties, including reconciliation and
recording of the payment. Proper
reconciliation of payments is important
as it allows treasury staff to perform
analysis of the efficiency of the accounts
payable department.
The financial purchase to pay cycle
On the financial side, there are three critical
points. First, the treasurer must ensure there
are, or will be, sufficient funds available to
pay the supplier. In addition, although the
treasurer needs to ensure funds are available
on the due date, these should only be
released once the appropriate authorisations
have been made. This process may include
a documentation check, especially if the
transaction is international.
Second, when agreeing credit terms or
contemplating making an early payment to
take advantage of a discount, the cost of
funds should be properly evaluated. Ideally
the treasurer should be able to prevent
the procurement team from agreeing to
early payment before the impact on cash
flow has been calculated. At the very least,
procurement should be provided with a
tool which will allow them to calculate the
potential benefit of any early payment
discount and to compare it with the
company’s current cost of funds.
Finally, once credit terms have been
agreed, the transaction should be entered
into the company’s cash flow forecasting
system as an actual, rather than predicted,
item. This will help the treasurer plan for
future cash requirements.Order to cash – accounts receivable
The order to cash cycle deals with the
process from the receipt of a potential
sales request, through the delivery of the
item, to the final receipt and reconciliation
of the payment.
On the order side, technology has also
changed the possibilities for marketing and
selling products. Most notably in the retail
sector, companies are now able to sell
internationally with perhaps only a relatively
small investment in an online marketing
presence. In other, non-consumer-facing
industries, technology has improved
communication between companies and
their suppliers, using the same ‘just-in-time’
techniques outlined earlier.
At the other end of the process, the
treasurer must be able to improve the
efficiency of the accounts receivable process.
First, this means establishing a mechanism
for collecting payment which is both efficient
(in the sense that bank accounts are not
opened unnecessarily, for example) and
convenient (in the sense that customers are
able to pay easily). Where the company has
an online selling tool, this will mean making
it easy for potential customers to pay online.
Second, there must be an effective process
for chasing non-payment and also to alert
the sales team about both non-payers and
weakening credits.