Chapter 2 Understanding working capital management
The other issue for cash managers
and treasurers is to determine how best to
structure the company’s bank accounts.
The degree of central control is typically
established by company culture, and can
range from highly centralised structures,
with accounts held in the name of the
group treasury, to completely decentralised
structures, where each group subsidiary
manages its own arrangements.
This is changing in Europe, where the
introduction of the Single Euro Payments
Area (SEPA) should result in companies
opening fewer accounts across the European
Union. Instead of needing a minimum
of one bank account per country, many
companies will be able to manage their EUR-
denominated collections and disbursements
from a single bank account, once there has
been significant take-up of SEPA instruments.
However, despite the three main elements of
SEPA (credit transfers, payment cards and
direct debits) being available since November
2009, it is taking longer than anticipated
for users to switch to these instruments.
As at August 2012, SEPA credit transfers
represented 29.9% of all credit transfers
in the eurozone. For direct debits, the
equivalent figure was 1.9%, representing both
the later introduction of SEPA direct debits
and the greater challenges in the transition
from legacy to SEPA instrument. (There is
more on SEPA in Chapter 5.)
When establishing the company’s
liquidity management structure, one of the
challenges is to try to implement a structure
which allows cash to be moved as easily
as possible between group entities. Where
exchange controls exist, this is likely to be
difficult, although typically the proceeds of
sales can usually be repatriated as long as
documentary evidence of the transaction
is provided. Treasurers will also want to
take care to avoid having to arrange cross-
guarantees (to implement notional cash
pools, for example) wherever possible, as
these will restrict the company’s ability to
arrange credit for other purposes.
However a company structures its liquidity
management, the implementation of a
structure will provide the treasury with greater
visibility over cash flows. This in itself will helpimprove the management of working capital,
as the treasury staff will be able to identify
cash flow patterns. In addition, a clearly
designed liquidity management structure
should streamline internal processes, such
as the authorisation of payments, and will
result in more efficient payments including,
for example, the introduction of weekly or
monthly disbursement cycles. A combination
of any of these changes should help to
reduce operating costs within the treasury and
accounts payable and receivable departments.The use of technology to collect
information
One technique which is increasingly being
used to collect information is electronic billing
and invoicing. Electronic bill presentment
and payment (EBPP) and electronic
invoice presentment and payment (EIPP)
allow companies to collect funds from
customers and collate sales information
without significant manual intervention at the
accounts receivable stage.
Both EBPP and EIPP are increasingly
popular, as they allow bills and invoices to be
raised electronically and presented online,
reducing the time taken to deliver the invoice.
Moreover, the data can be integrated into
a company’s enterprise resource planning
(ERP) system (where there is one), giving
all parties within the organisation greater
visibility of the use of working capital. From
an efficiency perspective, both systems result
in less manual intervention, reducing the risk
of error and increasing the efficiency of back
office work. This technique also helps the
treasury department understand how working
capital is being used, as more data can be
captured. This is particularly the case when
the EBPP/EIPP system links to an ERP and/
or treasury management system.
Both parties to a transaction benefit from
the process of electronic billing/invoicing.
The seller benefits because the process
of invoicing to collection and reconciliation
can all be automated, reducing the time and
cost of this process and accelerating the
receivables cycle.
The buyer benefits because the
corresponding accounts payable activities
can also be automated. EIPP/EBPP